One of the world’s most influential groups of economic experts – the OECD – has said the eurozone crisis has become the biggest threat to the global economy. In its twice yearly ‘Economic Forecast’ the Organisation for Economic Cooperation and Development warned that a break-up of the single currency zone can no longer be ruled out.
It slashed its previous economic growth forecasts, saying the eurozone is already in ‘mild’ recession and will virtually grind to a halt next year. It also warned that the malaise could spread across the Atlantic. The report said that contagion has entered a new phase threatening even the most solid economies.
Even Germany, Europe’s biggest, had difficulty persuading investors to buy its bonds last week. A third of them remained unsold. The report said in the absence of decisive action from euro zone leaders it would be down the the European Central Bank alone to contain the crisis.
The OECD’s Chief Economist Pier Carlo Padoan spoke to euronews from Paris.
Euronews business correspondent Stefan Grobe picked up on the point that global economic prospects depend on policy decisions related to the euro debt crisis and US fiscal policy. He first asked how long can Europe afford to continue muddling through while key decisions are yet to be taken?
Pier Carlo Padoan, OECD:
I am afraid that time is running out. If swift and decisive action is not taken at the euro area level, there is risk of what we call downside scenario, which could lead the euro area in deep recession over the next few years. And so decisive action is needed. But also in the United States, there must be a way to break the fiscal deadlock to avoid that the much tighter fiscal contraction bears a weight on the US economy, and there is a risk of recession there too.
What would be required for a positive scenario to materialise? Right now, the debate in the euro zone centres on a stronger role of the ECB and the flotation of eurobonds. What’s your opinion on this? Would that help solving the sovereign debt crisis?
Well first of all, what needs to be done in the area is to stop contagion. And there the ECB and possibly the EFSF have a major role. There must be a strong commitment to avoid that spreads are brought upwards from further contagion, and this can be done credibly only if the ECB alone or with the EFSF may take that stance. In addition, euro area leaders must be specific about what they want to do with the October 26 package, that is to say a much stronger EFSF with much larger firepower; how to address bank capitalization; how to enhance governance of the euro area and, of course, how to finalize the debt restructuring programme for Greece which was decided then. Eurobonds are a good instrument for further fiscal integration but only once stronger governance is implemented.
Now Moody’s warns of escalating dangers from the euro debt crisis with many countries defaulting on their debt or exiting the euro. What is more likely —a break-up of the euro zone or a stronger fiscal union and a better economic governance?
It all depends on policy action. If policy action is not taken, the euro could go all the way down. On the other hand, if policy action is taken along the lines I was mentioning we could have a much brighter outlook of the next few years with stronger growth and fiscal consolidation proceeding more smoothly, and above all, I would say, unemployment going down finally.
What about the United States? We see that economic recovery has lost momentum, that the labour market is weak and that this drags on domestic demand. But we also see that there is moderate growth. To what extent is Europe’s debt crisis a threat to the US economy?
The euro debt crisis is a threat to the US economy, but the US economy is a self-imposing threat by itself, by not agreeing on a fiscal stance. And so this is a policy failure which, in a way, is similar of what we are witnessing today in Europe. Unfortunately, we have seen now for almost a year and a half policy being behind the curve in the euro area, certainly, but also in the United States.