[Marxism] Financial Times: OECD calls for rates cut in eurozone

Jack Cade jack.cade at btinternet.com
Wed May 25 03:14:40 MDT 2005

OECD calls for rates cut in eurozone 
By Chris Giles, Economics Editor
Wednesday May 24 2005

 Pressure mounted on the European Central Bank on Tuesday to
boost demand after the Organisation for Economic Co-operation and
Development urged it to act immediately “by significantly cutting
policy rates”.
The Paris-based international organisation, charged with
improving the economic prospects of advanced countries, called
for a 0.5 percentage point reduction in eurozone interest rates. 

“It is of course a matter of central importance for the growth
prospects of the countries involved but also, to some extent, for
the credibility of the Economic and Monetary Union itself,” the
editorial of the OECD's twice-yearly economic outlook said. The
OECD also dropped the usual diplomatic language of international
organisations in relation to the risks posed by growing
imbalances in the world economy. 

Cutting the growth forecast for all leading economies,
Jean-Philippe Cotis, the OECD chief economist, told the Financial
Times: “We're not saying there willbe a doomsday tomorrow morning
. . . but because the adjustments [to global imbalances] are
relatively slow, we are running the risk that an accident will
happen. That's where we are.”

Mr Cotis added: “[A global adjustment] may happen, but late and
at a less propitious time. Time is running out the numbers are
getting big, big, big.”

The OECD forecast that the US current account deficit would
continue to rise, hitting nearly $900bn (€715bn) or 6.7 per cent
of US gross domestic product in 2006.

Wolfgang Clement, Germany's economics and labour minister,
supported the OECD's conclusions about Europe, joining Italian
ministers in urging the ECB to loosen monetary policy.

The ECB has insisted that a rate cut would be harmful and was not
supported by sensible economists. Jean-Claude Trichet, the ECB
president, told the European Parliament on Monday: “The last time
we met, we were absolutely convinced that we would not improve
the situation [with a rate cut] but that we would hamper Europe
if we would go in the direction that is suggested by some.”

In an interview in today's Financial Times, Erkki Liikanen,
governor of the Bank of Finland and a member of the ECB's
governing council, reiterated the ECB's view that the next move
in European rates would be up. 

But now that the OECD, a bastion of orthodox economic thought,
has flatly contradicted the ECB's position, Mr Trichet will find
it more difficult in future to reject out of hand a discussion of
lower rates.

In other areas, such as the need for lower government borrowing,
the OECD's views chimed with those of the ECB. 

The OECD's call on rates came after it concluded there was a
“chronic pattern of weak resilience and divergent activity” in
the eurozone economy and that “circumstantial arguments”, such as
the Iraq war and oil prices were “not sufficient to explain the
string of aborted recoveries in continental Europe”. It said:
“What is badly lacking is sustained momentum in the eurozone.”

In an implicit criticism of the G7 leading industrial nations,
the OECD said: “These continuing divergences in domestic demand
between Europe, and some Asian countries on the one hand, and the
US on the other, cannot be treated with benign neglect”.

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