EU should prepare for economic shock

The OECD sees Northern Europe countries most at risk

Photo: EPA OECD chief economist Laurence Boone speaks during an Economic Forum held at the OECD headquarter in Paris, 21 May 2019

In its annual growth report, released last week, the Organisation for Economic Co-operation and Development (OECD) painted a gloomy picture for the global market economy - rising inequalities, slowing growth and strong headwinds, notably because of increasing uncertainties on the world political stage and ongoing trade wars.

To mitigate the consequences of such scenario, Going for Growth 2019 thus gives potential answers to the most important issues that preoccupy the 36 OECD countries and calls on its member states to implement its proposals for reform quickly, especially as these states have lost motivation to reform in recent years.

The report’s authors, for example, consider education to be in the greatest need of reform in all OECD countries and calls on the bloc to restructure its multiannual financial framework (MFF)’s expenditure, saying more needs to be invested in areas that promise long-term growth, including research, education and mobility. This year’s report also focuses on reforms related to environmental sustainability. To this end, the report recommends placing greater emphasis on environmental taxes, reducing agricultural subsidies and abolishing tax concessions that harm the environment.

Commenting on the economic forecast, OECD’s chief economist, Laurence Boone told the Financial Times that Northern Europe should in particularly prepare for a big economic shock, probably by the end of the summer, with chastising countries with a fiscal surplus policy, especially Germany and the Netherlands, being the ones most in danger as “they are not doing enough” in terms of spending.

Boone's view was echoed by Germany’s economy ministry on 15 July, which confirmed that country's economy will experience a “weak” second quarter, but expressed confidence in a rebound if “the external environment settles.” But the risk is that it will not settle, with the German ministry pointing to the prospect of a disorderly Brexit.

In this regard, Boone commented that the European Central Bank (ECB) could do more to boost the economy, even though monetary policy alone no longer suffices and action was needed to support demand. Otherwise, China’s debt-driven stimulus could trigger further economic instability across Europe. She also warned that the bloc must play a more active role on profiling foreign investors, to ensure that global firms adhere to EU trade policy and regulation, ensuring “equal weight and strength” to China and the US.

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