The EU should be ready to withdraw financial support from countries such as Greece if the conditions attached to bailouts aren’t met and such terms should be part of any permanent aid facility, the Organisation for Economic Co-operation and Development (OECD) said yesterday.
“A credible mechanism for fiscal crisis management is required,” the OECD said in one of its regular regional economic surveys. “This should involve a permanent -liquidity-support mechanism subject to strong conditionality. If conditionality is not fulfilled, financing support should be withdrawn.”
The comments underline the stakes for EU leaders as they prepare to gather in Brussels this week to hash out a permanent crisis-resolution mechanism to replace the 440 billion euro (US$580 billion) stability fund created in May in an attempt to halt the spread of the region’s sovereign-debt woes. The current mechanism is scheduled to expire in 2013.
The Paris-based OECD, which provides policy advice for its 33 member governments, warned that the reduction of economic imbalances with the 16-nation euro region will be a “difficult and prolonged process in some deficit countries.”
Wage cuts may be necessary to return economies to sustainable growth, it said.
“Falls in wages and prices cannot be ruled out and in some cases may prove inevitable,” the OECD report said. “Structural policies have a key role in rebalancing economies. In deficit countries, reforms can boost productivity and help bring costs back in line. In surplus countries, structural changes could strengthen domestic demand.”
The European Central Bank’s exceptional liquidity measures to aid banks helped ease tensions in financial markets following the onset of the economic crisis and ensured smooth functioning of monetary policy, the OECD said. Still, the Frankfurt-based central bank must give careful consideration to asset prices and monetary growth, it said.
“Consideration should continue to be given to factors that may present risks at medium to long-term horizons, such as asset prices and balance-sheet growth,” the OECD said. “It is essential that monetary analysis continue to be enhanced in order to be effectively and systematically incorporated into the policy process.”