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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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Key challenges

Economic growth in the euro area economy began to moderate in early 2007 and has steadily lost momentum, with the area-wide economy now having slipped into recession. Consumption is expanding sluggishly, investment is now declining, and net exports are being weakened by the slowing world economy. Past increases in food and energy prices had pushed headline inflation well above the rate consistent with price stability, although it has now begun to decline sharply as global prices have dropped and the economy has slipped into recession. Since August 2007, the euro area and other developed economies have experienced a period of turmoil in international financial markets following a prolonged global credit cycle. This intensified after mid-September 2008 and is now placing considerable downward pressure on activity, adding to the drag on output from declines in residential investment. The immediate challenges stemming from the liquidity squeeze have been addressed by the European Central Bank through its monetary operations and by the emergency support measures taken by European governments to restore confidence in financial markets, but there continues to be considerable stress in financial markets. The policy rate has been reduced sharply already as downside risks to activity have emerged and inflationary risks have receded, and there could well be scope for further monetary easing in the coming months as economic slack develops. For the longer term, the financial market turmoil highlights the considerable challenges facing the European policy framework, as well as underlining the importance of appropriate measures to deal with the possibility of relatively rare, but severe, systemic events in financial markets that have the power to harm the wider economy.

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