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11/12/2016

OECD warns against austerity in the eurozone

Euro & Finance

OECD warns against austerity in the eurozone

Jyrki Katainen

[European Parliament/Flickr]

The OECD has thrown its weight behind the argument for relaxing budgetary policy, a position championed in the eurozone by France and Italy. The European Commission is due to publish its judgements on the member states’ budget bills on 28 November. EuActiv France reports

The Organisation for Economic Cooperation and Development (OECD) published its Economic Outlook on 25 November, in which it supports the position shared by Paris and Rome, just days before the European Commission’s assessment of the budgets.

The international organisation painted a dark picture of the effects of austerity policies on the economic growth of the eurozone, warning of their limitations at a time when the recovery of the eurozone is still in the balance.

Budget consolidation criticised

The OECD said that “euro area countries should, within the EU fiscal framework, slow down structural budget consolidation relative to previous plans to reduce the drag on growth”.

Angel Gurría, Secretary General of the OECD, singled out the eurozone, along with Japan, as an area of “concern” for the global economy.

Growth predictions for the eurozone remain well below the OECD average of 2.3% for 2015 and 2.6% for 2016: the OECD expects eurozone GDP to grow by 1.1% in 2015 and 1.7% in 2016.

The organisation’s predictions for the French economy also make for grim reading. They have revised their 2015 growth prediction down from 0.9% to 0.8%, contrary to the French government’s prediction of 1%. The French economy is expected to grow by 1.5% in 2016.

Revising the budgetary rules

As well as recommending greater flexibility in the application of the EU’s budgetary rules, the OECD calls for an overhaul of the rules themselves. “The current debate surrounding the European fiscal rules and uncertainty about how they may be applied suggests that it would be advisable to revise the framework,” the organisation said in its latest Economic Outlook.

In the report, the OECD also expressed its support for the relaxation of the rules of the European Stability Pact, in order to spare France and Italy from disciplinary action related to their large budget deficits.

“The slower pace of structural fiscal adjustment relative to previous commitments that France and Italy have proposed in their 2015 budget plans seems appropriate,” the OECD report stated.

Good news for France

This comes as good news for France. France’s Finance Minister, Michel Sapin, welcomed the report, saying “the OECD has confirmed our position […]. In order to restart our economic growth, of course we have to reduce our deficit, but at a pace that is compatible with growth”.

This is not the first time that an international organisation has criticised Europe’s the prioritisation of deficit reduction. The International Monetary Fund had already warned against the damaging pace of European deficit reduction in 2013, particularly in France.

Delayed decisions

The OECD’s analysis of the global economy could not have come at a better time for the member states that are struggling to balance their books, with the European Commission’s final ruling on the national budgets due on 28 November.

France managed to extend the deadline for bringing its budget deficit below 3% to 2015, but remains a long way off achieving this. The French deficit is expected to reach 4.3% of GDP in 2015, and only to fall below 3% in 2017.

The debate in Brussels over France’s excessive deficit moved up a gear last week, when the German Commissioner Günter Oettinger published an editorial calling upon the Commission to stand firm against Paris.

>> Read: French Socialists call for Oettinger to resign

“The European Commission would lose all credibility if we were to extend the agreed timescale for a third time without demanding compensation in a very concrete and precise way,” he wrote, angering the French Socialist party and some within the College of Commissioners.

The Commission’s response to the French budget on 28 November will set the tone for Brussels’ ongoing relations with Paris. The question of sanctions has been put off until the Spring, by which time the 2014 budget will have been finalised and the 2015 budget adopted.

>> Read: Excessive deficit fine looms over France

Background

France's deficit is fast becoming problem number one of the Eurozone. While many countries have tightened their belts by laying off civil servants and cutting pay, France has done neither. The country's public deficit remains very large, and the lack of economic growth leaves a diminished tax base.

Further Reading