OECD WARNS EUROZONE ON DEBT

Paris, December 13 (AFP)- Eurozone nations are enjoying a sustained if muted recovery but need to adopt biting sanctions to correct economic imbalances and must soon begin to cut their massive debt loads, the OECD said on Monday.

The eurozone should also put in place a permanent crisis resolution mechanism that would force nations to carry out reforms to get aid, the OECD said, an issue European leaders are expected to tackle at a summit later this week.

In its latest survey of the 16 nations which share the euro, the Organisation for Economic Cooperation and Development said a "gradual and sustained recovery" is underway in the but that "the pace of recovery is likely to be muted...".

Growth in the eurozone is likely to come in at 1.7 percent this year and in 2011 and then rise to 2.0 percent, according to the OECD's latest forecast.

With jittery government debt markets having forced both Greece and Ireland to seek international bailouts this year, the OECD urged the eurozone states to quickly slash deficits and debt despite the slow pace of growth.

"Fiscal consolidation is the immediate priority to stabilise the public finances and should begin by 2011 at the latest in all countries”.

The report said that while some countries have in fact begun to cut their deficits, they should all adopt "credible and detailed medium-term plans" as part of efforts to better manage fiscal policy.

But eliminating deficits would nevertheless leave eurozone countries with high debt levels, leaving them in a poor position to respond to future crises and the costs of their ageing populations, it noted.

"Prolonged consolidation is thus required in most countries to reduce the debt-to-GDP ratio to prudent levels," said the OECD.

It also urged eurozone countries to undertake reforms of their protected labour and product markets, which would not only help adjustment within the monetary union but would drive growth needed to reduce debt levels.

"Structural reforms in labour and product markets would facilitate economic adjustment and will be particularly important for achieving vigorous growth in coming years," said the report.

For the moment the OECD did not recommend that the European Central Bank pull the plug on the measures it has taken to support the eurozone financial system.

"As soon as upside risks to price stability in the medium-term emerge, monetary policy stimulus should be withdrawn," it said, adding that exceptional support measures should be ended as conditions allow.

Noting that the eurozone's current policies were insufficient to prevent the imbalances that led to the current sovereign debt crisis, it called for a "reinforced Stability and Growth Pact (SGP)" to discipline those who fail to bring their budgets and debt levels into line.

"Minimum fiscal standards set by the SGP should be better enforced: a range of sanctions, including financial penalties, should be applied quasi-automatically under the SGP early in the surveillance process," said the OECD.

The original SGP contained sanctions but was gutted when the major eurozone countries found they could not meet its conditions. European leaders have also signalled they plan to tighten its provisions.

The OECD also called for the eurozone to establish a "credible mechanism for fiscal crisis management" that that makes receiving aid conditional on undertaking needed reforms and adjustments.

"For solvent countries facing liquidity pressures, this should involve a permanent liquidity-support mechanism subject to strong conditionality," said the OECD, adding that contingency plans for pulling aid to states that fail to meet conditions should be drawn up.

Conditionality on the 110-billion-euro (145.5-billion-dollar) Greek and 85-billion-euro Irish bailouts has been enhanced by the involvement of the International Monetary Fund.

European leaders are expected to move forward at a summit later this week on developing a permanent European Stability Mechanism to replace temporary 750-billion-euro rescue measures that end in 2013.

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