Eurozone urged to print money to put an end to economic slump
OECD tells the ECB to adopt quantitative easing as it slashes 2013 growth forecast for the single currency area
The eurozone is in a "fragile" condition, and the European Central Bank should start printing money to drag the single currency area out of its protracted slump, the OECD said yesterday.
The call for a shift in policy came as the Paris-based think-tank slashed its 2013 growth forecasts for the euro area and the European Commission confirmed that some recession-ravaged single currency states will be given more time to reduce their budget deficits.
"The situation remains particularly fragile in Europe," said Angel Gurria, the OECD's secretary general. In its twice yearly economic outlook, the OECD said the ECB should consider providing forward guidance on the future course of interest rates and other "non-standard measures", including additional asset purchases.
In November last year, the OECD had forecast that the GDP of the euro area would fall by 0.1 per cent in 2013. Yesterday it increased that to a 0.6 per cent contraction. The eurozone has been in recession since the final quarter of 2011 and shrank by 0.2 per cent in the first quarter of this year. The OECD was forced to revise up its forecasts for contractions in Greece, Italy, Portugal and Spain over 2013.
The organisation now expects a 4.8 per cent contraction in Greece, a 1.8 per cent shrinkage in Italy, a 2.7 per cent decline in Portugal and a 1.7 per cent drop in Spain.
The European powerhouse of Germany is now forecast to grow by 0.4 per cent, down from 0.6 per cent in November. France's outlook was downgraded from 0.3 per cent growth to a 0.3 per cent contraction. The OECD said unemployment across the single currency area would continue to rise, hitting 12.3 per cent in 2014.
In a reflection of the intensification of the eurozone recession, which is adding to welfare bills across the Continent, the European Commission yesterday said that France, Spain, Poland, Portugal, the Netherlands and Slovenia would all be given extra time to reduce their budget deficits to the 3 per cent mandated by the pan-European Fiscal Compact. In its annual commentary on member states' economic plans, the commission said the Netherlands will have until 2014 to bring its deficit below the threshold. Slovenia, France and Portugal will be given until 2015. Spain's target date has been pushed back to 2016.
However, the commission insisted that these extensions should not be taken as an excuse to soft-pedal economic reforms. "Giving more time for certain member states to meet their agreed objectives is designed to enable them to accelerate efforts to put their public finances into order and carry out overdue reforms," it said. "Reform efforts must be stepped up to credibly produce the required outcomes within the new deadlines and excessive deficits must be corrected".
The OECD warned the extended weakness in the European economy "could evolve into stagnation" with negative implications for the rest of the globe. The organisation cut its 2013 growth forecast for growth across the world from 3.4 per cent to 3.1 per cent.
The 2013 growth forecast for the US was reduced marginally from 2 per cent to 1.9 per cent. However, the forecast for Japan was revised up sharply from 0.7 per cent to 1.6 per cent in the wake of Prime Minister Shinzo Abe's reflationary policy shift.
Despite calling for the ECB to enact more monetary stimulus, the OECD warned that the US Federal Reserve should be wary of the potential side effects of its own quantitative easing programme. "Monetary policy should remain accommodative but vigilant, as declining benefits of further quantitative easing are likely at some point to be outweighed by increasing costs in terms of misallocation and excessive risk-taking," it said.
Britain gets OECD approval, but EU wants faster cuts
The OECD marginally downgraded its 2013 and 2014 forecast for the UK yesterday, but also gave its backing to the Coalition's deficit reduction schedule.
It said that the British economy would grow by 0.8 per cent in 2013 and 1.5 per cent in 2014. Last November, it forecast growth in those years of 0.9 per cent and 1.6 per cent respectively.
Unlike the International Monetary Fund, which last week recommended the UK put its deficit reduction programme on pause in the present financial year, the OECD said that George Osborne should stick to his original cuts framework.
"The pace of fiscal consolidation of about 1 per cent of GDP per year in both 2013 and 2014 is appropriate and should be implemented as planned while letting automatic stabilisers operate in the event growth disappoints" it said.
However, in common with the IMF, the OECD recommended the Chancellor should bring forward infrastructure spending to boost growth. It also warned that Mr Osborne's housing subsidy scheme could boost house prices.
The European Commission also delivered its verdict on the Government's fiscal plans yesterday. It advised that the Coalition should speed up its cuts to bring the deficit below 3 per cent of GDP by 2015-16.
Under the Chancellor's present plans, the deficit is not due to fall to that level until 2017-18.
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