OECD warns risk of “severe recession” rising
By Lénaïc Vaudin d’Imécourt | Wednesday 23 May 2012
The Organisation for Economic Cooperation and Development (OECD) has warned the 17-member eurozone that it risked falling into a “severe recession” if European leaders failed to take immediate policy action. “Today we see the situation in the euro area close to the possible downside scenario” foreseen in the OECD’s November report, the organisation’s chief economist, Pier Carlo Padoan, said, on 22 May, at the launch of the twice-yearly global economic outlook. If said situation materialises, it “could lead to a severe recession in the euro area, with spillovers in the rest of the world,” he added.
The OECD predicts the eurozone’s economy will shrink by 0.1% in 2012, before picking up 0.9% in 2013. This “flat growth” in the eurozone “hides important differences, with Northern countries growing and Southern countries in recession,” Padoan said. Activity will begin to recover from mid-2012 provided that policy actions are sufficient for confidence to improve, the report says.
The European Central Bank’s injection of €1 trillion into the eurozone’s banks, together with the increase of International Monetary Fund reserves and EU bailout funds have helped the eurozone’s debt crisis from getting totally out of control. But “after some retrenchment at the end of last year, the crisis in the euro area has become more serious recently” because of weak or even declining confidence and volatile financial markets, Padoan noted. “Events in a number of euro area countries have signalled that reform fatigue is increasing and tolerance for fiscal adjustment may be reaching a limit,” he added. The OECD insists that the environment of slow or negative growth and deleveraging prompts a risk of vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth. And with Greece still struggling to remain solvent and Spanish banks needing to be recapitalised, the eurozone’s debt crisis could spiral out of control, Padoan said.
To support growth – which will be at the centre of the 23 May informal dinner between European heads of state and government in Brussels – the OECD recommends that monetary conditions should be further eased and bank balance sheets should be strengthened while avoiding excessive deleveraging. One possible step to support growth in the near term would be to “issue new jointly guaranteed government bonds to help recapitalise the banking sector and encourage the write-off of bad loans, thereby setting the stage for increased credit availability,” says the OECD. According to the report, with the issuance of eurobonds, the sovereign debt crisis would seem less retractable.
The OECD also urged EU leaders to consider increasing the jointly guaranteed resources available for the European Investment Bank to “provide financial assistance to new trans-European network infrastructure projects”. Padoan believes that the ‘fiscal compact’ could be improved “to allow for more selective assessment of spending items in computing debt reduction obligations”. And “if the situation gets worse, there are ways to enhance the firewall capacity, which could include a stronger intervention or role of the ECB,” Padoan noted.
Padoan urged eurozone countries to announce and commit to implement such reforms in a coordinated and parallel fashion, “signalling enhanced cooperation”. “Such a set of EU-wide measures would strengthen activity, both directly and indirectly, by boosting confidence and making it easier to achieve the intra euro area rebalancing effort,” Padoan concluded.
- Comprehensive structural reforms in areas such as education and competition
- Further enhancing the firewall to prevent contagion
- Boosting the European single market
- Increasing EIB funding for infrastructure projects
- Making better use of ECB balance sheets