The eurozone crisis is now one step away from plunging advanced economies into an abyss of recession and even depression, with waves of bankruptcies and wealth destruction in Europe, the OECD warned yesterday.
The eurozone is already in slight recession and the credibility of governments to keep the eurozone balanced on a high wire has been stretched to the limit: one false step now could tip the United States, Japan and advanced economies into a new grim landscape.
Excessively tight fiscal policy is sending the US economy towards stagnation, the OECD warned a week after failure of congressional efforts to broker a deal on spending cuts and stimulus measures.
“The euro area crisis represents the key risk to the world economy at present,” the OECD said in an unusually stark outlook report. “A large negative event would most likely send the OECD area as a whole into recession.”
Even if policymakers manage to avoid the worst, the eurozone is in for a brief recession and the United States for a period of slow growth, with emerging countries also hit.
China will slow but still show strong growth with moderate inflation.
But the OECD, forecasting OECD-area growth of 1.9 per cent this year and 1.6 per cent next year, said that if US fiscal policy were eased, US growth would be 1.7 per cent in 2011 and two per cent in 2012.
The eurozone was set for growth of 1.6 per cent this year and just 0.2 per cent next year, the OECD said, but also stressed there was still time for decisive action by policymakers to shore up stricken credibility and avert a far worse outlook.
The European Central Bank should buy up devalued government debt bonds in huge quantities and interest rates must fall, the OECD said, taking the opposite line to Germany which has so far rejected extra bond purchases, arguing that the priority is for countries in trouble to reform their economies.
The OECD estimated that the eurozone, in order to avert the worst, might need to take on a sizable portion of the Italian, Spanish and Belgian debt worth around €3 trillion, but this would still only represent about a third of the annual output of the currency bloc.
The OECD analysis comes amid reports, denied by the IMF, that Italy has been seeking a €600 billion bailout, and a recognition by Germany and France that an Italian debt default would be “the end of the euro”.
Moody’s credit rating agency warned over the weekend that the eurozone crisis threatens all EU country ratings.
The Organisation for Economic Cooperation and Development, a policy forum for the 34 most advanced economies, forecast that the Japanese economy was set to shrink by 0.3 per cent this year, rebounding to two per cent growth in 2012.
But a significant worsening of the eurozone debt crisis would push the single currency area into recession of more than two per cent for the next two years. The US and Japanese economies would also be tipped into recession.
There would be intense pressure for some countries to abandon the euro, which the OECD warned would amplify the crisis and trigger “massive wealth destruction, bankruptcies and a collapse in confidence in European integration.”