Euro zone crisis biggest threat to global economy: OECD

Mon Nov 28, 2011 9:23am EST
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By Leigh Thomas

PARIS (Reuters) - The euro zone's debt crisis has become the biggest threat to the global economy and a break up of the currency zone can no longer be ruled out, the OECD said on Monday, slashing its forecasts and urging the ECB to play a bigger role in defusing the crisis.

The euro zone has already entered a mild recession but much worse could follow unless policy makers take decisive action to get ahead of the market, the Organization for Economic Cooperation and Development said in a stark warning.

"There is a risk to the euro, let's not deny that," OECD chief economist Pier Carlo Padoan told Reuters in an interview. "But I would like also to say that there is a possibility of avoiding that risk."

A worst case scenario of continued inaction in the euro zone and the failure of U.S. lawmakers to agree a spending-reduction plan would usher in a devastating downturn for the world economy, the Paris-based OECD said.

In the absence of decisive action from euro zone leaders, the European Central Bank (ECB) alone has the power to contain the bloc's crisis, the OECD said. In the United States, however, the Federal Reserve had little ammunition left.

"We are still seeing policy behind the curve," Padoan told a news conference. "This cannot be accepted any more."

"Time is running out and every time we lose the occasion to act effectively the price or cost for having positive outcomes goes up," he added.

Padoan said that the absence of credible action from policymakers was sapping households and companies' confidence as well as fueling damaging volatility on financial markets.   Continued...