OECD: the eurozone must make 'ambitious structural reforms'

The European policy body has put itself on a collision course with just about everyone in the eurozone by suggesting it's time to raise the bailout fund.

by Emma Haslett
Last Updated: 06 Nov 2012
The eurozone must make ‘ambitious structural reforms’ if it wants to speed along its recovery, a report by the OECD has pointed out. The European policy advisory body reckons that while the eurozone will see a (very modest) 0.2% growth in 2012, to create anything of significance, it’s going to have to take some tough measures. That includes doubling the financial ‘firewall’ to provide bailout funds to struggling economies to something in the region of 1tn euros. Its other idea is to relax fiscal consolidation rules if the global economy fails to improve. But only for countries that have a bit of ‘fiscal space’ – ie. ones that aren’t struggling too much in the first place. Which is bound to upset just about everyone in the eurozone…

For a start, Angela Merkel, who may have gone on record yesterday to say that she supports raising the bailout fund to 700bn euros – but certainly not anything approaching 1tn euros. And Merkel’s strategy would be rather different to the OECD’s – her (rather complex) approach would be to avoid including existing bailout loans in the new bailout agency being established at the moment, which will create an illusion that Germany isn’t putting any more taxpayers’ money into bailouts. It’s all a bit confusing.  

The problem is that economists reckon nations like Spain and Italy may yet need a bailout. Just last month, for example, Spain admitted that it would miss a deficit target set for it by Brussels of 4.4% of GDP – while the Bank of Spain reckons its economy will shrink by 1.5% in 2012. So you can see where the OECD’s coming from: if the likes of Spain did require a bailout, it would need far more than the 500bn euros currently in Europe’s bailout pot.

Which brings us neatly to the second lot to be upset at the OECD’s recommendations: Greece, Ireland, Portugal, Spain and Italy – in short, anyone who has had, or might need, a bailout. The report specifically excluded them from the list of those who can afford a bit of breathing space on the fiscal consolidation front. In fact, it pointed out that Spain and Italy should actually be prepared to investigate further consolidation measures if they need to. Which will go down like a lead balloon with the leaders of those countries.

Still, at least the likes of the G20 and the IMF will be on their side: judging by comments from both groups, they’re very much on the side of adding more to the bailout fund. Unfortunately, though, any move like that will require approval from – you guessed it, Germany. The problem is that she is potentially leading Europe into 20 years of stagnation. You can't fight entropy - it'll get you in the end.

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