Reykjavik - Financially battered Iceland could benefit from introducing the European currency, the euro, the Organization for Economic Cooperation and Development (OECD) said Wednesday.

The Paris-based OECD said in a new economic survey of Iceland that there was a need for tax hikes but also "substantial scope to reduce health and education expenditure" to tackle budget deficits.

Other recommendations included improving financial supervision of the banking system and ensuring that the banks in future are not allowed to outgrow the economy.

The North Atlantic country of 320,000 people has been hit by the global credit crunch that a year ago saw its three major banks taken over by the state. The country was saddled with huge debts.

The OECD said the state should not stay on as owner of the banks but move to "prepare their full privatisation" and invite foreign banks in that process.

Iceland recently applied for membership in the European Union. The OCED said if Iceland is approved, it "would be advised to seek entry into the euro area as soon as possible."

"Past monetary policies based both on exchange rate and inflation targeting have produced unsatisfactory results," the report said. (dpa)