France, Germany and Italy must agree to jolt the eurozone economy back to life or face a long period of low growth, low inflation and an increasing debt burden, according to a stinging report by the Organisation for Economic Cooperation and Development (OECD).
The Paris-based thinktank, which counts the world’s major trading states as members, said Spain and other smaller countries had shown the way by pushing through reforms to reorganise their economies while the core nations were locked in discussions over how to lift growth.
Speaking before a meeting of world leaders at the G20 summit in Brisbane, Australia, this month, the OECD’s chief economist said eurozone governments needed to support efforts by the European central bank to lower borrowing costs in addition to boosting public spending on education and infrastructure investment.
Catherine Mann said: “Fiscal spending in the near term to support innovation, education, and infrastructure will both support near-term growth as well as turn back the legacy of low potential output and complement the engines of trade and investment.”
She praised Spain and other countries hit hard by the 2008 financial crisis for restructuring their banking sectors and driving down labour costs to revitalise the economy. She said the continent’s core countries needed to unlock the potential for growth in their economies with a similar programme of reform.
The prospect of a long period of stagnation in Europe has created unease in political circles, where it is seen as fuelling extreme political groups and the possible break-up of the single currency zone. Minor parties in Italy, France and Sweden seeking greater national independence have expanded their influence in recent months, while Ukip forms the largest group of British MEPs in the European parliament.
Low growth in the continent is also seen as hindering the prospects for a global recovery. The US and the UK have suffered a sharp fall in exports to the 18-member eurozone, while China has found it more difficult to push through reforms at a time when Europe, one of its major trading partners, remains moribund.
The OECD report said the recovery from the 2008 crisis was fragile and had been undermined by a lack of action by governments. “There are substantial downside risks to the outlook. Risks of financial instability remain high, while volatility may increase, notably for emerging markets, as monetary policy and economic activity differ across the major economies,” it said.
“Debt levels are high by past standards, and some emerging economies have significantly increased external financial exposure. Because the growth of potential output has slowed in major economies since the crisis, future trend growth may be weaker than anticipated.”
Mann said she was optimistic that policymakers in Europe would implement agreed reforms after a string of poor economic figures. She said the need for action was unambiguous and leaders would be unable to argue against taking action.
Berlin is locked in a dispute with Paris and Rome over plans to breach spending limits to boost spending on infrastructure and business subsidies to spur investment and restructure the banking sectors. Angela Merkel, the German chancellor, has argued against allowing more leeway before reaching budget targets set by Brussels, seemingly against the advice of the OECD.
Mann said world leaders had enough plans on the table to boost G20 GDP by about 2% by 2018, equivalent to an extra $1.6tn of income.
