OECD: Eurozone crisis could sink global economy

The recovery that is taking place in healthier economies is not strong enough to offset flat or negative growth elsewhere in Europe, the Organization for Economic Cooperation and Development (OECD) said Tuesday in its biannual economic report. 

"The crisis in the eurozone remains the single biggest downside risk facing the global outlook," said Pier Carlo Padoan, OECD's chief economist. 

The situation could "lead to a severe recession in the euro area and with spillovers in the rest of the world," he said.

Business and household confidence remains weak in Europe, financial markets are tight and the effects of austere fiscal policies could stymie near-term growth, particularly in countries hardest hit by the euro crisis, the OECD said.

"With slow growth, high unemployment and limited room for maneuver regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence”, OECD Secretary-General Angel Gurría said during the launch of the report in Paris.

Weak competitiveness must be addressed in those countries with large external deficits, while structural adjustment and higher wages in surplus countries would contribute to a growth-friendly rebalancing process, the OECD said.

Economic growth across the OECD, which includes the world's most developed economics, is projected to slow to an annual rate of 1.6 percent this year from 1.8 percent in 2011, before increasing to 2.2 percent next year, according to the report. 

Private-sector demand is expected to push activity up in the United States by 2.4 percent this year and by a further 2.6 percent in 2013, much faster than Europe's projected growth. 

The report estimates that the eurozone will contract by 0.1 percent this year, before picking up to 0.9 percent in 2013.

"There is now a diverging trend between the euro area and the U.S., where the U.S. is picking up more strongly while the euro area is lagging behind," Padoan said.

The economies of Japan, with growth forecast at 2 percent this year and a slowdown to 1.5 percent in 2013, and China, picking up pace to 9.3 percent from 8.2, are both expected to tick along faster than Europe. 

Adjustments in the eurozone are taking place in an environment of slow or negative growth and deleveraging, "prompting risks of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth," the report said. 

On the eve of a European Union summit in Brussels, the OECD suggested several ways to stimulate growth, including undertaking structural reforms in education, innovation, competition and green growth, increasing infrastructure spending, boosting the European single market to support additional economic activity and making better use of European Central Bank balance sheets.