By Kasra Kangarloo

WASHINGTON (MNI) – The creation of an integrated banking union
would only be the first step toward solving the European debt crisis,
according to economists at the Organization for Economic Cooperation and
Development, and it would need to be followed by a period of higher
inflation in Germany and those nations experiencing the higher end of
growth within the Eurozone.

Pier Carlo Padoan, chief economist of the OECD, said in a
conference call with reporters that higher inflation tolerance,
particularly by Germany, would speed up the process of deleveraging by
debtor nations such as Greece, Italy and Spain, which have had to endure
significant wage deterioration and unemployment in order to address
soaring deficits.

“The [debtor] nations are undergoing an adjustment in terms of
lower wages, higher productivity and higher unemployment,” Padoan said.
“But the process remains slow, incomplete and painful,” Padoan said.

By accepting higher wage inflation, creditor countries such as
Germany would provide a boost to debtor countries via increased
consumption, as lower wages would allow the Eurozone’s debtor
nations to be more competitive in the global market.

Without higher inflation tolerance from creditor nations, countries
such as Greece and Italy would be forced to endure slower growth and
higher unemployment. Given the perilous fiscal situation, Padoan says
this trend “cannot be sustainable for long.”

The comments illustrate the sweeping changes European nations would
need to enact in order to fully address the region’s fiscal woes. The
creation of a banking union for the entire euro zone, in itself a
massive and politically difficult undertaking, would only be the first
step.

A banking union, which includes an overarching regulatory regime
and enhanced lending ability by the European Central Bank, would be
needed to shore up the region’s dangerously undercapitalized banking
sector and prevent further runs on sovereign debt, according to Padoan.

Padoan also noted that current European sovereign debt prices “most
likely reflect the risk of a [Eurozone] breakup.”

Regarding the global economy, Padoan said there are four chief
risks to future growth, which include a further deterioration of the
eurozone’s fiscal situation, a sharp fiscal contraction in the U.S. and
Europe, continued weakness in U.S. and European labor markets, and
rising oil prices.

— Kasra Kangarloo is a Washington reporter for Need to Know News

** MNI Washington Bureau: 202-371-2121 **

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