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OECD: World economy picking up but Europe lagging

Thursday - 3/28/2013, 2:10pm  ET

AP Business Writer

PARIS (AP) -- The global economy is beginning to rebound, but Europe is lagging behind and unemployment rates, even in countries starting to see growth, are still too high, a leading international economic body said Thursday.

The Organization for Economic Cooperation and Development expects growth to accelerate in Japan and the United States in the first half of 2013. And though Germany will bounce back strongly, it says other countries that use the euro will contract or only grow slowly.

In an interim assessment that focused on the Group of 7 leading industrial economies, the OECD said that the European Central Bank needs to do more to encourage banks to lend and economies to grow.

For instance, Pier Carlo Padoan, the OECD's chief economist, said the central bank has more room to lower interest rates, even though they are already very low. He also said the ECB should follow the U.S. Federal Reserve's method of explaining its thinking and giving more information about what it plans to do in the future.

The report, which serves as an update to the OECD's November economic forecast, notes that countries that use the euro are making progress in reducing their debts, but that some should be allowed to meet their targets more slowly to temper the impact on their economies.

Padoan was careful to note that the OECD was not calling for European countries to abandon the deep budget cuts and tax increases many are making to reduce their debts. He said that eurozone countries must continue to reduce their structural deficits -- that is, deficits that persist over a long period because of sustained overspending. Such structural deficits have contributed to massive debts in European countries that led to the current crisis.

But he said the eurozone should show flexibility since reducing deficits too quickly can hammer growth.

"Nominal deficit targets are likely to be missed," he told reporters. "This is not a tragedy, as long as we are very clear about pursuing and achieving structural targets."

He also urged countries that are cutting their deficits to be careful to choose measures that wouldn't aggravate high unemployment rates. Even in countries that have begun to grow, like the United States, unemployment is still above pre-crisis levels.

Padoan added that he thought turmoil in Cyprus, which recently sought a bailout, would have a limited effect on the rest of the eurozone. Some have worried that very public indecision over how Cyprus would raise its share of a bank bailout -- including an initial plan to tax insured deposits -- could raise questions about the safety of all banks in the eurozone.

"The fact that the overall systemic risks of the region have been going down is not going to be changed by what is happening in Cyprus," he said. "The point has been made very firmly that deposits, true deposits, meaning under 100,000 (euros) are protected."
