OECD: Punish EU’s Weak Economies

The Organisation for Economic Co-operation and Development issued its Euro Area Economic Report. Some of its recommendations were harsh, particularly about punishing financially weak EU nations that cannot balance their budgets. The message was that strong economies in the region cannot carry the weaker ones indefinitely.

Most of the report was useless. Bank stress tests were a good idea and helped to build confidence that the financial system will not face another crisis. Public finances must be rebalanced to bring down deficit spending. Financial firms, the policies of which helped cause the last credit crisis, must be more carefully regulated.

The OECD did say that Europe’s economy had emerged from the recession, but warned that if its suggestions are not heeded, matters could worsen again.

The most aggressive of the proposals in the document is that nations that do not abide by new measures to balance their budgets should lose some degree of their financial independence. The OECD is in favor of what some nations such as Germany have discussed but are not in a position to implement.

Sanctions should range from intrusive surveillance and warnings by the Council to financial sanctions. Consideration should be given to other measures to  increase the costs of taking fiscal risks through non-compliance with EU fiscal requirements, such as making treatment in financial regulations less favourable

The most recent path to improve deficits is a combination of austerity and higher taxes. These actions may work in Spain and even Portugal. It is too late for Greece to escape surveillance by its neighbors. The OECD recommendation goes well beyond that. It anticipates that Greece and some of the other weak nations in the alliance may already be in financial positions which are too difficult to solve. The solution pressed by the OECD is that the problems must be solved for them.

The OECD proposal about how Europe must resolve its debt problems which differ significantly from nation to nation is that a sort of economic servitude is in the future of Greece and perhaps other countries. The OECD has no power to enforce its recommendations, but it has made a clear argument that Europe really has no other choice unless its wants it weaker nations to drag down the financial fortunes of the entire region.

Douglas A. McIntyre