Global economics: Instability in sovereign debt markets still poses threat to supply chain recovery

As reported in SCMR yesterday, a new report from the Organization of Economic Cooperation and Development, trade flows are ramping up.

Instability in sovereign debt markets, however, pose a serious risk to a global economic recovery. It has highlighted the need for the euro area to strengthen its institutional and operational architecture. Bolder measures need to be taken to ensure fiscal discipline, said the OECD report.

"Several countries are already taking early action to enhance the credibility of their fiscal consolidation plans and this is very welcome," said OECD Secretary-General Angel Gurría.
"This is a critical time for the world economy."

He added that coordinated international efforts prevented the recession from becoming more severe but that significant challenges remain.

"Many OECD countries need to reconcile support to a still fragile recovery with the need to move to a more sustainable fiscal path," he said. "We also need to take into account the international spill-overs of domestic policies. Now more than ever, we need to maintain co-operation at an international level."

With a huge debt burden weighing on many OECD countries and the strengthening recovery, the emergency fiscal measures provided by governments to tackle the crisis must be removed by 2011 at the latest, the OECD report stated. It adds that the pace of such action must be appropriate to particular conditions and the state of public finances in each country.

To support growth as budgets are being tightened, macroeconomic, financial and structural policies need to be linked, said OECD spokesmen. Spending cuts or tax rises should focus on areas that are the least harmful to growth, they added.

According to the report, fiscal rules could enhance the credibility of plans to strengthen public finances. Reforming product and labor markets to enhance competitiveness must also be part of the strategy.

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