Eurozone at risk of falling into 'severe recession' if governments, European Central Bank do not act quickly, says OECD; eurozone economy could contract as much as 2% this year

Cindy Allen

PARIS , May 22, 2012 (Associated Press) – The 17-country eurozone risks falling into a "severe recession," the Organization for Economic Cooperation and Development warned on Tuesday, as it called on governments and Europe's central bank to act quickly to keep the slowdown from dragging down the global economy.

OECD Chief Economist Pier Carlo Padoan warned the eurozone economy could contract by as much as 2 percent this year, a figure that the Paris-based think tank had laid out as its worst-case scenario in November.

In its twice-yearly global economic outlook, the OECD — which comprises the world's most developed economies — said its average forecast was for the eurozone economy to shrink 0.1 percent this year and grow a mere 0.9 percent in 2013.

"Today we see the situation in the euro area close to the possible downside scenario" in the OECD's November report, "which if materializing could lead to a severe recession in the euro area and with spillovers in the rest of the world," Padoan told reporters before the report's release.

The report forecasts Europe falling further behind other countries, particularly the United States, whose economy is expected to grow 2.4 percent this year and 2.6 percent next.

"There is now a diverging trend between the euro area and the U.S., where the U.S. is picking up more strongly while the euro area is lagging behind," Padoan said.

Europe itself is increasingly split between a wealthier north continuing to grow and a southern rim that is sliding deeper into recession, the OECD figures show.

Germany, Europe's largest economy, will accelerate to 2 percent growth next year after 1.2 percent growth in 2012, while France, the eurozone's second-largest economy, will expand 1.2 percent next year after 0.6 percent growth this year, the OECD said.

Italy's economy, by contrast, will shrink 1.7 percent this year and 0.4 percent in 2013, the OECD forecast. Spain is also set to remain mired in recession, with contraction of 1.6 percent this year and 0.8 percent next.

Padoan called on eurozone leaders to adopt a "growth compact" to promote growth even while reducing deficits. French President Francois Hollande has made securing such a pact the focus of his European diplomacy in the first weeks of his administration.

So-called eurobonds — debt issued jointly by countries in the currency bloc — could be used to recapitalize banks, Padoan said. He also reiterated his call of six months ago for the ECB to do more to stem Europe's crisis.

The ECB has an "essential" role to play in solving Europe's crisis, Padoan said, both by using its balance sheet firepower to shore up banks and by lowering interest rates. The ECB should also consider renewing the "unconventional measures" it used last year such as buying up government bonds, "if there is need to cope with contagion problems," Padoan said.

Asian economies will also do better than Europe, the OECD predicted. Japan is forecast to grow 2 percent this year and slow down to 1.5 percent in 2013, while China is expected to accelerate from 8.2 percent to 9.3 percent.

Despite their growth downgrades for Europe, the OECD's figures are more optimistic than those of the International Monetary Fund. Last month the IMF predicted Europe's economy would shrink 0.3 percent this year, with the U.S. expanding 2.1 percent.

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