The European Central Bank has ruled out a cut in interest rates even though economists have painted a gloomy picture of the prospects for the 12 eurozone countries.
The single currency economy will grow by only 1.2 per cent this year instead of the predicted 1.9 per cent, according to the Organisation for Economic Cooperation and Development (OECD).
The organisation yesterday called for an interest rate cut to boost weak domestic demand in euroland - but ECB president Jean-Claude Trichet responded with an emphatic "non", claiming that rate cuts would only make euroland's problems worse.
But European Central Bank President Jean-Claude Trichet on Monday ruled out a rate cut, saying it would only make the euro zone's problems worse.
The answer to sluggish growth rates and high 2004. unemployment, which the OECD forecast at 9.0 per cent compared with 8.9 per cent in 2004, was structural reforms and healthier public finances, Mr Trichet said.
High oil prices and the strong euro were mainly to blame for the weak growth rate, which would be only one-third of that forecast in the United States, the OECD said in its latest world economic outlook. But it also said that the effect of these factors was amplified in large euro zone economies like Germany and Italy which lacked the resilience to external shocks displayed by smaller economies in the Nordic region or Spain.
The OECD growth estimate is the most pessimistic so far because the European Central Bank, the European Commission and the International Monetary Fund have all scaled down forecasts to 1.6 per cent this year from two per cent in
The OECD said inflation in the 12-nation euro area would fall to 1.5 per cent this year from 1.9 per cent in 2004 in line with the European Central Bank's target of two per cent or less.
The OECD also stressed the need for reforms, saying that "whatever the political difficulties, the case for further European economic integration remains pressing".
Of the major European economies, Italy will contract by 0.6 per cent this year and show only weak growth in 2006, while Germany will falter and need to institute more reforms in order to show a lasting upswing, the report says.
France is on track for 1.4 per cent growth this year and two per cent in 2006 .
In the US, the global economic powerhouse, interest rates will need to rise further to keep inflation in check.
And the OECD warned that the US's current account deficit could trigger an abrupt collapse of the dollar with damaging consequences for growth in Europe and Japan.
"Given the unsustainable US current account position, pressures for correcting existing imbalances will become even larger," Mr Cotis said.
"At some point, they may take the form of an abrupt weakening of the dollar with adverse consequences for the OECD area as a whole."
Mr Cotis said such an event was not likely at present but "such an unpleasant scenario is gradually looming larger", he added.
The OECD calculates that a 30 per cent fall in the dollar would result in a one per cent decline in US domestic product and output but the knock-on effect would be greater.
Even without a sharp fall, there is a high likelihood that dollar depreciation will play some part in correcting the current account deficit which cannot continue indefinitely.
Of the other major global economies, Japan is the most likely to show firm growth this year and next.
But the Bank of Japan needs to maintain its "ultra-loose" monetary policy until deflation is finally dead.
"In Japan, growth has regained momentum on the back of strong profits and a slowly recovering labour market," the OECD said.
In Russia, the worsening business climate is depressing economic growth.
The OECD blamed the " ongoing assault" by President Vladimir Putin's Government on Yukos, the oil group, is causing "considerable damage" to business.
It also cited the Government's grip on key strategic sectors and the "arbitrary and aggressive behaviour" of the Russian tax authorities as contributing to the decline.
Russia's 7.1 per cent GDP growth last year was well below the average of ten per cent in other former Soviet states and growth is expected to slow further to six per cent this year and next.
The OECD has pencilled in a fall in crude oil prices from the current $51 a barrel to about $48 dollars by the end of next year.