Euro zone vulnerable to oil shock - OECD

Current rises in oil prices are less likely to damage economic growth in countries where growth is both strong and broadly based, according to a report by the OECD issued yesterday.

Since the last economic projections of the OECD, produced in May, oil prices have risen by around $20 and the report is an interim assessment of the economic impact of these rises.

The latest report focuses on the US, Europe and Japan, which together constitute a majority of its 30-country membership.

It suggests that the euro area economy is more vulnerable than those of the US and Japan to the strong increases in oil prices seen in recent weeks.

The US and Japan are in a better position to survive the impact of these rises as a result of their stronger economic growth. It also points to the less broadly based nature of growth as a source of weakness in several European economies, noting the reliance of the French and UK economies to slower consumption.

The report also addresses the implications of developments in oil price for interest rate and budgetary policy. It suggests that the US and Japan should stick with their present monetary policies. But the report also says that the case is strengthening for an easing of interest rates in the euro area and UK.

In contrast it calls for more restraint to be shown by its members in the area of government spending.

Yesterday the EU Commission discussed a five-point plan to react to the surge in oil prices. As well as measures to reduce energy consumption and develop alterative energy forms the plan notes the need to increase oil refining capacity and calls for increases in strategic oil reserves available in times of emergency.