The Federal Reserve should continue to raise U.S. interest rates but the European Central Bank should ease euro zone monetary policy, the OECD says in its semi-annual Economic Outlook out today. Euro zone growth forecasts of 1.2 % for 2005 and 2.0% for 2006 are based on the assumption that the ECB, which has maintained its core refinancing rate at 2.0% since June 2003, will cut rates by half a percentage point in mid-2005.

?With domestic demand sluggish, resilience feeble and possible upward pressures on the euro looming ahead, the balance of risks on growth and inflation is clearly tilted to the downside, calling for an early easing of monetary policy?.

Economics Commisioner Joaquim Almunia is reportedly rolling his sleeves up. He is apparently preparing to use Italy’s continuing excess deficit as a test case, to show the way the new SGP will be applied. Forgive me if I am a little skeptical, but then again a French no on Sunday may leave him with little alternative.

“Revisions to Italian data by Eurostat, the European Commission’s statistical agency, showed the country breaching the 3 per cent limit on budget deficits (in 2003 and 2004 Edward). The changes will be used by Joaquin Almunia, EU monetary affairs commissioner, to underpin a recommendation that action be taken against Italy under the stability and pact“.

Unemployment continues a slow but steady rise in the UK. More eviedence of the slowing economy?

U.K. jobless claims rose for a third month in April and wage growth eased to the slowest in almost a year amid signs expansion in Europe’s second-largest economy is faltering.

The number of people claiming unemployment benefit rose by 8,100 to 839,400, the Office for National Statistics said in London today. Wages excluding bonuses rose 4.1 percent in the first quarter, down from 4.3 percent in the month-earlier period.

Record levels of employment have helped underpin 51 straight quarters of expansion in the U.K., prompting the Bank of England to raise interest rates to the highest among the Group of Seven industrialized nations. The central bank last week trimmed its economic forecast and said a slowdown in consumer spending has “become more marked,” leading to speculation of a rate cut.

Things may be about to liven up a bit for Economics Commissioner Joaquim Almunia: it seems probable that the Italian deficit will be nearer 4% than 3% this year, and Portugal may even clock-in something of the order of an incredible 6 to 7%.

The worsening outlook in the two countries will rekindle the debate about whether they should have joined the single currency in 1999.

Germany had strong doubts during the 1990s about whether the economies of the ?Club Med? countries were ready. As part of the currency union, they are denied the traditional escape routes from economic trouble: devaluation or cuts in interest rates.

With their deficits already above the EU’s 3 per cent limit, neither government has scope to cut taxes or raise public spending.

Make no mistake: there’s a real and big problem looming here.

Apropopos this post Edward’s post on fistful a couple of days ago, an observation. I find it remarkable how when people discuss these issues, (the working age population declining) no one ever talks about female participation in the work force. In some euro countries it’s pretty low, and an increase could make a real difference.

It’s weird.

The European Commission has approved the merger of Air France and KLM

RT? News reports that the European Commission is expected to find tomorrow that Ryanair’s Charleroi airport deal with the Walloon government is illegal. Such arrangements will not be ruled illegal per se, but will be subject to significant limits of scope and time. We shall all have to wait to see what effect the ruling will have on the future of cheap air travel.