The doubling of the International Monetary Fund's firepower, an increase in Europe's bailout fund and liquidity injections should be enough to contain Europe's sovereign debt crisis, the head of the Organisation for Economic Cooperation and Development said on Wednesday.
European officials need to boost economic growth with deregulation, education and environment-friendly technology, because there's little room to maneuver with fiscal policy and monetary policy, said OECD Secretary-General Angel Gurria.
We've run out of monetary policy room because interest rates are around zero, Gurria said after giving a speech.
We've run out of fiscal policy room because we're trying to bring down fiscal deficits and accumulated debt. So, what to do? We say, 'Go structural, go social, go green.'
The IMF last weekend secured commitments of over $430 billion in funding, more than doubling its lending power to help it safeguard economies from Europe's two-year-old debt crisis.
The funding boost follows Europe's agreement last month to boost its bailout fund to $1 trillion and the European Central's move to pour more than 1 trillion euros of ultra-cheap, three-year funds into the banking system since the end of December.
The ECB's benchmark interest rate is currently at 1.0 percent.
European officials have been struggling to contain a debt crisis that brought Greece to the brink of uncontrolled default.
The collapse of the Dutch government on Monday after the opposition rejected an austerity budget needed to meet European Union targets has fanned speculation that the crisis could spread to Spain, Italy and Portugal; three countries with large public debt.
Europe's debt crisis has also led some investors to turn a wary eye to Japan, which has the worst debt burden among industrialized economies at nearly twice the size of its $5 trillion economy.
Japan's tax revenue is the fifth-lowest among OECD members, so higher taxes are essential to fiscal discipline, Gurria said. However, Japan's rapidly ageing society makes it difficult to cut fiscal spending, he said.
Gurria said he supported Japanese Prime Minister Yoshihiko Noda's plan to double the 5 percent sales tax to pay for welfare spending, but Gurria chided the Japanese government because tax hikes won't start until 2014.
The average value-added tax in the OECD is 18 percent, Gurria said, referring to a tax similar to Japan's sales tax.
The fact that you're moving from 5 percent to 10 percent is commendable. The fact that you're taking so long is not commendable.
Japan should start raising taxes right away and may gradually need to raise them to 15 percent or more to improve public finances, Gurria said.
Japan should use welfare spending targeted at low-income households instead of tax breaks to offset the higher tax burden in the short term, he said.
(Reporting by Stanley White; Editing by Kim Coghill)