OECD warns eurozone on debt

Posted on Dec 14, 2010 in AllEconomic News
Eurozone nations are enjoying a sustained recovery but need to adopt biting sanctions to correct economic imbalances, and they must soon begin to cut their massive debt loads, the OECD said Monday.

The eurozone should also put in place a permanent crisis-resolution mechanism that would force nations to carry out reforms to qualify for aid, the OECD said. It’s an issue that European leaders are expected to tackle at a summit later this week.

In its latest survey of the 16 nations, the Organisation for Economic Cooperation and Development said a “gradual and sustained recovery” is underway, but “the pace of recovery is likely to be muted.”

Growth in the eurozone is likely to come in at 1.7 percent this year and in 2011, before rising to 2 percent, according to the OECD’s latest forecast.

With jittery government debt markets having forced both Greece and Ireland to seek international bailouts this year, the OECD urged eurozone states to quickly slash deficits and debt, despite the slow pace of growth.

“Fiscal consolidation is the immediate priority to stabilize the public finances and should begin by 2011, at the latest, in all countries,” the OECD said.

The report said that while some countries have, in fact, begun to cut their deficits, they should all adopt “credible and detailed medium-term plans” as part of efforts to better manage fiscal policy.

But eliminating deficits would nevertheless leave eurozone countries with high debt levels, leaving them in a poor position to respond to future crises and the costs of their aging populations, it noted.

“Prolonged consolidation is thus required in most countries to reduce the debt-to-GDP ratio to prudent levels,” the OECD said.

It also urged eurozone countries to undertake reforms of their protected labor and product markets, which would not only help adjustment within the monetary union but would drive growth needed to reduce debt levels.

“Structural reforms in labor and product markets would facilitate economic adjustment and will be particu-larly important for achieving vigorous growth in coming years,” the report said.

For the moment, the OECD isn’t recommending that the European Central Bank pull the plug on the measures it has taken to support the eurozone financial system.

“As soon as upside risks to price stability in the medium term emerge, monetary policy stimulus should be withdrawn,” it said, adding that exceptional support measures should be ended as conditions allow.

OECD warns eurozone on debt – People’s Daily Online.