CORRECTED: Eurozone heads for increased 1.2-percent growth: OECD

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The OECD raised its growth forecast for the eurozone economy on Wednesday to 1.2 percent this year but urged it to tackle financial weaknesses which could slow recovery and threaten monetary union.

The grouping of 30 developed nations forecast gross domestic product across the 16-nation bloc would rise by 1.2 percent in 2010 -- raising its last estimate of 0.9 percent growth made in November.

It forecast growth of 1.8 percent in 2011.

"A gradual (eurozone) recovery is under way driven by economic policy stimulus, a rebound in world trade and improving financial conditions, although there has recently been significant financial market volatility," it said.

"Difficulties in restoring competitiveness and sound public finances in some peripheral countries may complicate recovery," it added, however, in its twice-yearly world economic report.

Recovery in Germany, although fundamentally robust, would pick up from the second quarter as exports benefited from a rebound in world trade.

However, the outcome for the whole of 2010 would be 1.9 percent, from a contraction of 4.9 percent last year, and then rising to 2.1 percent in 2011.

"Notwithstanding the temporary weakness, the underlying growth momentum is intact and suggests solid growth going forward," the OECD said

Growth in France, the second main economy in the eurozone after Germany, would rise somewhat to about 2.0 percent this year and next, led by business investment, exports an end to destocking by companies. Growth last year was 0.8 percent.

But France should unwind measures used to stimulate the economy during the global economic crisis, the report said.

And the government should undertake reforms of public pensions, health care and the administration to signal a "commitment to cut spending in a sustainable way". Action on taxes was also needed, the OECD advised.

Costly stimulus measures to drag countries out of recession following the 2008 financial meltdown have forced eurozone governments to enact tough spending cuts now that recovery seems to be underway.

European countries have also had to support Greece with a massive emergency loan package to rescue it from a debt crisis that has raised fears for other countries such as Portugal and Spain.

In its overall world assessment, the Organisation for Economic Cooperation and Development (OECD) warned that the eurozone debt crisis combined with overheating in emerging markets elsewhere could undermine a broader recovery.

"The sovereign debt crisis has highlighted the need for the euro area to strengthen significantly its institutional and operational architecture to dissipate doubts about the long-term viability of the monetary union," it said.

It even suggested the eurozone could go as far as a system of common tax management.

"Bolder measures need to be taken to ensure fiscal discipline," it said, from "stronger surveillance and more effective sanctions... to external auditing of national budgets, all the way to de facto fiscal union."

It also forecast that unemployment in the eurozone would remain stubbornly high at more than 10 percent this year and next.

"Persistently high unemployment in much of the euro area, and financial deleveraging by indebted households and businesses will weigh on domestic demand," it said.

© 2010 AFP

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