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Christina Vasilaki: The OECD Warns Against the Danger of Deflation

The risk of deflation, high unemployment rates -particularly among the youth- and ever increasing inequalities between the member-states of the Eurozone persist, while the first signs of economic recovery are starting to emerge, according to the latest survey of the OECD.

“The Eurozone exited from recession in the second quarter 2013, following six quarters of declining GDP,” according to the summary of the economic survey of the international organisation that came to light in the past week. The survey argues that confidence has been restored, in light of the Outright Monetary Transactions (OMT programme of the ECB for the purchase of bonds, which was announced in 2012), the progress in fiscal consolidation, the structural reforms and balancing of external account deficit, while stressing that significant steps forward were taken with regard to the reform of the banking supervision system. The same survey goes on to underline that, nevertheless, “sizeable differences remain, especially on the labour market, which usually lags behind recovery: the unemployment rate in Germany is at a record-low level of about 5%, but exceeds 25% in Spain and Greece. In the vast majority of countries, unemployment among the young is at least twice the overall rate”.

Concerning the danger of deflation or an extended period of very low inflation, the survey says: “the large degree of economic slack has put persistent downward pressure on inflation, which is well below the ECB’s quantitative definition of price stability”, i.e. lower than 2%. In case that this trend continues, the survey advises the ECB to take “further unconventional measures”, while stressing that Greece, Cyprus and Spain are already experiencing deflation.

Despite these findings, the OECD survey remains aligned with the track of fiscal “restraint” for the member-states of the Eurozone, as it proposes that tight government budgets are maintained.

More specifically, it proposes that the members of the Euro:

  • Continue to pursue fiscal consolidation, in compliance with the requirements of the Stability and Growth Pact -as planned- thus allowing automatic stabilisers to be fully operational.
  • Maintain fiscal consolidation, in order to boost growth and employment.
  • Secure effective implementation of the strengthened EU and fiscal pact rules in their respective national fiscal frameworks, including medium-term budgets, forecasts for future expenditure and revenue, and effective mechanisms for mending deviations from fiscal targets.


Banking Union

The survey notes that progress has been made in establishing a European banking supervision mechanism, although it also sounds the alarm regarding non-performing loans. As mentioned, the “red” loans incurred to the balance sheets of banks are a major risk to the fragile economy of the region.

It is emphasised that “the crisis left Europe with high non-performing loans, fragmented capital markets and a negative feedback loop between sovereigns and banks”, whereas “substantial public funds have been spent to save failing banks in some countries, while private creditors have taken fewer losses”.

As far as the forthcoming stress-tests of European banks are concerned, the survey stresses the need for credible results and welcomes the establishment of firm institutions that “foster unbiased risk assessment in financial markets”.

Among the recommendations on banking unification are securing equal treatment in the bail-in process of bank creditors in all states, so as to avoid making the process of banking resolution more complex and negate any effects on their funding, as well as ensuring that national involvement in defining resolution prerequisites is minimised.



The survey notes that, “for the first time since the outburst of the crisis, debt-to-GDP ratios are about to stabilise in most euro area countries thanks to substantial consolidation efforts in the last two or three years,” while pointing out that “debt levels are nevertheless still much too high, and remain in many euro area countries above the 60% of GDP reference value set in the Treaty on the Functioning of the European Union (TFEU).” As a result, several countries are advised to move forward with budgetary consolidation more vigorously, in order to stabilise their debt at 60% of GDP. With regard to Greece, in specific, during the presentation of the study in Brussels the secretary general of the organisation for Economic Cooperation and Development (OECD), José Ángel Gurría, referred to the country’s debt, which amounts to 170% and is “extremely difficult” to meet the projections that refer to its reduction to 120%. Mr. Gurría said that these projections were based on much higher growth levels, which is currently not the case; therefore, we ought to re-examine the debt with more objectivity.