OECD bullish on EU zone despite problems of euro

The decline in the euro has been played down by the Organisation for Economic Co-operation and Development in a review of the currency's first year of operation.

The Paris-based think-tank produced a bullish view of the European economy yesterday but repeated the usual mantra that structural reforms must begin. With one eye on wage rounds in many Continental countries, it also called for wage restraint.

The report, EMU One Year On, pointed out that confidence remains high and the outlook favourable for Europe. However, it did not come up with any fresh forecasts for the area, repeating those from the end of last year. These are for an increase in growth of 2.8 per cent this year and next year and an inflation rate of 1.5 per cent and 1.6 per cent for 2000 and 2001 respectively.

The report played down concern over the euro's 15 per cent fall during 1999, saying that its fluctuation against the dollar and other currencies was "not more pronounced" than during the years in the run-up to the introduction of the euro in January 1999 and was less than the fluctuation of the yen.

The ECB was right to consider that the early fall in the euro was "limited in scope and less of an inflationary threat" than some commentators judged, the OECD said.

But apparently contradictory remarks by some ECB members on the euro's level showed that "too much or disorderly communication may add to the ambient uncertainty rather than reduce it". It also warned that trying to assess some ideal "equilibrium" value for a currency was particularly difficult, as such values change over time with evolving fundamentals. The OECD also found that interest rate policy in 1999 was "appropriate" but a gradual tightening will be needed over 2000. However, the extent of this can be held back if wage restraint is adhered to, according to the think tank.

Overall, according to the OECD, the euro got off to a "commendable" start but major challenges lie ahead including the need for the ECB to communicate more effectively.

It also warned against any temptation to try to "circumvent" the Maastricht Treaty requirement to keep public deficits below 3 per cent with several countries "uncomfortably close" to the limit and "vulnerable to an adverse interest rate or other shock."

The OECD also questioned how long national authorities could remain responsible for supervising banking activities in individual countries in an increasingly pan-European system amid a raft of cross-border mergers.

"Uncertainties remain, not least with respect to the adequacy of decentralised supervision if and when a large pan-European institution unexpectedly runs into trouble," the report said.