Eurozone urged to create 'mother of all firewalls'
by Daniel Mason
Eurozone finance ministers meeting on Friday should put in place the "mother of all firewalls" to restore confidence and prevent the debt crisis spreading, the secretary general of the Organisation for Economic Cooperation and Development, Angel Gurrķa, said today – echoing earlier calls from the G20 and the International Monetary Fund to boost region's bail-out fund to €1tn.
Presenting the OECD's eurozone and European Union economic surveys for 2012, Gurrķa said the signing of the fiscal stability treaty to limit national debts and deficits, as well as the European Central Bank's injection of €1tn of cheap loans into the banking system, represented some "closure" to outstanding issues. But he warned that despite this progress the euro area was "not out of the woods" yet and the ECB may have to do more.
According to the report, the eurozone could still fall into a "severe recession" if political leaders fail to take effective policy action to stem the crisis. On the flip side, resolving the crisis may open the door to a "stronger than anticipated and earlier recovery of confidence". The OECD forecasts growth in the eurozone of just 0.2 per cent in 2012 but emphasises that the outlook is "unusually uncertain".
Meeting in Copenhagen on Friday, euro area finance ministers are expected agree an increase in the size of the firewall to between €700bn and €750bn, after Germany dropped its opposition to temporarily combining the remaining capital in the European Financial Stability Facility – which was used to bail out Greece, Portugal and Ireland – with the €500bn European Stability Mechanism that is due to be established in July. However, Gurrķa called for a fund closer to €1tn to "show the markets that you have the firepower".
The OECD report outlines four recommendations for resolving the crisis: increasing the size of the firewall, recapitalising the banking system, putting in place the ESM as planned and dealing with Greece "rapidly and in a structured way". Speaking alongside Gurrķa, European Commission vice-president Olli Rehn said the eurozone's actions were "in line" with the OECD's advice. "Further reinforcement of our financial firewall will be decided on Friday, which will help us to remove any possible remaining doubts about the euro area's commitment to overcoming the crisis," he said, adding that negotiations on the precise size of the firewall were "ongoing".
Even merging the two bail-out funds might not be sufficient, according to Guy Verhofstadt, leader of the Alliance of Liberals and Democrats in the European Parliament. "Member states must acknowledge that by having procrastinated, the decision to establish a real firewall has become more costly," he said in a statement ahead of the Copenhagen meeting. He called for the mutualisation of over 60 per cent of the debt of eurozone countries that have not been bailed-out, until debt levels are reduced.
Meanwhile the OECD said that strengthening the single market "should be at the centre of EU policy action to boost growth", along with labour market reforms and structural reforms. The report also urged the EU to ensure that migration "responds more directly" to the skills shortage being experienced in many member states, while also "making better use of the existing population".
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