(by Helen Russon)    

 

On Tuesday the Organization for Economic Cooperation and Development announced that the European Central Bank should remain cutting interest rates if there is any evidence of weakening euro-zone economic growth. In the report the intergovernmental panel reiterated its previous forecast that the euro-zone economy will grow by 1.6% this year, compared with just 0.5% last year, as the bloc's recovery firms.

    At the same time, it still foresees inflation at 1.7% this year after 1.9% in 2003. For 2005, the OECD forecasts economic growth of 2.4% and an inflation rate of 1.5%.  The OECD said that growth in the euro zone is strikingly much slower than in many other OECD countries.  Governments in the euro zone's three biggest economies - Germany, France and Italy - have been hampered in attempts to stimulate growth by slow implementation of structural reform. 

   The OECD's report highlights that one of the most vital factor which boosts the euro zone's growth potential reform is labor markets. The OECD predicts the euro zone's unemployment rate will be 8.8% in 2004, unchanged from 2003 and at its highest level since 1999's 9.4%.

    The organization also warned of the danger of a collapsing of confidence in the Stability and Growth Pact set up by the European Union to smooth the working of the single currency. Under the terms of the pact, euro-zone members pledged to curb budget deficits to less than 3% of gross domestic product, but, at present, six euro-area countries (including Germany, France and Italy) are experiencing deficits above 3% of GDP. Support for the Stability and Growth Pact has been diluted and the credibility of enforcement has suffered, it added, referring to a key decision last November to suspend heavy fines that should have been imposed on France and Germany for exceeding the deficit limit.