Jan-2011-International

INTERNATIONAL AFFAIRS

OECD sees growth firm
Global economic recovery is on track, helped by a stronger United States, but threats ranging from high oil prices to European sovereign debt crises could yet combine to create a bout of stagflation, according to the Paris-based Organisation for Economic Co-operation and Development (OECD).

OECD says the US and Euro area economies were growing faster than expected in forecasts six months ago, although Japan’s economy was set to contract after the March earthquake, tsunami and nuclear crisis.

In its twice-yearly Economic Outlook, the OECD forecast world growth would ease to 4.2 per cent in 2011, from 4.9 per cent in 2010, before accelerating to 4.6 per cent in 2012. “This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again,” OECD Secretary-General Angel Gurria said.

There is also some concern that if downside risks reinforce each other, their cumulative impact could weaken the recovery significantly, possibly triggering stagflation in some advanced economies.

The OECD also cited a slow recovery in Japan as a possible threat to its economic partners, especially if global supply chains remain disrupted as a result.

The effect would be all the more damaging if coupled with a bigger-than-expected slowdown in China, a spiralling sovereign debt crisis in Europe and/or persisting uncertainty over budget policies in the United States and Japan, the OECD warned.

If those risks coincided with a renewed surge in oil prices, then the major economies could see stagflation—the pernicious combination of stagnant growth and high inflation.

The situation was made all the more fragile by high levels of debt, with the average level of debt across the OECD expected to top 100 per cent of output in 2011.

OECD chief economist Pier Carlo Padoan said major economies were not only strong enough to withstand fiscal tightening, but needed to get debt down to keep it from becoming a brake on growth.

European Union Summit
Major decisions on economic policy, immigration, relations with North African countries and Croatian membership were taken during the EU Summit, held June23-24, 2011 in Brussels.

EU leaders agreed to expand measures to coordinate economic reforms and spending policies. They endorsed the Commission guidelines on measures which each EU country should take to stimulate economic growth, create jobs and keep public finances under control.

The decision closed the first “European semester”, a six-month process during which EU governments consult each other as they formulate spending plans and economic policies.

Governments must now take the guidelines into account when drafting their budgets and making reforms for 2012.

EU leaders also agreed to changes increasing the effectiveness of a temporary fund providing financial help to euro zone countries in difficulty. It will be replaced by a permanent €500bn fund in 2013.

They encouraged Greece’s Parliament to pass laws on a fiscal strategy and privatisation. The reforms will allow euro zone countries and the International Monetary Fund to provide more support under a new rescue package.

Euro zone leaders agreed that the private sector should provide some of the additional funding. They reaffirmed their commitment to do “whatever is necessary” to ensure the financial stability of the single currency.

Member governments asked the Commission for ideas on strengthening cooperation among the countries in the EU’s border-free area. The measures should allow countries to coordinate their responses to exceptional circumstances, such as sudden inflows of asylum seekers. Leaders called for proposals on common asylum procedures to be agreed by 2012.

The summit also called for Croatia's membership negotiations to be concluded by the end of June 2011. They hope to sign a treaty with the country, allowing Croatia to join the EU on  July 1, 2013.