Distribution of average direct payment per beneficiary of the Common Agricultural Policy in the EU25 - - The Common Agricultural Policy (CAP) represents around 40% of the total EU budget (the total support estimate - - encompassing price support and budgetary transfers – is estimated at 0.9% of GDP), and just over a quarter of gross farm receipts/income.

European Union banks may have further problems with toxic assets and capital shortages, the Organization for Economic Cooperation and Development (OECD) warned in a report published today. In a survey of the EU27 economy, the Paris-based OECD said EU governments need to conduct rigorous and transparent stress tests in the banking sector.

Policy briefing

An EU committee of banking supervisors began a series of tests last May, but the OECD says the tests won't identify how much capital banks need or disclose results to the public.

Last Spring in the US, a similar series of tests found that 9 of the country's largest banks needed an additional $75 billion in capital.

"In many EU countries, uncertainties remain regarding the extent of the impaired assets problems on banks' balance sheets and concerns persist that banks may be insufficiently capitalized to deal with a further deterioration in economic conditions," the OECD report said.

"Failure to deal with banks' balance sheet problems adequately could inhibit the functioning of the financial system as well as overall economic growth, for some time," the OECD said.

The OECD also said that real powers of financial supervision should be transferred to the European level to detect risks better and to help create a single market for financial services.

While financial markets have become well integrated, supervision has remained mainly in national hands to the detriment of European growth, according to the organisation, which represents 30 mainly developed economies.

It urged the EU to press ahead with plans to give new powers to a European System of Financial Supervisors as well as a European Systemic Risk Council.

The report says strengthening innovation, deepening the single market and moving to a low carbon economy are among the areas where reform needs to be accelerated to strengthen long-term growth in the European Union after the worst recession in 50 years.

The Economic Survey of the European Union says Europe has responded promptly to the crisis amid signs that member countries will emerge from the recession earlier than expected. But it adds that emergency policies to stabilize financial markets and support the economy must not endanger the single market and must be withdrawn once the economy recovers.

Other structural reforms needed to help prevent future financial crises and improve economic performance include improving financial regulation and supervision, raising the long-term sustainability of public finances and further increasing foreign access to European markets.

“Economic crises can offer opportunities to carry out important reforms to reinforce the long-term resilience of the economy,” said OECD Secretary-General Angel Gurría. “The current crisis has already triggered ambitious reforms to tackle weaknesses in the financial system which, if achieved and implemented effectively, should support longer-term growth prospects.” 

The survey notes that fiscal actions across nearly all member countries, deep cuts to short-term interest rates, quantitative and credit easing policies and actions to stabilise financial markets are helping Europe to weather the economic storm.

The OECD says a major challenge for the EU over the longer-term is to raise the level of innovation; despite numerous policy initiatives, Europe still lags behind the United States and Japan in research and innovation. An integrated labour market for researchers, a European Community patent and a Unified Patent Litigation System would help to stimulate innovation. Tackling obstacles to the funding of innovation and encouraging research co–operation are also critical.

However, such metrics are not always a guide to what is success in innovation. In Ireland, citation in scientific journals is touted as a key metric but it may mean little in terms of results in commercialisation of inventions.

Growth would also be boosted by enhancing competitive pressures in the single market. The Services Directive needs to be implemented in a timely and effective manner and actions taken to ensure proper implementation of single market rules. Competition in financial services, energy markets and network industries can all be raised further.

The EU must continue to resist the rise in protectionist sentiment and push for global trade liberalisation, the report adds. Although recent reforms have reduced distortions in the Common Agricultural Policy, support could be further decoupled from production and payments better targeted to achieve ecological, social or other policy objectives.

The report says policies to reduce greenhouse gases, promote low–emission technologies and cut energy consumption are helping Europe to become a low-carbon economy. But the measures need to focus more on correcting only genuine market failures and be flexible enough to cope with future environmental, economic and technological changes. Faster liberalisation of EU electricity and gas markets is critical to increase competition and improve energy security.