Economic growth in the euro area has seen a growing confidence in the currency throughout the EU and new all-time highs in the euro area, the OECD reports in its survey of the euro area.
But despite the ongoing economic expansion and the ECB’s expansion of the money supply, nominal wage growth did not pick up meaningfully and higher headline inflation in 2017 meant limited real wage gains.
The average improvement in real disposable incomes “was not inclusive: more rapid growth of top incomes and weak improvements at the bottom meant that the overall income inequality did not decrease”, the OECD says.
While investment is picking up in many euro area countries, the accumulated weak performance, especially in countries hit the most by the crisis, will keep the aggregate investment in the euro area below the 2007 probably until next year.
Inflation
The report notes that inflation remains well under the target of below, but close to, 2 per cent., and the forward guidance of the ECB points to a very gradual normalisation of its monetary stance.
The OECD urges the bank to maintain an “accommodative monetary policy” until inflation is durably back to the objective, but then gradually to reduce its support.
It urges continued fiscal discipline to reduce debt ratios and says the improved financial situation should be used “to complete monetary and banking union Further reforms in the architecture of the monetary union are needed to enhance its resilience to downturns and ensure its long-term sustainability”.
In particular, to ensure smooth resolution of banks, to use the European Stability Mechanism as a fiscally-neutral backstop for the Single Resolution Fund that can be deployed rapidly. It is a proposal likely to get strong support at this month’s European Council.
The OECD also backs commission proposals to set up a common fiscal stabilisation capacity, for example through an unemployment benefits re-insurance scheme, and allow it to borrow in financial markets.
Funding
The report argues that charging more to member states which draw regularly on such funding would ensure that it would not become a transfer mechanism from the wealthier states, a prospect that has been the main barrier in Germany to such ideas.
Better integration of euro area capital markets would lead to more diversified sources of financing and more substantial cross-border investment, the report says. Progress on harmonising insolvency regimes would remove an important barrier to cross-border financial intermediation, by reducing legal uncertainty and facilitating the efficient restructuring of companies and resolution of non-performing loans.
“In addition to removing the bias towards debt financing over equity, the tax preference for debt over equity should be addressed in the context of the Common Consolidated Corporate Tax Base proposal,” the OECD suggests.
