Economic activity remains relatively stable in emerging markets and the United States, but Europe remains a fiscal threat to the entire global recovery, economists with the Organization for Economic Co-operation and Development said Tuesday.
“The crisis in the euro zone remains the single biggest downside risk facing the global outlook,” said OECD chief economist Pier Carlo Padoan.
The international organization, which advises governments, said slow growth, high unemployment and limited room for further expansion into macroeconomic policies is fostering concern about Europe’s fate.
While the U.S. and Japan are expected to see 2.4% and 2% GDP growth, respectively, in 2012, the Euro area is likely to see GDP contract by 0.1%, OECD said.
Europe’s economy is stalling on weak business and household confidence, tight financial markets and the negative effects of fiscal consolidation on near-term growth.
Even though other economies are gaining in health, their emergence is “not strong enough to offset flat or negative growth elsewhere in Europe,” OECD said.
The organization warned European policymakers that a failure to act will lead to a greater European fiscal crisis that could impact economies outside the Euro zone.
OECD recommends the creation of growth through reforms in education, innovation and green growth; the development of a firewall to prevent the spread of the Euro crisis, boosting the European single market; increasing European investment bank funding for infrastructure products and making better use of European Central Bank balance sheets.
Adjustments in the euro area are taking place in a slow or negative growth environment that is impacted by deleveraging, which creates risk of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.
The organization added that spending cuts must be balanced with revenue increases to make the adjustment as “growth-friendly as possible.”
