The euro zone must embark on tough reforms if it wants to catch up with the United States, the OECD said this morning.
In a twice-yearly report, the Organisation for Economic Cooperation and Development said the 12-nation zone's biggest economy, Germany, was dragging the entire region down.
The Paris-based OECD, which represents 30 industrialised countries, predicted gross domestic product (GDP) in the common currency area would expand by just 1 per cent this year - the same as in Japan - and by 2.4 per cent in 2004.
For the 15-nation European Union as a whole, GDP growth was seen at 1.2 per cent in 2003 and 2.4 next year. The figures compared with OECD growth forecasts for the United States of 2.5 per cent this year and 4 per cent in 2004.
"The case for economic reform remains very strong in the larger European countries and Japan," the OECD said, noting the two regions had, for the first time since World War II, stopped catching up with US growth levels in the 1990s.
The EU has set itself the target of overtaking the United States as the world's most competitive economy by 2010. But the scale of the task was made clear in the OECD report.
Economic activity in the euro area "is expected to grow only modestly this year and next", it said.
On monetary policy, the OECD noted that even after an interest rate cut by the European Central Bank to 2.50 per cent in early March, euro zone rates are still 125 basis points above those in the United States.
The OECD noted that France, Germany and Portugal have run foul of the European Commission - the EU's executive arm - for letting their budget deficits breach a ceiling set in the euro zone's Stability and Growth Pact - 3 per cent of GDP.
The OECD said that Germany and France would "distinctly" breach the limit this year and next.
It called on the euro-zone heavyweights to respect an EU agreement that requires countries to redress their deficits by at least 0.5 per cent of GDP a year until it achieves balance.
Eleven of the 12 euro economies have pledged to abide by the target. France is the exception, arguing its bigger priority is economic growth.
AFP