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“The crisis in the eurozone remains the single biggest downside risk facing the global outlook”, said OECD Chief Economist, Pier Carlo Padoan. In Europe, business and household confidence is weak, financial markets are tight and the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis, the OECD said.
Recovery in the healthier economies, while welcome, is not strong enough to offset flat or negative growth elsewhere in Europe. 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.
Adjustments in the euro area are now 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.
On the eve of a European Union summit in Brussels, the OECD suggested Leaders could stimulate growth by:
The OECD warns that failure to act today could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy. Avoiding such a scenario requires action to be taken both at country and supranational level.
Fiscal consolidation and structural measures must proceed hand in hand, to make the adjustment process as growth-friendly as possible. Finding a careful balance between spending cuts and revenue increases is critically important. The reform agenda must also be specifically targeted at supporting employment, reducing inequalities and protecting the weakest segments of the population.