Bloomberg News

OECD Urges Europe to Strengthen Firewall

March 29, 2012

The Organization for Economic Cooperation and Development urged European finance ministers to lift the limit on emergency lending to governments to bolster confidence as the region’s recovery lags that of the U.S.

“In the euro area, we’re not out of the woods yet,” OECD Chief Economist Pier Carlo Padoan said today in a Bloomberg Television interview in Paris. “Policy must be prepared to deal with possible negative events,” meaning the “firewall still needs to be further strengthened.”

European governments are preparing for a one-year increase in the ceiling on rescue aid to 940 billion euros ($1.3 trillion) to keep the debt crisis at bay, according to a draft statement written for finance ministers. European officials will gather in Copenhagen tomorrow to discuss the measure.

“Everyone knows what needs to be done,” Padoan said. “I’m confident this will be achieved so that markets will not be disappointed as they have been a number of times last year.”

Padoan’s remarks marked the release of the OECD’s interim assessment of the Group of Seven countries. On a weighted average, the three largest euro-area economies, Germany, France and Italy, will shrink by an annualized 0.4 percent in the first quarter and grow by 0.9 percent in the second, while U.S. gross domestic product will rise 2.9 percent and then a further 2.8 percent, the Paris-based organization said.

G-7 Growth

Growth across the G-7 economies will be about 1.9 percent annualized in both quarters, the OECD said. Canada’s GDP will rise 2.5 percent in each three-month period, while Japan’s growth will be 3.4 percent and 1.4 percent, according to the report. The OECD predicts the U.K. economy will shrink 0.4 percent in the first quarter and expand 0.5 percent in the second.

“The forecasts for the first half of 2012 point to a decoupling of GDP growth between Canada and the U.S. on the one hand, and Europe on the other,” the OECD said in the report. The situation in Europe is “expected to remain fragile.”

The European economy suffered at the end of last year as the region’s sovereign debt crisis damaged confidence among consumers and governments in Italy, France and elsewhere sought to raise taxes and reduced spending to reassure bondholders. Budget cuts will continue to restrain growth this year, the OECD said.

Rising oil prices may pose a threat to the recovery, adding about 0.25 percentage point to inflation across the 34 OECD economies and reducing growth by about 0.1 and 0.2 percentage point on average over the next year, the report said.

The OECD said that central banks should be ready to maintain support for economies as governments fight to restore their financial strength.

“Monetary policy remains very supportive,” the report said. “This policy setting will be warranted for a considerable time to come, as will maintaining support through quantitative measures.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Olivia Sterns in London at osterns1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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