The webinar, which took place on 7 July, revealed how recovery in the fragile euro zone has been weaker than in the United States and Japan. Domestic demand only ceased to fall in the first quarter of 2010 despite strong fiscal and monetary policy, which reduced interest rates to close to zero and generated an extraordinary liquidity provision, webinar participants heard.
Sveinbjorn Blondal, Head of the Macroeconomic Policy Division of the Organization for the Economic Cooperation and Development (OECD), shared his views in a forty minute presentation, followed by an interactive session of questions and answers in real time.
Mr Blondal reported that the euro zone’s recovery had been hampered by a structural policy setting that impeded adjustment to negative and repeated shocks. There were also concerns that had undermined confidence and raised outlook risks.
The current turbulence implied a number of inter-related concerns such as: the fiscal situation and sovereign debt, weak banking systems, imbalances and competitiveness problems within the euro zone, and governance issues.
Webinar participants also heard how a major near-term fiscal consolidation plan had already been decided (In Greece 11% of GDP in 2010-2012 and in Portugal and Spain 5% of GDP in 2010-2011) but elicited only a muted reaction in financial markets, especially for Greece. Doubts about implementation of consolidation and questioning of fiscal sustainability, even given planned consolidation, explained the muted reaction, according to Mr Blondal.
The OECD economic outlook on the euro zone for May 2010 showed a very weak recovery of 2.25 % in the fourth quarter of 2011. Since the outlook was released more intensive fiscal consolidation is expected in 2011 (by 0.3% of GDP).
Regarding the impact of euro area developments on the rest of the world, the import ratio in the euro area was similar to that of the United States and Japan. The share of exports destined to the euro area differed across countries: around 10% in Japan and China, close to 20% in the United States and close to 50% in the United Kingdom.