BRUSSELS (MNI) – The European Central Bank may need to consider
using a wider set of non-standard measures should the Eurozone economic
crisis worsen, the Organisation for Economic Cooperation and Development
said in a report published on Tuesday.

The OECD also urged the currency bloc to boost the size of its
crisis firewalls and persevere with deficit and debt cutting, even
though it risks exacerbating the economic downturn.

The multi-lateral think tank praised the unconventional policies
adopted by the ECB last December — including almost E1 trillion in
cheap three-year loans to banks and a lowering of credit eligibility
standards — for having successfully lowered interbank lending rates and
lowering sovereign bond spreads. But the organization cautioned that
“market conditions remain far from normal” and that investor confidence
in the sovereign debt of Eurozone countries is “fragile.”

“With inflationary pressures expected to remain moderate in an
environment of weaker growth in the euro area and globally, the ECB has
eased monetary policy by reducing short-term interest rates and has
expanded the balance sheet to provide liquidity to banks and thereby
support the monetary transmission mechanism,” the OECD said. “A wider
set of non-standard measures could be needed if the transmission process
becomes further impaired,” it noted.

“At the same time, the effect of recent ECB measures is still
unfolding,” the Paris-based organisation said.

Eurozone governments need to take “decisive action” to stabilise
sovereign debt markets, including further expanding their stability
funds, the OECD report said, in a timely message to the bloc’s 17
finance ministers, who are set to debate the issue at a meeting in
Copenhagen this Friday and Saturday.

The OECD acknowledged that some key elements of the Eurozone’s
crisis strategy, including fiscal consolidation and bank
recapitalisations, risked “restricting economic activity before the
benefits of healthier public finances and growth-boosting reforms
materialise.” However, the government-financed policy institute said
that countries receiving financial bailouts “should stick to headline
targets.”

“Countries facing close market scrutiny should continue to meet the
agreed budgetary targets and stand ready to pursue further consolidation
measures if needed,” the OECD said.

Structural reforms to “boost growth, improve debt sustainability
and rebalance the economy” are also essential to help the Eurozone
improve what the OECD described as Europe’s weakest growth prospects in
20 years.

Improving the functioning of the EU single market through easier
cross-border business conditions and freeing up the movement of labour
between EU countries are essential, the OECD said.

–Brussels newsroom: +324-9522-8374; pkoh@marketnews.com

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