OECD urges eurozone rescue fund boost to 1tn euros

Protests in Madrid Protesters against austerity in Madrid - which some fear will need aid from Europe

The head of the Organisation for Economic Co-operation and Development (OECD) has said that the eurozone needs to double its bailout fund to 1tn euros ($1.3tn; £836bn).

Angelo Gurria said the eurozone must show investors they have the "firepower and by God... I'm going to use it".

But German Chancellor Angela Merkel said that she would favour only a temporary increase to 700bn euros.

Some fear that the fund could not cope with another bailout.

So far, Greece, Republic of Ireland and Portugal have been bailed out.

Most recently, Greece was granted its second bailout of 130bn euros after passing some harsh austerity measures and forcing bondholders to write off half of its debts.

But - despite some calming of financial markets over the past few months - some still fear that large countries like Spain and Italy will also need to be bailed out.

"The mother of all firewalls should be in place, strong enough, broad enough, deep enough, tall enough," Mr Gurria said.

The Bank of Spain on Tuesday confirmed that the Spanish economy had fallen back into recession. It contracted again in the first quarter of 2012, the central bank said, after shrinking 0.3% in the three months to December.

The recession was blamed on a decline in private spending in January and February - down to levels not seen since 2010.

'Investors more concerned'

Start Quote

Those countries that simply have no fiscal space or no credibility in the bond markets, they need to stick to their agreed headline targets no matter what”

End Quote Olli Rehn European Commission

Mr Gurria said that the finance ministers of the 17 nations in the euro, who are meeting later this week, should boost the fund, adding that the current commitments are not enough to restore market confidence.

"Europe is stalling," he said. "It needs to get out of first gear and make growth the number one priority.

"It's something that you're telling the markets. 'I've got the firepower and by God if I need to I'm going to use it'. So anybody that is speculating is going to lose their shirt."

The eurozone created the European Financial Stability Facility (EFSF) in 2010 to serve as a temporary bailout fund.

Under the EFSF, countries with top credit ratings, who can borrow money cheaply, can then lend it on to countries that are struggling.

A new permanent bailout fund, the European Stability Mechanism, is due to be established later this year.

Last month, G20 finance ministers also made the same call for eurozone countries to put more money in their rescue fund, as has the International Monetary Fund.

But backing for such a move will need to come from Germany, Europe's largest economy.

Analysis

The secretary general of the OECD, Angelo Gurria, came to Brussels with a simple message. The eurozone still has plenty of work to do.

Market conditions have improved, but debt levels are still rising, banks are still weak, and several countries are struggling to meet fiscal targets.

The OECD is calling for a much bigger rescue fund, a financial firewall of at least one trillion euros. Eurozone finance ministers are expected to increase the size of their rescue fund later this week. But for many observers, including Mr Gurria, it still won't be enough.

The OECD is also calling on the eurozone to set out more credible and more detailed medium term budgetary plans. The crisis in the eurozone has faded from the headlines in recent weeks, but it hasn't gone away.

The BBC's world economics editor, Andrew Walker, said: "The idea floated by the chancellor involves keeping existing rescue loans outside the new bailout agency that is being established, and so could give the impression that Germany is not putting any more taxpayers money at risk.

"The case for more resources has been underlined in the last few weeks by signs in financial markets that investors are becoming more concerned about Spain as the government there tries to change its borrowing targets."

Spain last month said it would miss a deficit target of 4.4% of output for 2012 agreed with Brussels.

The Bank of Spain has said it expects the economy to shrink 1.5% in 2012 as the government faces a 22% unemployment rate, meaning low income tax revenues and high demand for benefits.

Austerity cuts

The European Commission has predicted that the eurozone economy will contract by 0.3% in 2012 - while the OECD is predicting 0.2% growth for the bloc.

It predicts that Spain and Italy - as well as Greece, Portugal, Belgium, Cyprus, the Netherlands and Slovenia - will all shrink in 2012.

That has led that some economists to say that Spain and Italy will need to do even more in terms of budget cuts than they have already done.

Spain's Prime Minister Mariano Rajoy and Italian Prime Minister Mario Monti are both tackling labour reform - mainly making it easier to hire and fire workers - as their next step.

But many are unhappy with the austerity cuts enacted so far. For example, unions have called a national strike in Spain for Thursday.

Spain on Tuesday paid a higher borrowing rate on 2.6bn euros of six-month debt and the fact that yields on its outstanding debt have trickled higher has worried European officials.

Olli Rehn, the European Commissioner for Economic and Monetary Affairs, said: "Those countries that simply have no fiscal space or no credibility in the bond markets, they need to stick to their agreed headline targets no matter what - including the programme countries, including the countries under particular market scrutiny."

The OECD urged more work to reform the economies of the eurozone.

The reforms "should tackle weaknesses in product market regulation, labour market institutions, tax systems, and strengthen the single market," the body said.

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