MEXICO CITY (Reuters) - OECD Secretary-General designate Angel Gurria warned on Wednesday that sustained U.S. budget and trade deficits would eventually lead to inflation in the world's largest economy.

"You have to pay those deficits sooner or later," said Gurria, a former Mexican finance minister formally appointed on Wednesday to replace Canada's Donald Johnston as head of the Organisation for Economic Cooperation and Development.

"Sustained deficits will cause inflation, will cause a rise in interest rates and will eventually cause a downturn in economic activity," he told Reuters in an interview.

Gurria said he was encouraged by signs U.S. President George W. Bush would seek to cut deficits in 2006.

"The problem also is that the United States affects the rest of the world," he said in an interview at his home in Mexico City.

"There's a double whammy here," he said. "For the sake of the American economy itself but also for the sake of the whole of the world economy, there should be fiscal discipline in the United States."

Gurria said a widely expected quarter-percentage-point interest rate hike by the European Central Bank would not hurt European economic growth.

"A 25-basis-point increase ... is not going to stem or kill the recovery," he said. "At the same time it is going to be a signal for those who may be complacent about prices."

The ECB is expected to raise interest rates on Thursday by a quarter point to 2.25 percent, its first monetary tightening in five years.

"There are signals of incipient recovery, given the numbers from the third quarter in Europe," said Gurria. "There are people saying: 'Listen, if it ain't broke, then don't fix it... you know please, come on, don't increase the rates.'"

In the case of a rate hike on Thursday, he said the (European) central bank would be saying: "Listen, I am not going to be increasing the rates in a succession of increases 'a la' (the) Federal Reserve in the United States."

The Fed has raised its benchmark federal funds rate 12 times since June 2004 in quarter point increments. It is now 4 percent.

LOUDER VOICE

The Paris-based OECD is a highly respected source of economic information, but many observers say it keeps too low a profile. Current head Johnston devoted much of his time to dealing with OECD budget and benefit cuts.

Gurria said the OECD under his watch would not hold back from speaking out against harmful economic policies.

"If there's protectionism, the OECD is going to raise its voice; if there are obstacles to the free flow of investment, the OECD is going to raise its voice," he said.

"We believe that more trade is better, we believe that open markets, that free economies are better than the alternative and we are going to openly advocate that."

Gurria urged China to allow the yuan currency to rise, citing its low level as a cause of global economic imbalance.

He said suppressing the yuan and accumulating huge dollar reserves could create distortions over time.

"The golden rule is to let markets work, let markets do their thing..." he said. "In this particular case it's not happening."

"Everybody else is working with market rules, China is not."

Commentary:
As long as we have a republican president and GOP control of Congress we will have near record deficits. During the 80's when the GOP controlled the Senate for the first six years under Reagan we had the largest accumulation of debt in US history. Of course, today it's far worse. There will always be a thousand reasons why the GOP can't balance the budget but excuses don't pay the bills.

No president has mismanaged the government or our economy more than Bush. In just five years he's created almost $2.4 trillion of debt.