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23rd Mar 2019

Eurozone 'grinding to standstill', OECD warns

  • The ECB should expand its stimulus programme if the eurozone is to avoid 'grinding to a standstill', the OECD says (Photo: Images_of_Money)

The eurozone is “grinding to a standstill” and now poses “a major risk to world growth”, the Organisation for Economic Co-operation and Development (OECD) has warned in a report which urges the European Central Bank (ECB) to expand its stimulus programmes.

The stark warning is part of the biannual economic outlook report published on Tuesday (25 November) by the Paris-based think tank, whose members represent the world’s most advanced economies apart from China.

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“Intensified monetary support is critical to growth”, said Catherine L. Mann, the OECD’s chief economist and author of the Economic Outlook.

The report calls on the ECB to “further expand its monetary support including through asset purchases [quantitative easing]”.

“If demand does not pick up as projected, some economies, notably the eurozone, could get stuck in persistent stagnation".

The 18-country bloc is forecast to expand by 0.8 percent over the course of this year and by 1 percent in 2015, although both projections have been revised down this year as the eurozone’s fragile recovery has slowed.

The ECB has already launched new programmes offering cheap bank loans and buying private bonds in a bid to stimulate economic activity.

But ECB chief Mario Draghi signaled last week that he is prepared for the bank to start buying government bonds, a policy usually referred to as quantitative easing, and which essentially amounts to printing money.

Both the US Federal Reserve and the Bank of England launched similar programmes following the financial crisis.

However, such a programme, which could start as early as the new year, are unlikely to be well-received in Germany.

Angela Merkel’s government and the Bundesbank fear that buying government debt would remove incentives for governments to balance their budgets.

Elsewhere, the OECD expects the world economy to grow by 3.3 percent this year, followed by 3.7 percent in 2015.

For his part, Angel Gurria, the secretary general of the organisation, urged EU leaders to give countries more time to move into line with the bloc’s 3 percent deficit limit to give them a greater chance of recovery.

“It doesn’t mean you’re going to get away with murder,” Gurria told reporters.

“It means there has to be some accommodation. It’s about how you adjust to a change in circumstances".

France and Italy, the second and third largest economies in the eurozone, are the two countries under greatest pressure to adhere to the rules.

The European Commission is expected to announce this week whether to impose sanctions on France, whose budget plans for the next three years do not plan to hit the 3 percent threshold until 2017, two years later than agreed with Brussels.

However, the OECD offered praise for the eurozone’s bailout countries, pointing out that all of the bloc’s “vulnerable” countries now boast current account surpluses, and are now producing more than they consume.

“Those economies who have rebuilt their engines with sweeping reforms are starting to move up the field”, the report says.

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