Wednesday, May 23, 2012
In its half-yearly Economic Outlook, released overnight, the OECD cautiously throws its weight behind the snowballing demands for the European Union to reweight its economic policies to give more priority to growth rather than austerity and low inflation.
Its economic forecasts are heavily qualified, as they rest on the assumption that policy actions will be sufficient to prevent destabilising euro developments, that there will be no major disturbances affecting oil prices, and that disruptive US fiscal consolidation will be avoided .
If those assumptions are right, the OECD estimates GDP growth in 2012 will be 3.1 per cent in Australia, 2.4 per cent in the US, 2 per cent in Japan, 1.6 per cent in the rich world as a whole and -0.1 per cent in the eurozone, ranging from 1.2 per cent in Germany to -5.3 per cent in Greece.
The OECD does not challenge the EU s fiscal compact, which requires EU members to slash their bloated budget deficits to below 3 per cent of GDP by next year, other than to urge that if growth slumps, countries should abandon the targets rather than try to meet them at all costs.
But while noting that prospects for the global economy are somewhat brighter than six months ago , when markets were paralysed with fear of government debt defaults and bank failures, it warns that the risks facing the world are extensive, and primarily on the downside .
The OECD warns that the eurozone crisis is the biggest risk to the global economy and urges the EU to try radical new measures to restore confidence and growth.
In particular, it urges new issues of jointly guaranteed government bonds to refinance Europe s troubled banks, and allow them to write off bad loans. It suggests this could be a step towards the future issuance of eurobonds, which would allow Greece, Ireland, Spain, Italy and other troubled countries to borrow from global markets without prohibitive costs.
France s new President, Francois Hollande, will propose eurobonds tonight at an informal summit of EU leaders called to debate Europe s recession and the crisis of confidence surrounding its banks and government debt.
German Chancellor Angela Merkel firmly opposes any move to centralise debt issuance. Germany s 10-year bond yields have fallen to record lows, just below 1.5 per cent, with widening spreads to other EU members. Yields for French bonds are almost 3 per cent, Italy and Spain close to 6 per cent, and Greece in the 20s. For Germany, a move to eurobonds could be expensive.
An economic think tank based in Paris and financed by its 35 rich and middle-income member governments, including Australia, the OECD is a fringe player in the policy contest now being fought out all over Europe, from national leaders at summit meetings to the voters at the polling booths.
But its endorsement counts for something when new economic policies are in the wind.
Its new report does that, in suggesting that the EU s proposed growth compact includes increased mutualisation of risk by:
Issuing jointly guaranteed government bonds to help recapitalise Europe s banks and encourage them to write off bad loans.
Increasing the resources of the European Investment Bank so it can step up financing new projects in transport, energy and communications infrastructure.
Growth-friendly structural reforms, agreed jointly by a range of countries, to liberalise labour markets and product markets, particularly opening new opportunities for service industries.
An easing of monetary policy by the European Central Bank, in view of the minimal risk of an inflation breakout.
The risk of disruptive policy changes has probably increased, the OECD observes. Against the backdrop of fiscal consolidation, increased inequality, and high and rising unemployment, a sense may be spreading that the burden of the crisis has not been shared fairly.
This risks giving rise to policy upheavals with adverse long-term, and possibly near-term, effects on growth prospects.