The euro zone can expect only a tepid economic recovery next year, marked by a lingering growth gap with the US, and may need another round of interest rate cuts from the European Central Bank, the OECD said today.
The Organization for Economic Cooperation and Development, in its latest survey of the area, also highlighted a persistent lag in innovation and research compared with other advanced countries.
'The recovery is likely to face headwinds for some time,' the OECD warned.
Weighed down by rising unemployment, depressed consumer sentiment and government spending constraints, the euro zone can expect only 'subdued' economic momentum this year before enjoying a possible 2% pace of growth in 2004.
But the study also pointed to the potential for a somewhat brighter picture if oil prices fell more sharply than expected, boosting household income, and if consumer confidence strengthened.
A more than 20% appreciation in the euro against the dollar since late-2000 has kept inflation tame, enabling the European Central Bank to cut its benchmark interest rates to 2% since May 2001.
The OECD predicted that the bank's monetary policy was likely to remain on hold until solid evidence emerges of a sustained recovery, or at least until mid-2004.
But the it added that 'if evidence of further weakening of economic activity surfaces, moderating inflationary pressures further, the ECB should stand ready to reduce its key interest rates again.'
The OECD noted that a grand plan adopted by euro zone leaders at a summit in Lisbon three years ago to transform the region into 'the most competitive and dynamic knowledge-based economy in the world' by 2010 now appears 'very challenging'.
