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OECD Economic Surveys: Euro Area 2009

image of OECD Economic Surveys: Euro Area 2009

This edition of OECD's periodic survey of the Euro Area economy finds a slowing economy, receding inflationary pressures and financial market turmoil  The survey focuses of key challenges being faced including financial market stability, fiscal policy, and financial integration, innovation and the monetary policy transmission mechanism. An annex looks at wealth effects on household consumption.

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Assessment and recommendations

The euro area achieved a high degree of macroeconomic stability over the first decade of economic and monetary union. The end of exchange rate turbulence and realignments within the euro area has proved to be a major asset. However, the financial market turmoil since the summer of 2007 and the intensification from mid-September 2008 is having a major adverse impact on the world economy. Although the immediate cause of the turmoil lay in the US subprime mortgage market, euro area financial institutions and markets were part of the prolonged credit cycle of recent years, and have been hit by heightened financial market stress. The current turmoil is the first financial crisis the euro area has had to face. It initially coincided with a very sharp increase in energy and food prices, as well as a substantial appreciation of the euro which mitigated the inflationary impact but reduced competitiveness. Today’s priority for all member states is to find responses to the financial crisis and ensure their swift implementation. In reacting to these developments, policy actions that would undermine longer term objectives should be avoided. The necessary response to the possibility of financial instability touches many areas of policy making. It involves financial regulators, supervisors, central banks and finance ministries. This Survey reviews recent developments, looks at both monetary and fiscal policy and focuses on the nexus of issues related to financial markets. The macroeconomic analysis covers the euro area, while many aspects of financial regulation relate to national and European Union responsibilities within the European single market. Other structural issues related to growth will be dealt with in greater depth in the 2009 Economic Survey of the European Union.

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