Tuesday

16th Aug 2022

Banks still eurozone's weak link, OECD warns

  • Banks are still the eurozone's weak link, says the Paris-based OECD (Photo: oecd.org)

The eurozone's banks are in urgent need of extra capital if the bloc is to stabilise its fragile economic recovery, according to research by a leading economic thinktank.

"Euro area banks are insufficiently capitalised and weighed down by bad loans" was the assessment of the Paris-based Organisation for Economic Co-operation and Development (OECD) in its 'Interim economic forecasts' published Tuesday (3 September).

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It added that "measures are required to ensure the credibility of next year’s asset quality review and bank stress tests and to provide adequate financial support arrangements to meet shortfalls in bank capital."

Speaking at a press conference launching the report, Deputy Chief Economist Jorgen Elmeskov, warned that, though out of recession, the eurozone was still "vulnerable to renewed financial markets, banking and sovereign debt tensions".

"It is necessary to continue to support demand, including through unconventional monetary policies, in order to minimise the risk of the recovery being derailed," he added.

However, there were more encouraging signs for the eurozone economy, whose three largest economies are expected to grow by 0.4 percent overall.

The bloc's largest country, Germany, is expected to achieve a 0.7 percent growth rate, while the French economy is expected to grow by 0.3 percent, an upward revision from projections that it would remain flat in 2013. The Italian economy, by contrast, is expected to contract by a further 1.8 percent this year.

There is also evidence that business confidence and industrial production is returning. The Markit index, which assesses manufacturing output, climbed above 50 points in the eurozone for the first time since mid-2011.

However, the EU is still lagging well behind the United States and Japan, both of which were showing "encouraging rates" of recovery according to the OECD.

The report also indicates that the economic growth gap between the G7 and emerging market economies is decreasing, in part driven by investor fears about the possible withdrawal of quantitative easing measures by the US Federal Reserve.

The strength of emerging economies such as the BRIIC group of countries is expected to take centre stage at the G20 meeting in St.Petersburg later this week, with Brazil, Indonesia and India all suffering the effects of currency depreciation and higher interest rates over the summer months.

There will be a "shift of attention to emerging markets," a commission official told this website, adding that G20 leaders would assess "how much the difficulties faced by emerging markets are the result of US monetary policy."

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