The European Central Bank, which shored up the eurozone last year, needs to act again to lift the bloc out of recession, the OECD said yesterday, calling for bold steps beyond just interest rate cuts.
Europe is in a dire situation
The 17-nation eurozone is suffering its longest economic downturn since its creation in 1999, weakened by public debt and banking crises that have nearly shattered the currency area.
Still waiting for a recovery almost a year after the ECB offered to do “whatever it takes” to save the bloc, the Organisation for Economic Co-operation and Development said in a report that the bank must consider new ways to help, including a US-style quantitative easing programme.
“Europe is in a dire situation,” OECD chief economist Pier Carlo Padoan told Reuters. “We think that the eurozone could consider more aggressive options. We could call it a eurozone-style QE,” he said, referring to the policy of printing money for asset purchases to revive growth.
The OECD’s call echoes that from a top US Federal Reserve official earlier this month and adds to expectations the ECB will consider ‘non-standard monetary policy measures’.
The ECB has run its own bond purchases programmes in the past but has always withdrawn an equivalent amount of money from markets – in effect not printing new money – to ensure its interventions have no impact on the money supply for fear of pushing up the rate of inflation.
But eurozone inflation is well below the ECB’s two per cent target level at 1.2 per cent in April, and indebted Greece is already seeing deflation, along with non-euro country Latvia which is due to become the bloc’s 18th member next year.
The OECD did not go into details about whether the ECB should emulate the Fed, which is buying $85 billion worth of bonds every month, but the Paris-based body warned that a failure to move and strengthen banks was a “major risk”.
Predicting an economic contraction of 0.6 per cent in the eurozone’s economic output this year, the OECD said the ECB should also consider cutting its deposit rate below zero because interest rates are already at a record low.
That would mean charging commercial banks for holding their money overnight, encouraging banks to lend out money to businesses and households rather than hold it at the ECB.
Such a move might help counter the lack of bank lending in southern Europe, where companies and consumers are often seen as too risky and banks prefer to keep their money in Frankfurt.
In its report, the OECD’s economic forecasts were generally more pessimistic than those of the European Commission and eurozone governments, forecasting that France, Europe’s second largest economy, would contract 0.3 per cent this year. That compares to the EU executive’s 0.1 per cent contraction estimate.
The OECD is also more downbeat about Greece’s growth prospects than the country’s international lenders. The OECD says the Greek economy will contract for a seventh consecutive year in 2014, by 1.2 per cent, compared with the Commission’s forecast of 0.6 per cent growth.
That has implications for Athens’ ability to return to market, as a weaker-than-expected economy might require more emergency loans from the eurozone and the International Monetary Fund, the OECD said.
Portugal could also shrink 2.7 per cent this year, greater than the government’s -2.3 per cent forecast and a worsening compared to the OECD’s previous estimate of a 1.8 per cent drop in GDP although the OECD still expects a 0.2 per cent recovery next year.