Eurozone crisis main risk to world economy, OECD calls for action

28 November 2011 11:19  [Source: ICIS news]

Pier Carlo Padoan, OECD chief economist presented the OECD Economic Outlook. OECD Conference Center. Paris, France. (Source: OECD)LONDON (ICIS)--The eurozone sovereign debt crisis remains the main risk to the world economy and decisive policies must be urgently implemented to stop the outlook from becoming much bleaker, the OECD said on Monday in its latest economic outlook.

The OECD (Organisation for Economic Co-operation and Development) added that if the eurozone crisis was not addressed, the risk of contagion to countries thought to have relatively solid public finances could escalate economic disruption.

“Prospects only improve if decisive action is taken quickly,” said OECD chief economist Pier Carlo Padoan.

Padoan said that the risk of contagion in the eurozone must be stemmed through a capacity increase in the European Financial Stability Fund, together with a greater ability to call on the European Central Bank’s balance sheet.

“Much greater firepower must be accompanied by governance reforms to offset the risk of moral hazard,” he added.

The OECD's outlook assumes that policy-makers take sufficient action to avoid disorderly sovereign defaults, a sharp credit contraction, systemic bank failures and excessive fiscal tightening.

“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,” said Padoan.

“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,” he added.

Eurozone growth is forecast to slow down from 1.6% this year to 0.2% next year, before picking up and reaching 1.4% in 2013.

The OECD said that weak growth and low levels of inflation should trigger accommodative monetary policy in OECD countries. It added that central banks should provide ample liquidity to calm tensions in financial markets and prepare contingency plans that could be implemented swiftly if needed.

"A continued lack of effective action could trigger an alternative, downside scenario where the outlook becomes much bleaker," the OECD added.

By: Franco Capaldo
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