[an error occurred while processing this directive]
BBC News
watch One-Minute World News
Last Updated: Tuesday, 12 July, 2005, 16:15 GMT 17:15 UK
Eurozone growth warning from OECD
A euro symbol next to a Stop sign
Is the eurozone hitting the buffers?
The Organisation for Economic Cooperation and Development (OECD) has told eurozone policymakers reform is need to prevent weak growth until 2020.

An OECD report warns a growth limit of 2% can be expected unless the challenge of competition if faced.

In 2005 growth would be 1.25%, slightly less than last year, before reaching the 2% mark in 2006, it said.

The OECD advised the European Central Bank (ECB) to hold its key interest rate at 2.0%, despite calls for a cut.

'Structural reforms'

"It would seem reasonable for the ECB to hold its rate stable as long as the outlook for price developments remains in line with price stability over the medium term," the OECD said in its latest survey of the 12-nation eurozone economy.

The persistent budget deficits and the near-zero growth in several key European economies, not least Germany and Italy, has prompted calls for the ECB to cut interest rates which have been at 2% for more than two years.

Growth predictions for 2005:
EU ministers: 1.3%
European Commission: 1.6%
ECB: 1.4%
International Monetary Fund: 1.6%
OECD: 1.25%

But the OECD said that unless there were major competitive reforms, including making labour markets more flexible and integration of its services markets, then it faced a growing income gap with the US.

"Boosting the poor growth performance to date requires stepping up the pace of structural reforms and restoring sound public finances," the OECD wrote.

European Central Bank governing council member and governor of the Bank of Greece, Nicholas Garganas, also said there was a case for reform.

"My feeling is that potential growth is slower than it used to be. This is really the reason why we have all been urging governments to proceed with structural reforms," he said.

"One shouldn't really expect too much from monetary policy as far as its contribution to growth is concerned."

Deficit problems

Meanwhile European Union finance ministers have warned that soaring oil prices are set to pull Europe's economic growth even lower than previously expected.

Their prediction that the EU economy will expand by 1.3% in 2005 is more gloomy than both their previous prediction and that of the European Commission, but less downbeat than the OECD outlook.

The 50% rise in oil prices since the start of the year was largely responsible, the ministers said.

The European Council building in Brussels
A number of eurozone economies have hit deficit troubles

They also gave Italy more time to meet EU rules on its budget deficit.

Italy now has till the end of 2007 to bring the shortfall down to less than 3% of gross domestic product (GDP), from its current 4.3%.

This week's "Ecofin" meeting of finance ministers is the first with UK Chancellor Gordon Brown in the chair, the UK having taking over the presidency of the EU on 1 July.

Italy is the third of the EU's biggest economies to fall foul of the 3% rule, enshrined in the Stability and Growth Pact.

France and Germany have spent the past few years above that level, and their failure was one reason for the decision taken earlier this year to relax the rules.

Other countries in breach include Portugal, which is expecting at a deficit of more than 6% of GDP for 2005 and recently announced spending cuts and tax hikes to correct the situation.

UK to push for deal on EU budget
30 Jun 05 |  UK Politics
EU blasts Portugal over deficit
22 Jun 05 |  Business
Fresh jitters hit EU budget rules
23 May 05 |  Business
EU ministers finalise euro deal
21 Mar 05 |  Business

The BBC is not responsible for the content of external internet sites


News Front Page | Africa | Americas | Asia-Pacific | Europe | Middle East | South Asia
UK | Business | Entertainment | Science/Nature | Technology | Health
Have Your Say | In Pictures | Week at a Glance | Country Profiles | In Depth | Programmes
Americas Africa Europe Middle East South Asia Asia Pacific