European reforms paying off, says OECD

European reforms are starting to pay off, bringing the public finances of many Member States back to health, says the Organization for Economic Cooperation and Development (OECD).

Many Eurozone economies emerged from the financial crisis with alarmingly high current account deficits; most of them now boast surpluses. Market tensions have eased off and debt-to-GDP ratios are stabilizing.

Europe’s economies are recovering again, albeit slowly. However, they still face some “daunting challenges”, including unemployment. In Greece, 27% of the country’s adult population have no jobs and the majority of its young adults (18 to 25 years of age) are jobless.

The OECD has published two reports, one on the EU as a whole and the other on the Eurozone. They set out policies required to guarantee sustainable medium- and long-term economic growth and address the increase in inequality across society.

European reforms effective, but government debt still high

OECD Secretary-General Angel Gurría said:

“Fiscal consolidation has made much progress, but government debt in many countries is still too high. Continued consolidation is needed, but without losing sight of the need to support inclusive growth and job creation.”

“Reforms to strengthen the banking sector, reinforce the single market and foster new sources of growth in a low-carbon economy are also crucial.”

Gurría who presented the reports in Brussels with European Commission Vice-President Joaquín Almunia, added “Restoring credit flows and investment is also crucial. So the sooner banks’ balance sheet problems are tackled the better.

European reforms

(Source: OECD)

Banks’ asset risk weighting

The methodology for the asset risk weighting of banks should be improved in the Eurozone, the The Euro Area Survey notes. The report welcomes the development of the Single Supervisory mechanism, but suggests a higher priority should be placed on “leverage ratio”, which measures a financial institution’s capital relative to its non-weighted assets.

The authors add that “greater competition is essential to promote the labor and product market mobility necessary for dynamic economies to thrive.”

Spain, Portugal, Greece and Ireland have made significant progress in implementing the structural reforms to modernize their economies, the authors of The Economic Survey of the EU said.

Both reports emphasize the need for deeper and broader action across Europe. The European Semester and Horizon 2020 initiative, along with some others have only had limited effects.

The European Services Directive needs to go further in order to reinvigorate the Single Market, the authors wrote. Companies are hindered by a maze of rules across EU nations. “Co-operation between national regulators could be strengthened and labor mobility boosted by developing automatic recognition of qualifications.”

The main aim of a single market is to facilitate free-trade (no taxes) in goods and services between member states.

The EU must maintain its focus on achieving a low carbon economy, as well as adopting “an ambitious 2030 emissions target.”

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