OECD Chief Economist Mr Jean-Philippe Cotis said today that any further sharp rise in the euro could force the European Central Bank to cut interest rates.
"Should the euro appreciate again, then of course yes, the Europeans would have to use the complement of every possible action for a recovery to sustain itself," Mr Cotis told a news conference at the World Economic Forum.
"Policy reactions from the Europeans will be unavoidable," he said.
Currently the euro-zone economy is recovering well, but growth is driven entirely by the manufacturing and export sector and strong foreign exchange appreciation could shut down the engine of growth, he said.
While an interest rate cut would be a last resort, he said it would not in the short term endanger euro-zone inflation, which was "well under control".
"If you are forced into a corner, you may have to resort to this sort of action," Mr Cotis said of an ECB rate cut, noting that Canada had chosen monetary easing to stem its currency's rise.
In the longer term, the large amount of money flushing through the economy, and the world economy more broadly, will need to be reversed or it risks pushing up asset prices, he said.
The OECD chief economist cited China as an example of a country with very high liquidity, driven by its policy of pegging its yuan currency to the US dollar.
"There are signs it is overheating," Mr Cotis said of China's economy, which grew by 9.1 per cent in 2003, its fastest pace in about seven years.
"If you peg your currency, you tend to lose control of your money supply. China may have to find other ways to manage its exchange rate policy. There would be a spectrum of ways with a peg at one extreme of the spectrum, and there are other ways to be more accommodative," Mr Cotis told the news conference.
Moving to flexible exchange rate regimes is an important step toward achieving more balanced global growth, he said. For the United States, he said that correcting its public deficits "as soon as possible" is needed.