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Nov 25, 8:17 AM EST

Global watchdog OECD calls on Europe to relax fiscal rules, increase stimulus

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PARIS (AP) -- Europe must relax its fiscal rules and let governments spend more money or risk dragging down the global economy, a major international organization said Tuesday.

The report by the Organization for Economic Cooperation and Development, a gathering of the world's richest countries, found Europe has consistently underperformed economically and risks remaining economically stagnant unless demand picks up. The report also calls for major reforms in Japan, saying its debt is unsustainable.

EU requirements that members focus on bringing their budget deficits below 3 percent of GDP are coming under increasing pressure as the bloc's economy continues to perform below expectations. More government spending can help economic growth by increasing investment in projects like schools and roads.

"Even our optimistic scenario is still pretty grim," said Catherine Mann, the OECD's chief economist.

Germany, a fierce defender of the budget rules, was taken to task in the report, which called on the government to invest more in childcare and infrastructure.

"Germany has some room for spending," Mann said.

Government spending in Germany, Europe's largest economy, remained flat from 2009 onward. It plunged elsewhere in Europe, especially in the countries hardest hit by the economic crisis like Spain, Greece and Portugal.

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