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OECD urges eurozone to put brake on deficit cuts if outlook worsens

Eurozone nations should be prepared to ease up on deficit reductions to avoid pushing the single currency area into a deeper slump, the Organisation for Economic Co-operation and Development argued yesterday.

The Paris-based think-tank issued the call as it unveiled its latest growth forecasts, which showed the eurozone contracting by 0.1 per cent in 2013, after a 0.4 per cent shrinkage this year.

"Euro area member countries should implement fiscal consolidation measures as planned. But if activity weakens more than expected in their fiscal programmes, they should allow the automatic stabilisers to work," the OECD said. "To avoid loss of credibility for individual countries acting alone, this should be announced in co-ordination."

The think-tank also said that the European Central Bank should cut interest rates further. OECD chief economist Pier Carlo Padoan told Reuters: "We recognise that one of the causes of the slowdown is fiscal tightening." In an apparent reference to Germany, he added: "If the situation deteriorates further, those countries with fiscal space should use it, by possibly adding some stimulus or further discretionary easing."

The call from the OECD represents a policy reversal. In May 2011, it approved of the ECB's decision to raise interest rates, and urged the Bank of England and the US Federal Reserve to follow. The advice echoes the warning from the International Monetary Fund that the impact of spending cuts could be three times higher than the IMF previously calculated.

Monday night's deal on Greece's debt between European finance ministers and the IMF won a cautious welcome yesterday. Stock markets rose, and the euro climbed to a three week-high.

The German parliament will vote this week on the new agreement, which will reduce Greece's debt pile by €40bn (£32bn). The measures, which include a cut in the interest rates on Greece's loans, will reduce the country's debt-to-GDP ratio to 124 per cent in 2020 and 120 per cent in 2022.

Meanwhile, politicians in Portugal yesterday passed a budget for 2013 that promises a third year of recession for the country.