Euro dip welcome, no eurozone recession: OECD

PARIS (Reuters) - Recession is unlikely in the euro zone and a "welcome" drop in the value of the euro should help offset the toll that debt-shrinking austerity measures take on economic growth, the OECD's chief economist said.

Pier Carlo Padoan argued in an interview with Reuters that governments need to step up fiscal consolidation, combine that with growth-increasing reforms of pension systems, labor and other markets, and show they are working in unison to convince skeptical financial markets that their strategy is credible.

Even if austerity hits growth, it would be partly offset by Asian-led demand for euro zone exports, made more competitive by the drop in the euro's exchange rate, he said.

The euro exchange rate versus the dollar has fallen in the region of 14 percent this year, while its trade-weighted value has slipped more than 10 percent, according to a measure the European Central Bank watches closely.

The Paris-based Organization for Economic Co-operation and Development on Wednesday issued new forecasts predicting a post-recession recovery led by China and other emerging markets. It forecast 1.2 percent growth in 2010 and 1.8 percent a year later in the 16-country euro zone, more than the 0.9 and 1.7 percent it forecast in November 2009, but less than projected for the U.S., Japanese and British economies.

"Is there going to be a double-dip (recession) in Europe? I don't think so," said Padoan, who said massive debts following the 2007-09 global recession were "not just a European story," but one that Europe was about to tackle faster than others.

"European growth is already slow. Unless there's another recession, which I would rule out, it's going to be a little less of a small amount," Padoan said.

Asked if debt restructuring would ultimately be needed in Greece, the first country in the 11 years of the euro to need a financial bailout, Padoan said governments would do well to consider a general mechanism that allows for orderly debt workouts among other institutional reforms that it is now starting to consider.

"The Europeans are rightly reconsidering the architecture of the euro in general," he said. "An instrument that looks at an orderly debt restructuring mechanism would be useful. As part of the toolkit, I would say an orderly debt restricting (mechanism) would be useful."

GOOD EURO WEAKNESS

If foreign demand from China and other emerging economies continued, and North America's recovery was as solid as it was now looking, euro zone exporters stood to do well from rising foreign demand, helped by a weaker euro exchange rate.

"If you combine the two -- high growth in Asia and a weaker euro -- that could add quite a boost to European exports," said Padoan. "The weak euro, in the short- to medium-term, is a welcome development."

"In any case it would be good for the global economy if ... nominal exchange rates changed a little bit. The euro certainly has been overvalued for some time and the renminbi has certainly been undervalued for some time."

He said he believed the dollar could rise again in the not-too-distant future in line with relatively better economic growth forecasts than those of Europe.

On monetary policy, the twice-yearly report in which the OECD updated its macroeconomic forecasts said central banks should take account of the extra fiscal sacrifices governments were being forced to make -- meaning they should not move too fast to raise interest rates, currently very low.

"Given the inflation outlook, in terms of output gaps, it's actually very difficult to argue for higher rates in the short term," said Padoan.

The OECD recommends that the U.S. Federal Reserve hold off on policy rate rises until late 2010, then raise them to 3.75 percent by the end of 2011. Japan's central bank should leave rates as they are this year and next and the European Central Bank stay on hold this year, thereafter raising its key policy rate for the euro zone from 1 to 2 percent by the end of 2011.

"(Fiscal consolidation) is going to be faster in Europe and therefore monetary policy should be on hold -- also, given the favorable inflation scenario there," he said.

The Bank of England faced the toughest task of the world's large central banks because Britain, not part of the euro, needed to reduce a bloated debt too at a time when there were greater fears of inflation than elsewhere.

"We are watching closely inflation expectation developments, which are a little bit off-line with respect to other advanced economies," he said of Britain. "Inflation could be a bit higher going forward in the UK than in other regions, (such as the United States and Europe)," he said.

(Editing by Patrick Graham)