Report says 'intensified euro area crisis' could destroy growth in Europe and also wipe out US recovery, causing recession
Europe's debt crisis remains a far bigger threat to the world's economy than the "fiscal cliff", according to the Organisation for Economic Co-operation and Development (OECD).
In its latest twice yearly report the OECD warned the world's major economies could all got back into recession if euro-zone and US policy makers fail to tackle their fiscal crises. The organisation believed an escalation in the ongoing European crisis poses the biggest threat to global economies and could drag Europe into a deep recession in the next two years and the US along with it.
The economic think tank warned the world economy is at risk of a fresh contraction and slashed the forecast growth rate for its 34 member nations to 1.4% in 2013, downward from a forecast of 2.2% made just six months ago.
"After five years of crisis, the global economy is weakening again," said Pier Carlo Padoan, the OECD's chief economist. "The risk of a new major contraction can't be ruled out."
The report comes as politicians in Washington are increasingly focussed on the fiscal cliff – the year end expiration of wide-ranging tax cuts and the imposition of draconian spending cuts. The crisis has rattled investors and business leaders around the world.
A series of reports from the Congressional Budget Office and the White House have emphasised the threat the fiscal cliff poses as Europe's woes seem to have dropped off Washington's agenda.
Padoan said the US's budget spat posed significant threats to the US and the global economy but said that Europe presented a larger challenge.
The report comes as eurozone finance ministers are meeting with officials International Monetary Fund and the European Central Bank amid signs of a breakthrough in negotiations over Greece's massive debts.
"We don't think the euro-zone crisis is over yet," Padoan said. "Fragility in the euro-area remains, the negative feedback loop between banks and sovereigns is still there."
"We believe that the European crisis represents the largest risk to the global economy," he said. Padoan said an escalation in Europe's fiscal problems threatened "the global economy, including the US".
According to OECD calculations the eurozone should return to growth next year while the US should grow at 2% next year and close to 3% in 2014. But an "intensified euro area crisis" would wipe out growth in Europe, plunging the economy into a deep recession. It would also wipe out the US's recovery, causing a shallow recession.
Padoan said the "worst-case scenario" was for a fresh crisis in Europe and a collapse in the fiscal cliff talks. But he added that both crises represented opportunities for politicians. "The common element is that there is the possibility for policymakers to take defensive action. There is lots of room for upside scenarios," he said.
The economist said that businesses were increasingly uncertain about the future. "The major cause of that is policy uncertainty both in the US and Europe," he said.
The fiscal cliff was created in an attempt to force Republicans and Democrats to negotiate as the US struggles to cut its record $16tn debts. Padoan said that it was important for the US to reduce its debts in the medium term but that too rapid a reduction runs "a very high risk of pushing the economy back into recession".
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