The Organisation for Economic Cooperation and Development (OECD) warned Europe’s leaders this week that failure to embark on reform of the continent’s underperforming economy would put the credibility of monetary union at risk.
In a scathing account of the eurozone’s persistent failure to break out of the low-growth pattern of recent years, the Paris-based OECD said Europe had run out of excuses to explain away its poor recent record.
It said attempts to deal with imbalances in the global economy were being hampered by sluggish growth in the eurozone and it called for a combination of lower interest rates from the European Central Bank and deep-seated structural reforms.
While revising up its forecast of growth in the United States this year from 3,3% to 3,6%, the think-tank used its half-yearly health check on the global economy to slash its prediction for expansion in the eurozone from 1,9% to 1,2%.
Jean-Philippe Cotis, the OECD’s chief economist, said: ”The smooth scenario where the economy was expected to spread more evenly across the OECD has not materialised. While some elements of this scenario, such as a relatively ‘soft landing’ in the US and rebound in activity in Japan, may be in place, what is badly lacking is sustained momentum in the eurozone.”
If the OECD is right, 2005 will be the fifth year running in which eurozone growth has failed to reach 2%. ”It is becoming increasingly evident that circumstantial arguments — Iraq war, oil and commodity price shocks, exchange rate fluctuations — are not sufficient to explain the series of aborted recoveries in continental Europe,” Cotis said.
He added that an encouraging upswing in the first half of last year had petered out and that a rebound early this year had been followed by activity ”flagging anew”.
The OECD’s outlook said the spare capacity in the eurozone economy created scope for the European Central Bank to cut interest rates — currently 2% — but that policy would have to be tightened once recovery was under way.
The OECD called for further interest rate rises in the US and action to reduce the size of the budget deficit. — Â