OECD Urges Countries to End Stimulus

The Organization for Economic Cooperation and Development has urged countries to gradually stop the fiscal stimulus measures within 2010. The OECD stated that economic growth will continue during the first half of 2010, albeit at a slower rate. This will be preceded by a decline in supply and an end to additional borrowings.

Paris-based OECD represents 30 high income economies, which fall under the category of developed nations. It is a reliable source for economic and social data. The organization uses this data to analyze the existing economic structures, and provide valuable forecasts on economic growth and development.

To this end, it has recommended that governments should start thinking of medium-term plans and put an end to bailout packages. The chief economist of the OECD, Pier Carlo Padoan, maintained that countries should not put off action on improving their fiscal condition until market pressure increases.

The Greek bond fiasco is a case that the OECD is using to drive home its point. The country’s financial markets are reeling under the hike in yield, or the interest payable on Greek government’s debt. Interest rates rose as high as 7.5% on ten-year bonds while two-year bonds had a yield of over 8%. Investors fear that Greece may be on the verge of bankruptcy and speculation has given way to a fall in European stocks.

Padoan said that a double-dip recession was unlikely in Europe or elsewhere, with the possible exception of Germany. OECD estimated that France, Italy and Germany will grow at a rate of 0.9% annually in the first quarter, and 1.9% in the second. The American economy recorded an estimated growth of 2.4% during the first quarter, which is expected to dip slightly to 2.3% in the second quarter.

Padoan also stated that monetary policies should gradually go back to normal, while exercising caution in removing policy support. The OECD further recommended that China should allow its currency to appreciate, an issue that has become a thorn in US – China relations.

Some developed nations have already chosen to cut back stimulus by announcing limited measures, but they are not ready to increase tax rates yet, fearing adverse effect on the recovery process and public protests. Most central banks have said that they are not in a hurry to increase interest rates or withdraw special measures. Consolidation programs may be announced this year but will come into effect only in 2011.

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