OECD predicts seventh year of recession for Greece

Paris-based OECD says European Central Bank must consider new ways to help lift the eurozone out of recession, including a US-style quantitative easing programme

The EBC needs to consider quantitative easing - printing money for asset purchases - to revive growth, says the OECDThe Greek economy will contract for a seventh consecutive year in 2014, by 1.2%, compared with the European Commission's forecast of 0.6% growth, the Organisation for Economic Co-operation and Development (OECD) said on Wednesday, in a prediction that is more downbeat about the country's growth prospects than the troika's.

This will have implications for Greece's ability to return to the money markets, as a weaker-than-expected economy might require more emergency loans from the eurozone and the International Monetary Fund, the OECD said.

Overall, the OECD's economic forecasts were generally more pessimistic than those of the European Commission and eurozone governments, forecasting that France, the bloc's second largest economy, would contract 0.3% this year. That compares to the commission's -0.1% estimate.

Portugal could also shrink 2.7% this year, greater than the government's -2.3% forecast and a worsening compared to the OECD's previous estimate of a 1.8% drop in GDP, although the OECD still expects a 0.2% recovery next year.

The OECD also cut its forecasts for Italy from projections made less than a month ago, saying the economy would contract by 1.8% this year. The recession that has already lasted for seven straight quarters will extend to the end of the year before growth edges up by 0.4% in 2014, it said.

Print money

Calling for bold steps beyond just interest rate cuts, the Paris-based body said in a report that the European Central Bank, which shored up the eurozone last year, needs to act again to lift the bloc out of recession.

Still waiting for a recovery almost a year after the ECB offered to do "whatever it takes" to save the bloc, the OECD said the bank must consider new ways to help, including a US-style quantitative easing programme.

"Europe is in a dire situation," OECD chief economist Pier Carlo Padoan told Reuters. "We think that the eurozone could consider more aggressive options. We could call it a eurozone-style quantitative easing," he said, referring to the policy of printing money for asset purchases to revive growth.

The OECD's call echoes that from a top US Federal Reserve official earlier this month and adds to expectations the ECB will consider "non-standard monetary policy measures".

The ECB has run its own bond purchases programmes in the past but has always withdrawn an equivalent amount of money from markets - in effect not printing new money - to ensure its interventions have no impact on the money supply for fear of pushing up the rate of inflation.

But eurozone inflation is well below the ECB's 2% target level at 1.2% in April, and Greece is already seeing deflation, along with noneuro country Latvia which is due to become the bloc's 18th member next year.

The OECD did not go into details about whether the ECB should emulate the Fed, which is buying $85bn worth of bonds every month, but it warned that a failure to move and strengthen banks was a "major risk".

Predicting an economic contraction of 0.6% in the eurozone's economic output this year, the OECD said the ECB should also consider cutting its deposit rate below zero because interest rates are already at a record low.

That would mean charging commercial banks for holding their money overnight, encouraging banks to lend out money to businesses and households rather than hold it at the ECB.

Such a move might help counter the lack of bank lending in southern Europe, where companies and consumers are often seen as too risky and banks prefer to keep their money in Frankfurt.
 

Reuters