Eurozone needs the 'mother of all firewalls'

OECD calls on EU finance ministers to boost bailout funds and 'overshoot' expectations

European leaders must erect "the mother of all firewalls" to protect the eurozone from the flames of financial contagion, the secretary of the OECD urged yesterday. Angel Gurria, the head of the economic organisation, urged finance ministers, who are due to meet in Copenhagen on Friday, to come up with a plan to boost the capacity of the eurozone's bailout funds that will be sufficiently large to impress investors.

"When dealing with markets, you must overshoot expectations," said Mr Gurria in Brussels. "The mother of all firewalls should be in place, strong enough, broad enough, deep enough, tall enough, just big."

The European Commission has been pushing for the existing €400bn (£334bn) temporary EU bailout fund, the European Financial Stability Facility, to be merged with the new €500bn permanent fund, the European Stability Mechanism, which will be introduced in June, to create a €940bn firewall.

But the German government is pushing for a less ambitious plan that would see the funds run in tandem for a year. This would result in the size of the firewall falling to back to €500bn by mid-2013. Mr Gurria warned European leaders against complacency in response to the easing of market tensions since last year as a result of the successful Greek debt swap and the €1 trillion liquidity operation by the European Central Bank.

"The pressure has come down, but we can't draw too much comfort from signs of healing," he said in Brussels. "Risk spreads remain at unsustainable levels for some countries and have shown signs of creeping up in the last few days." Investors have been looking at Spain with growing alarm in recent days. Yesterday, the Bank of Spain confirmed that the economy has returned to recession, after shrinking 0.3 per cent in the first quarter of 2012. Last year Spain's deficit came in at 8.5 per cent, well above the 6 per cent target. Earlier this month, European finance ministers set the centre-right administration of Mariano Rajoy a deficit target for 2012 of 5.3 per cent, but there are growing doubts about whether this can be achieved while the Spanish economy is contracting.

The OECD yesterday forecast that the eurozone will grow by 0.2 per cent in 2012. "Europe is stalling. It needs to get out of first gear and make growth the number one priority," Mr Gurria said. The OECD's latest Economic Surveys of the euro area and the European Union said that the Continent's economic weakness is a due to insufficient short-term demand. It recommends a programme of reforms in labour and product markets and tax regimes.

The report also calls for an annual review for each country of the obstacles to the proper functioning of the single market.