Eurozone growth set for 2.0 percent, rules need teeth: OECD

PARIS, (AFP) -Eurozone growth is set for 1.7 percent, rising to 2.0 percent in 2012 the OECD said on Thursday, warning that interest rates should then rise.

The eurozone, hit by its second crisis in six months, should also beef up budget rules and could make a temporary bailout fund permanent, the OECD said alluding to market scepticism about the framework of the single currency.

The OECD called for a strengthening of the Stability and Growth Pact which is supposed to enforce fiscal discipline among the 16 nations which use the euro needed to ensure the viability of the single currency.

The Organisation for Economic Cooperation and Development said in its twice-yearly Economic Outlook report it expected the eurozone to manage 1.7 percent growth this year and the next, picking up to 2.0 percent in 2012.

While noting that a gradual economic recovery is underway, driven both strong exports and a rise and consumption and investment, the OECD warned that “the pace of recovery is likely to be muted” as governments rein in deficits and stimulus measures.

Moreover, the OECD said that all euro economies should step up budget tightening in 2011, even though this dampens growth, and that measures need to be taken reassure markets that huge deficits will be eliminated.

“Detailed medium-term consolidation plans should be set out in all euro area countries to increase the credibility fo the consolidation process,” the OECD urged.

“The commitment to consolidation would be further enhanced by reforms to strengthen market discipline, the Stability and Growth Pact, and national fiscal institutions.

In particular, in warned that interest rates, which have been kept at historically low levels in order to boost activity during the crisis, need to start coming up after next year, giving governments little time to underpin economic recovery.

“The main refinancing rate should gradually be increased from the early part of 2012, unless higher than expected inflationary pressures emerge,” said the OECD report.