OECD warns eurozone on debt

(PARIS) - Eurozone nations are enjoying a sustained if muted recovery but need to adopt tough measures to correct economic imbalances and must soon begin to cut their massive debt loads, the OECD said Monday.

The eurozone should also put in place a permanent crisis resolution mechanism that would force nations to carry out reforms to get aid, the OECD said, an issue European leaders are expected to tackle at a summit later this week.

In its latest survey of the 16 nations which share the euro, the Organisation for Economic Cooperation and Development said a "gradual and sustained recovery" is underway in the but that "the pace of recovery is likely to be muted."

Growth in the eurozone is likely to come in at 1.7 percent this year and in 2011 and then rise to 2.0 percent, according to the OECD's latest forecast.

With jittery government debt markets having forced both Greece and Ireland to seek international bailouts this year, the OECD urged the eurozone states to quickly slash deficits and debt despite the slow pace of growth.

"Fiscal consolidation is the immediate priority to stabilise the public finances and should begin by 2011 at the latest in all countries."

The report said that while some countries have in fact begun to cut their deficits, they should all adopt "credible and detailed medium-term plans" as part of efforts to better manage fiscal policy.

But eliminating public deficits could still leave eurozone countries with high debt levels, leaving them in a poor position to respond to future crises and the costs of their ageing populations, it noted.

"Prolonged consolidation is thus required in most countries to reduce the debt-to-GDP ratio to prudent levels," said the OECD.

It also urged eurozone countries to undertake reforms of their protected labour and product markets, which would not only help adjustment within the monetary union but would drive the growth needed to reduce debt levels.

"Structural reforms in labour and product markets would facilitate economic adjustment and will be particularly important for achieving vigorous growth in coming years," the report said.

Noting that the eurozone's current policies were insufficient to prevent the imbalances that led to the debt crisis, it called for a "reinforced Stability and Growth Pact (SGP)" to discipline with sanctions those who fail to bring their budgets and debt levels into line.

The OECD also called for the eurozone to establish a "credible mechanism for fiscal crisis management" that would make receiving aid conditional on undertaking needed reforms and adjustments.

"For solvent countries facing liquidity pressures, this should involve a permanent liquidity-support mechanism subject to strong conditionality," said the OECD, adding that contingency plans for withdrawing aid to states that fail to meet conditions should be drawn up.

Conditionality on the 110-billion-euro (145.5-billion-dollar) Greek and 85-billion-euro Irish bailouts has been enhanced by the involvement of the International Monetary Fund, an issue which intitially was very controversial.

European leaders are expected to move forward at a summit later this week on developing a permanent European Stability Mechanism to replace the temporary 750-billion-euro rescue measures that end in 2013.

In a separate report, the OECD said its index of composite leading indicators showed that for the United States, China and to a lesser extent France showed "signs of improvement" in October compared to September.

In Germany and Japan the indicators "show moderation toward a stable pace of expansion" but economic recovery in Southeast Asian nations was now losing steam, the OECD said.