Wed, May 23, 2012 - Page 10 News List

Eurozone risks vicious circle: OECD

Reuters, PARIS

The Organisation for Economic Co-operation and Development (OECD) called on EU leaders yesterday to ease the pace of austerity, saying aggressive budget cuts to curtail the eurozone’s debts threaten to suck the currency area into a downward spiral that could spill over into the global economy.

German-led fiscal austerity policies have so far dominated the EU’s approach to solving Europe’s devastating public debt crisis as leaders try to win back investors’ confidence. However, efforts to reduce deficits have caused the eurozone’s economy to stagnate, making it harder to reach EU--mandated targets.

“The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth,” OECD chief economist Pier Carlo Padoan said.

The drag on growth was evident in the Paris-based think tank’s forecast for the 17-nation eurozone, which sees the bloc’s economy shrinking 0.1 percent this year and growing only 0.9 percent next year — less than half the US’ projected growth next year.

Unemployment is likely to reach a new record of 11.1 percent of the working population, it said.

“There is scope for easing the pace [of debt reduction in some countries],” Padoan said in the OECD’s economic outlook.

“For Spain and other countries, if there are unforeseen drops in economic activity, then the fiscal necessary adjustment which ensues should only be done very gradually,” he said in an interview before the report’s official release.

The OECD signaled its support for growth measures backed by French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy.

They include issuing bonds jointly underwritten by all eurozone countries to recapitalize banks, increasing the resources of the European Investment Bank to fund infrastructure projects and redirecting EU development funds to create jobs.

The report said the US and Japan are leading a fragile economic recovery among developed countries that could yet be blown off course if the eurozone fails to contain its flaring growth crisis.

In its twice-yearly economic outlook, the Paris-based OECD forecast that global growth would ease to 3.4 percent this year from 3.6 percent last year, before accelerating to 4.2 percent next year, in line with its last estimates from late November last year.

Growth across the organization’s 34 members, generally the wealthiest in the world, would ease this year to 1.6 percent from 1.8 percent last year and then reach 2.2 percent next year, also roughly in line with previous estimates.

In contrast to the eurozone, the US was expected to continue to benefit from easy credit conditions and ultra-loose monetary policy, with the world’s biggest economy forecast to grow 2.4 percent this year and 2.6 percent next year. In November last year, the OECD had forecast 2 percent for this year and 2.5 percent for next year.

Although some budget tightening and a still weak housing market would be a drag on growth, demand in the private sector would continue to strengthen as the unemployment rate drops to as low as 7.5 percent by the end of next year, from 8.1 percent last month.

The OECD said that while the US needed to step up the pace of its fiscal tightening, if tax cuts were allowed to expire as scheduled next year, it could result in too much cutting at once and threaten growth.

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