OFFICIALS at the Organisation for Economic Co-operation and Development (OECD) believe there may be room for further small cuts in European interest rates to counteract the effect of fiscal tightening.
This emerged as the OECD published its latest forecasts ahead of the annual meeting of ministers in. Paris today, showing that it had sharply downgraded its 1996 forecast from the last projections it made at the end of 1995.
Next year, the OECD says growth will rebound sharply. However, officials admitted recent spending cut plans announced by the German and French governments could weaken growth in the short term.
Consequently, economists believe some further easing might be appropriate. However, they warned that sudden large cuts could fuel market unease and push up long term interest rates, unless monetary easing was accompanied by actual reductions in deficits.
The group was far less optimistic than the European Commission about the prospect of France and Germany meeting the Maastricht criteria on debt.
These stipulate that debt should be no more than 3 per cent of GDP in 1997 to qualify for monetary union in 1999.
The Commission forecast last week that France and Germany would narrowly meet the debt requirement. However, OECD economists were "very surprised" by this.
Some suspect the Commission reached this conclusion only by downplaying the knock on impact that slower growth would have on trade flows across the region.
The OECD said its own forecasts showed France and Germany would miss the target, if latest French and German deficit cutting plans were not taken into consideration.
Consequently, the OECD stressed it did not plan to factor the measures into its calculations until it has seen the promises put into legislation.
Nevertheless, the French government yesterday indicated that it had every intention of pressing ahead with its spending cuts and said it was determined to meet the 3 per cent criterion for debt.
If all the promised measures are actually implemented, then some OECD economists think it could bring the French deficit down near 3 per cent.
Nevertheless, Mr Jean Claude Paye, the outgoing secretary general of the OECD, believed that monetary union would go ahead in Europe.
