Eurozone urged by OECD to be flexible over debt reduction

The Organisation for Economic Cooperation and Development expects growth to accelerate in Japan and the United States in the first half of 2013. And though Germany will bounce back strongly, it says other countries that use the euro will contract or only grow slowly.

In an interim assessment that focused on the Group of Seven leading industrial economies, the OECD said that the European Central Bank needs to do more to encourage banks to lend and economies to grow.

Pier Carlo Padoan, the OECD’s chief economist, said the central bank has more room to lower interest rates, even though they are already very low. He also said the ECB should follow the US Federal Reserve’s method of explaining its thinking and giving more information about what it plans to do in the future.

The report, which serves as an update to the OECD’s November economic forecast, notes that countries that use the euro are making progress in reducing their debts, but that some should be allowed to meet their targets more slowly to temper the impact on their economies.

Mr Padoan was careful to note that the OECD was not calling for European countries to abandon the deep budget cuts and tax increases many are making to reduce their debts.

He said that eurozone countries must continue to reduce their structural deficits – that is, deficits that persist over a long period because of sustained overspending. Such structural deficits have contributed to massive debts in European countries that led to the current crisis. But he said the eurozone should show flexibility since reducing deficits too quickly can hammer growth.

“Nominal deficit targets are likely to be missed,” he told reporters. “This is not a tragedy, as long as we are very clear about pursuing and achieving structural targets.”

He also urged countries that are cutting their deficits to be careful to choose measures that wouldn’t aggravate high unemployment rates. Even in countries that have begun to grow, like the United States, unemployment is still above pre-crisis levels.

Mr Padoan added that he thought turmoil in Cyprus would have a limited effect on the rest of the eurozone. Some have worried that public indecision over how Cyprus would raise its share of a bank bailout could raise questions about the safety of all banks in the eurozone.