March 27, 2012

OECD Calls for Realistic Debt Targets, Higher Firewall in EU

Euro zone economic woes far from over, OECD says

Despite the calmer state of financial markets this year, the sovereign debt crisis in the euro zone is far from over, said the Organization for Economic Cooperation and Development (OECD). Continuing weakness in banks, rising debt levels and questionable ability to meet fiscal targets combine to create an atmosphere in need of fiscal reform.

Reuters reported that the OECD warned against complacency as it said that economic reform must be ambitious. Despite the fact that it parts company from the International Monetary Fund and the European Commission in not predicting a recession—the OECD instead sees 0.2% growth, for now at least—it warned against backing off on reform.

"Market confidence in euro area sovereign debt is fragile," it said in a report on the euro zone's health. "The outlook for growth is unusually uncertain and depends critically on the resolution of the sovereign debt crisis."

In a warning to austerity advocates, the body also cautioned against taking debt-cutting goals to extremes and losing credibility as unrealistic targets are not met. It said the euro zone must "set out more credible and detailed medium-term budgetary plans" or risk an inability to enforce sanctions on southern European nations that could miss targets because of recessionary issues.

Banks must be strengthened and a financial firewall must be devised that is large enough to handle possible calls from Italy and Spain, it said as its chief, Angel Gurria, called for a trillion-euro ($1.3 trillion) rescue fund—what he called "the mother of all firewalls."

"Immediate action is required to ensure sufficient and large-scale availability of a firewall to stop the dynamics of runs against solvent sovereigns," the OECD said.

Though even Chancellor Angela Merkel of Germany, a longtime opponent of boosting the rescue fund, now says it should be increased, euro zone finance ministers are expected to boost it only to a target level of 700 million euros. Should both Spain and Italy need its help, that may not prove adequate.

Despite the calmer state of financial markets in 2012, said the Organization for Economic Co-operation and Development (OECD), the sovereign debt crisis in the euro zone is far from over. Continuing weakness in banks, increasing levels of debt, and the iffy state of fiscal target combine to create an atmosphere in need of fiscal reform.

Reuters reported that the OECD warned against complacency as it said that economic reform must be ambitious. Despite the fact that it parts company from the International Monetary Fund (IMF) and the European Commission (EC) in not predicting a recession—the OECD instead sees 0.2% growth—it warned against backing off on reform.

In a report on the state of the euro zone's health, it said, "Market confidence in euro area sovereign debt is fragile. The outlook for growth is unusually uncertain and depends critically on the resolution of the sovereign debt crisis."

In a warning to austerity advocates, the body also cautioned against taking debt-cutting goals to extremes and losing credibility as unrealistic targets are not met. It said that the euro zone must "set out more credible and detailed medium-term budgetary plans" or risk an inability to enforce sanctions on southern European nations that could miss targets because of recessionary issues.

Banks must be strengthened and a financial firewall must be devised that is large enough to handle possible calls from Italy and Spain, it said as its chief Angel Gurria advocated for a trillion-euro ($1.3 trillion) rescue fund—what he called "the mother of all firewalls." "Immediate action is required to ensure sufficient and large-scale availability of a firewall to stop the dynamics of runs against solvent sovereigns," it said.

Even though German Chancellor Angela Merkel, a long-time foe of boosting the rescue fund, has finally conceded that it should be increased, euro zone finance ministers are expected to boost it only to a target level of 700 million euros. Should both Spain and Italy need its help, that may not prove adequate.

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