* OECD follows IMF in saying aggressive cuts can be
* Germany should be prepared to consider spending, OECD says
By Robin Emmott
BRUSSELS, Nov 27 The euro zone should ease up on
deep government spending cuts but stick to the path of reform,
the OECD said on Tuesday, adding its voice to those calling for
a softening of cost-cutting they see as choking economies.
Budget cuts are at the centre of the euro zone's strategy to
overcome a three-year public debt crisis, but since the bloc
sank back into recession this year, policymakers are beginning
to question the wisdom of such aggressive deficit reduction.
Against a backdrop of record unemployment and strikes across
Europe this month, the Organisation for Economic Co-operation
and Development said in a report that simultaneous spending cuts
in almost all euro zone countries had worsened the crisis.
It now urged those countries that could afford to, such as
Germany, to be prepared to increase spending to help growth.
"We recognise that one of the causes of the slowdown is
fiscal tightening," OECD chief economist Pier Carlo Padoan told
"If the situation deteriorates further, those countries with
fiscal space should use it, by possibly adding some stimulus or
further discretionary easing if need be," he said, singling out
Germany in the euro zone and China further afield.
After years of overspending, southern Europe is cutting
public sector wages and spending on hospitals and schools, while
Belgium and France are also under pressure to control their
deficits. That is also translating into less demand for German
goods and eating away at business confidence across the bloc.
The OECD's call follows an admission by the International
Monetary Fund last month that the damage from aggressive
austerity may be up to three times more than previously thought.
The Fund has since shifted its earlier advice to the
17-nation euro zone, now arguing against forcing heavily
indebted countries such as Greece to reduce their deficits too
The European Commission, which polices the euro zone's
efforts to bring down budget deficits, has also softened its
stance, granting Spain and Portugal more time to meet
EU-mandated fiscal targets. Euro zone finance ministers this
month gave Greece two more years, until 2016, to reach its
Given the apparent shift in policy, the Paris-based OECD
said the euro zone should be clearer about its strategy, or risk
a perception among investors that any country easing off on
cutbacks was going off track.
"If there is agreement that the pace of consolidation in the
euro area needs to be slowed down a little bit, then we
recommend that this is announced and decided as a collective
decision," Padoan said.
The euro zone's 9.4 trillion euro ($12 trillion) economy,
which generates a fifth of global output, slid into its second
recession since 2009 in the third quarter and full-year 2012 is
expected to show it contracted slightly.
The Commission sees just 0.1 percent growth in 2013, while
the OECD forecasts another year of contraction and partly blames
government spending cuts. "Ongoing fiscal consolidation will
hold back activity," the organisation said in its report.
Still, the OECD said economic reforms such as modernising
rigid labour laws, winning back lost export shares and making
public pensions sustainable remained vital.
The European Central Bank's new bond-buying programme for
indebted euro zone countries that has calmed financial markets
was no excuse for relaxing, the OECD added.
"We have gained in Europe a window of opportunity," Padoan
said on the ECB's plan to buy government bonds of countries who
request help from the euro zone's permanent ESM bailout fund.
"But this is only buying time," he said, calling on euro
zone leaders to concrete plans for a banking union, a system to
strengthen the monitoring and support of the region's lenders.