LITTLE ROCK — The Organization for Economic Cooperation and Development said Europe’s debt crisis risks spiraling and seriously damaging the world economy.
“The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth,” Pier Carlo Padoan, the organization’s chief economist, wrote in the organization’s semiannual report on the global economy. Such a downside scenario “may materialize and spill over outside the euro area with very serious consequences for the global economy,” he said.
The remarks amount to a warning to European Union leaders who are preparing to gather in Brussels on Tuesday to discuss how to revive growth and grapple with a political impasse in Greece, where voters rejected austerity measures in elections on May 6. The euro has dropped more than 3 percent this month on concern that Greece may opt to leave the 17-nation monetary union.
“We cannot do anything about what the Greek voters decide, but I don’t think we’ve been strong enough and clear enough in terms of demonstrating that there is an alternative,” Jose Angel Gurria, the organization’s secretary general, told reporters Tuesday in Paris. “Are we offering the necessary safety net and therefore a way not out of the euro but out of the crisis? I think we can do better.”
The organization, which advises its 34-member governments on economic policy, left its 2012 growth forecast for the group unchanged at 1.6 percent as the gloomier picture in the euro area was offset by improving prospects in the U.S.
Gross domestic product in the euro region will shrink 0.1 percent this year and expand 0.9 percent in 2013 instead of posting growth of 0.2 percent and 1.4 percent as predicted last November, the Paris-based organization said Tuesday.
“Such persistent weakness reflects underlying economic, fiscal and financial imbalances within the euro area, which have been the root cause of this crisis and barely begun to unwind,” Padoan said. “Recovery in healthier countries, while welcome, is not strong enough to offset flat or negative growth elsewhere.”
Germany’s GDP, adjusted for workdays, will expand 1.2 percent this year and 1.9 percent in 2013, while France will post growth of 0.6 percent and 1.2 percent, the organization forecast. By contrast Italy’s economy will shrink 1.7 percent and 0.4 percent, and Spain’s will contract 1.6 percent and 0.8 percent.
The organization urged the European Central Bank to stand ready to resume buying government bonds in the secondary market should market turmoil increase.
Volatility in sovereign bond markets “could have repercussions for the stability of the banking system and ultimately public finances,” the organization said. That may require a policy response that “could involve further action by the European Central Bank through its government bond purchasing program.”
In any event, given declining inflationary pressures, “there is room for further monetary easing,” it said. The central bank has already cut its benchmark interest rate to a record low of 1 percent.
The Organization for Economic Cooperation and Development warned that voters in euro-area countries struggling with austerity measures may not put up with further budget cuts.
“Tolerance for fiscal adjustment may be reaching its limit,” it said. “With recession in a number of countries in 2012 and 2013, a combination of enduring financial fragility, rising unemployment and social pain may spark political contagion and adverse market reaction.”
Given the risks inherent in fiscal adjustment, the organization called for austerity measures to be “as growth-friendly as possible,” arguing “much can be gained in efficiency of public spending and through a composition of taxation that is least harmful to growth.”
Europe’s fiscal compact, which aims to anchor budget restraint in national law and boost supranational surveillance, should be partnered by a growth compact that could include the issuance of jointlyguaranteed bonds to help recapitalize banks and increase resources available to the European Investment Bank to fund infrastructure projects, the organization said.
“Such moves could pave the way to a broader issuance of euro-bonds,” Padoan said.
The European outlook contrasts with that of the U.S., for which the organization lifted its growth forecasts to 2.4 percent and 2.6 percent this year and next. In November, the organization predicted a U.S. expansion of 2 percent in 2012 and 2.5 percent in 2013.
“In the U.S., growth should continue to strengthen as confidence is picking up in both businesses and households,” Padoan wrote. “The risk of excessive fiscal tightening in 2013 remains to be addressed, failing which, growth would be severely affected.”
Business, Pages 31 on 05/23/2012