Eurozone countries are being urged to take a new approach to economic and financial management to stabilize national economies, some of which have been severely damaged by public debt and financial woes.

While offering a long list of policy recommendations, the Paris-based Organization for Economic Cooperation and Development (OECD) said on Monday that the current policy framework was not sufficient to prevent the emergence of national economic, financial and fiscal imbalances, and leaving some countries unprepared to deal with subsequent crises.

"In the context of a common monetary policy and single currency, greater differentiation of other policy settings is required to stabilize national economies, and unsustainable policies at the national level that can lead to spillovers need to be avoided," the OECD said in a new report.

The OECD's latest Economic Survey of the Euro Area, presented on Monday in Brussels by the OECD's Deputy Secretary-General and Chief Economist Pier Carlo Padoan, confirms that a moderate recovery is under way.

The OECD forecasts annual economic growth of 1.5 percent to 2 percent during the coming two years. The organization also said that inflationary pressures will remain weak and unemployment will remain above 9 percent during the next two years.

Estonia will begin to introduce the euro on Jan 1, 2011, and become the 17th member of the euro area. It became an official member of OECD last week.

But Padoan said the new cross-cutting approach should rest on a broad range of policies that can tackle the sources of macroeconomic imbalances, including sound fiscal policies, the development of macroprudential tools, and structural reforms.

The report also said that the wage-setting mechanisms should be more attuned to maintaining competitiveness. Distorting housing market policies that exacerbate housing cycles should be removed and the structural barriers that impede economic adjustment, productivity gains and sustainable growth should be addressed.

To put the euro area on a more robust footing, Padoan urged eurozone governments to improve fiscal discipline through the reform of euro area budgetary rules and the creation of national fiscal councils.

"In the current climate of uncertainty surrounding euro area sovereign debt, implementation of these reforms by European authorities would contribute to restoring stability," said Padoan.

An appropriate operational definition of the reduction in debt for countries with debt above 60 percent of GDP should be put in place so that the debt criterion can be applied effectively.

National governments are ultimately responsible for their public finances and all euro area countries should adopt and abide by broad-based medium-term frameworks for public finances based on multiyear paths or ceilings for both current and capital expenditures.

The European Union should be ready to withdraw financial support from countries such as Greece if the conditions attached to bailouts aren't met, and such terms should be part of any permanent aid facility, Reuters quoted the OECD as saying.

"A credible mechanism for fiscal crisis management is required," the organization said. "This should involve a permanent liquidity-support mechanism subject to strong conditionality. If conditionality is not fulfilled, financial support should be withdrawn."

The comments underline the high stakes for EU leaders as they prepare to gather in Brussels later this week to thrash out a permanent crisis-resolution mechanism to replace the 440 billion-euro ($580 billion) stability fund created in May in an attempt to halt the spread of the region's sovereign-debt woes. The current mechanism is scheduled to expire in 2013.

Euro area countries have experienced their most severe recession of the post-war era, alongside other OECD economies, followed by a sovereign debt crisis in some countries. This has been the first major test of the resilience of the euro area since the advent of monetary union.

OECD said coordination of the response to the crisis has been complicated by the governance arrangements of the euro area, with many powers remaining at national level and multiple actors at the EU and euro area levels.

The OECD said the institutional framework was strengthened with the enforcement of the Lisbon Treaty in December 2009, which for the first time recognized the Euro Group and its role in enhancing the coordination of economic policies.

The European Central Bank's (ECB) exceptional liquidity measures to aid banks helped ease tensions in financial markets following the onset of the economic crisis and ensured the smooth functioning of monetary policy, the OECD said. However, the Frankfurt-based ECB must give careful consideration to asset prices and monetary growth, it said.

"Consideration should continue to be given to factors that may present risks to medium- to long-term horizons, such as asset prices and balance-sheet growth," the OECD said. "It is essential that monetary analysis continue to be enhanced in order to be effectively and systematically incorporated into the policy process."

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