September 15, 2023
The European economic recovery has been disrupted by Russia’s war of aggression against Ukraine, which has driven energy and food prices higher and curbed the post-pandemic rebound. While co-ordinated and timely policy action helped avoid a severe downturn, the near-term outlook remains clouded by uncertainty, according to a new OECD report.
The latest OECD Economic Survey of the European Union and the euro area looks at how European economies are reacting to the negative external shocks as well as the challenges facing Europe moving forward. The Survey projects growth will pick up gradually, from 0.9% in 2023 to 1.5% in 2024, with inflation expected to decrease to 5.8% in 2023 and 3.2% in 2024, but to remain above the European Central Bank’s 2% target.
Given broad-based and persistent inflation, monetary and fiscal policy need to act in synergy to durably reduce inflationary pressures, according to the Survey. Driving down inflation will require a continuation of restrictive monetary policy, as well as greater efforts to ensure that fiscal policy becomes better targeted and more sustainable.
The Survey recognises that financial vulnerabilities are significant, especially in countries with high levels of private debt and a high share of variable mortgages. The authorities should use macroprudential policies and other targeted instruments to address financial sector risks, as needed. Fiscal sustainability should be grounded in well-prioritised, more efficient public spending and underpinned by improved economic governance, notably stronger compliance with fiscal rules. These should refocus on debt sustainability and multiannual expenditure plans to ensure a more countercyclical fiscal policy and a downward path to more prudent debt levels.
The Survey says that a stronger and deeper Single Market can help Europe boost growth and innovation while fostering structural change. Priorities should include renewed efforts to ensure a level playing field, through a consistent and evenly applied state aid framework, as well as a re-direction of EU resources towards support for green R&D, innovation and early-stage support. Further harmonisation of national regulations and their alignment with EU rules for digital services, the circular economy and building codes is needed, alongside continued co-ordination of national efforts to fight corruption and fraud.
Achieving climate change objectives – notably the net-zero target by 2050 – will require an acceleration of emission reductions. More action is needed across all sectors, but particularly in sectors not covered by emission trading, notably agriculture, buildings and transport. Reducing emissions in these sectors will rely on regulatory measures and a gradual alignment and raising of carbon prices.
An important element of the green transition is affordable and secure energy, which requires more integrated electricity markets. Deeper capital markets could support the development of new clean technologies, while improving labour mobility and skills will help to reduce transition costs.
Source: OECD
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