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Last Updated: Thursday, 22 January, 2004, 12:59 GMT
Eurozone recovery 'at risk'

By Tim Weber
BBC News Online business editor in Davos

A woman walks past a WEF sign
A chilly outlook for Europe?

The economic recovery in continental Europe is "distinctly weak" and could easily be wrecked should the euro continue to rise, the Organisation for Economic Cooperation and Development (OECD) has warned.

In contrast, growth in the United States should "remain very strong," said the OECD's chief economist, Jean-Philippe Cotis, at the World Economic Forum in Davos.

He called on eurozone countries and the European Central Bank (ECB) to "take every possible action to boost the recovery" appreciate if the dollar got ever weaker.

And he chided the West's six largest economies - the United States, Japan, France, Germany, Italy and the UK - for failing to keep their budgets under control.

The growth paradox

Mr Cotis said the global economy found itself in a very unusual situation.

High growth in the United States and Asia was "dangerously imbalanced" with the "distinctly weaker" European growth data.

"Paradoxically it is the weakest economy that sees its currency appreciating," Mr Cotis said.

Should the euro's value rise again, "we will get into a danger zone, enough to wipe out all the recent good news pointing to a recovery in the euro area."

The 'vanana' recovery

Traditionally, Mr Cotis said, Anglo-Saxon countries had experienced V-shaped economic cycles, with a sharp drop in economic activity followed by an equally sharp recovery.

Continental Europe, in contrast, was used to "banana-shaped cycles" with a slower downturn and a more gentle upswing.

OECD estimates of first-quarter GDP growth
US : 1.3%
Eurozone: 0.6%
UK: 0.7%
Japan: 0.9%
This time, however, Europe was experiencing a 'vanana-cycle' - with a slump that was equally sharp if not sharper than the Anglo-Saxon world, and a recovery that was very slow.

And he warned that Europe's export-driven recovery could easily be dashed by external factors like higher oil prices and currency fluctuations.

The impact of the higher euro on the economy would only be felt during the spring, Mr Cotis said, and only then would the eurozone's future become really apparent.

However, with all things being equal, the OECD felt confident enough to raise its overall growth forecast for the euro area, to an annual rate of 2-2.5%.

This compares to an annualised US growth rate of 5.5% and a Japanese recovery running at 4%.

While generally being positive about the US economy, the OECD was however sceptical about the prospects for job creation.

This was held back by the sharp rise in productivity, which in turn allowed many firms to grow without having to take on new workers.

Sorry finances

And Mr Cotis had harsh words for the "sorry state" of government finances, which had "weakened to a worrying extent over the last three years".

The notable exception, he said, was Canada, which he also commended for cutting interest rates to steer against the recent rise of its currency against the US dollar.




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