OECD urges EU to increase interest rates further

The President of European Central Bank, Christine Lagarde, delivers a speech at the European Parliament in Strasbourg, France, on Feb. 15, 2023.
The President of European Central Bank, Christine Lagarde, delivers a speech at the European Parliament in Strasbourg, France, on Feb. 15, 2023. Copyright AP Photo/Jean-Francois Badias
By James Thomas
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In its latest report, the Organisation for Economic Co-operation and Development says further reforms are needed to help the post-pandemic European economic recovery.


The EU needs to bolster the single market and keep a restrictive monetary stance if it wants to tackle inflation and boost the resilience of the European economy, the OECD has said.

In a report published on 6 September, the OECD said the European Central Bank (ECB) needs to raise interest rates for as long as possible to put inflation back on a sustainable path towards its 2% target.

The latest data in August showed that inflation across the 20 eurozone countries was 5.3%, with projections expecting it to decrease to 3.2% in 2024.

The report comes as countries across the continent and beyond grapple with the lingering effects of the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine.

The post-pandemic rebound has been muted as the consequences of the war set in, ramping up energy prices as European countries reduced their reliance on Russian fossil fuels and aggravating the cost of living crisis.

In an effort to curb inflation, the ECB has successively raised interest rates, taking it to 3.75% in July, a joint record high last seen in 2000.

The eurozone economy at a glance

The OECD provided an outlook for the eurozone economy in its report.

Private consumption, which provides almost one-fourth of GDP, is currently growing in the eurozone and supported by strong labour markets. The survey says that wages will keep growing in 2023, before they start gradually easing off in 2024. On the other hand, higher rates leading to higher costs and uncertainty in the global economy will burden private investment. 

State aid and recovery plans

Yet despite the somewhat positive outlook, to combat the “critical challenges” of the energy and cost of living crises, the EU needs to protect its single market, according to the OECD. It said it can do so by maintaining a restrictive monetary policy and simplifying labour mobility and rules for posting workers, granting them easier access to the market and increase its versatility.

The organisation said the EU should also avoid relaxing state aid rules further, as it had during the pandemic, so that competition was not tilted in favour of businesses in countries with more fiscale resources.

It suggested instead a more targeted state-aid framework and advises the bloc to redirect EU resources for green R&D (research and development) and innovation.

A big step towards that is the EU implementing its Next Generation EU recovery plan, under which the member states have agreed to invest €807 billion to help each other to “emerge stronger from the pandemic” by putting money towards environmentally-friendly technology, digitalisation and healthcare.

Green transition and the fight against corruption

Other way the EU can protect and nurture the single market is by ramping up efforts to tackle financial crime and accelerating the green transition.

The bloc should continue coordinating national efforts in the fight against corruption and fraud by aligning minimum standards across member states and strengthening provision measures. Doing so would protect the single market by keeping economic efficiency and preventing the waste of public resources, the OECD said.

Meanwhile, stronger carbon pricing, subsidies for renewable technologies that aren’t yet competitive and other regulatory measures will facilitate the EU’s green transition, according to the OECD.

It says an important element of the transition is affordable and secure energy, but the EU needs to further integrate its electricity markets to make that happen.

“Deeper capital markets could support the development of new clean technologies, while improving labour mobility and skills will help to reduce transition costs,” it said.

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