The Organisation for Economic Co-operation and Development (OECD) has warned that a further sharp rise in the euro's value against the dollar could wreck Europe's economic recovery.
OECD chief economist Mr Jean-Philippe Cotis told the annual meeting of the World Economic Forum in Davos that the European Central Bank (ECB) could have to cut interest rates if the euro continues to rise.
"Should the euro appreciate again, then of course yes, the Europeans would have to use the complement of every possible action for a recovery to sustain itself. Policy reactions from the Europeans will be unavoidable," he said.
Mr Cotis said that Europe's recovery was entirely driven by manufacturing and exports, and that a stronger euro could shut down the engine of growth. He said that an interest rate cut should be seen as a last resort but he predicted that lower interest rates would not push up inflation.
"If you are forced into a corner, you may have to resort to this sort of action," he said.
Despite Mr Cotis's warning, the OECD predicts that the European economy could grow by 2-2.5 per cent this year, compared with 5.5 per cent in the US and 4 per cent in Japan.
The ECB has shown no inclination to cut interest rates and few analysts believe that a unilateral intervention in the financial markets would be enough to halt the euro's rise. The currency yesterday rose through $1.27, its highest level against the dollar for a week as markets showed scepticism about the appetite among euro-zone policy-makers for decisive action to halt the euro's upward trend.
Germany's Deputy Finance Minister, Mr Caio Koch-Weser, said yesterday that the euro should not bear the brunt of global imbalances and suggested that Group of Seven (G7) finance ministers could yet agree a strategy to stop the currency's rise when they meet in Florida next month.
"It would be incorrect to conclude that because I was cautious on the outcome of the G7 meeting that, therefore, there would be no agreement," he said.
Mr Koch-Weser declined to say whether there would be a joint G7 statement on exchange rates but pointed out that the meeting usually issued such a communiqué.
"Clearly, the euro should not bear the burden of external imbalances and the situation is a more complex one than in the 1980s, because we have new players who increasingly play a role here - China and its links with east Asian economies," he said.
