The Organisation for Economic Cooperation and Development (OECD) on Monday called for “decisive policies” to be adopted urgently to halt the debt crisis affecting the Eurozone and prevent its negative impact on global growth.
The OECD, which regroups over 30 of the world’s industrialized nations, expressed concern that the European debt problems could spread and said this particular issue is the “key risk” to world economy.
“Concerns about sovereign sustainability are becoming increasing widespread, ” the Paris-based OECD said in a report.
It warned that “recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption.” The result would be huge pressures on banks and the risk of a credit crunch, the report said.
Additionally, failure to act rapidly in the Euro crisis could push other economies into recession, particularly in view of fiscal policies in the United States.
“Prospects only improve if decisive action is taken quickly,” said OECD Chief Economist Pier Carlo Padoan.
“In the euro area, the risk of contagion needs to be stemmed through a substantial increase in the capacity of the European Financial Stability Fund (EFSF), together with a greater ability to call on the European Central Bank’s balance sheet.” he said, noting that governance reforms were also necessary.
“Improved prospects would also depend on the enactment of a credible medium-term fiscal programme in the United States,” the OECD statement said.
The OECD said that if required action is taken the developed economies could still grow by 1.9 percent in 2011, before slowing down to 1.6 percent in 2012 and then recovering to 2.3 percent growth in 2013. At the same time, OECD average unemployment rates would remain high at 8.0 percent for the next two years.
“We see the US growth recovering only slowly, the euro area entering into mild recession and Japan growing faster because of reconstruction, but this boost is temporary and will fade away.”
According to the OECD, the US economy is projected to expand by 2.0 percent in 2012 and by a further 2.5 percent in 2013, after growth of 1.7 percent this year. Euro area growth is forecast to slow down from 1.6 percent this year to 0.2 percent next year, before picking up to 1.4 percent in 2013.
In Japan, Gross Domestic Product is expected to expand by 2.0 percent in 2012 and 1.6 percent in 2013, following a contraction of 0.3 percent in 2011, which reflects the impact of the March earthquake and tsunami and subsequent reconstruction activity.
Chinese economic growth is seen falling to 8.5 percent in 2012, from 9.3 percent this year, before edging back up to 9.5 percent in 2013.
“We are concerned that policy-makers fail to see the urgency of taking decisive action to tackle the real and growing risks to the global economy,” Padoan said at the launch of the report in Paris.