The Organisation for Economic Co-operation and Development is warning that the euro area is set to enter recession and that policies need to be put in place urgently to stop the sovereign debt crisis from spreading.
In its latest economic outlook report, the OECD says that if not addressed, recent contagion to European countries thought to have relatively solid public finances could hugely escalate economic disruption.
It says that pressures on bank funding and balance sheets increase the risk of a credit crunch.
Pier Carlo Padoan, chief economist at the OECD, says that prospects will only improve if decisive action is taken quickly.
He says: “In the euro area, the risk of contagion needs to be stemmed through a substantial increase in the capacity of 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.”
Padoan adds: “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. 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.”
The OECD says that eurozone GDP growth is forecast to slow down from 1.6 per cent this year to 0.2 per cent next year, before picking up to 1.4 per cent in 2013.