Tags: europe | debt | crisis | economy

European Debt Crisis Greater Threat to Economy Than Fiscal Cliff

Tuesday, 27 Nov 2012 11:08 AM

By Bill Hoffmann

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The debt crisis sweeping Europe is a far greater threat to the global economy than America’s looming fiscal cliff, an alarming new economic report concludes.

The Organization for Economic Co-operation and Development — an international fiscal think-tank of 34 countries founded in 1961 — says European instability could plunge Europe into a deep recession that could pull the United States down with it.

“The world economy is far from being out of the woods,” OECD Secretary-General Angel Gurría said in Paris, where the group’s “Economic Outlook’’ report was released.

“The United States fiscal cliff, if it materializes, could tip an already weak economy into recession, while failure to solve the euro-area crisis could lead to a major financial shock and global downturn.

“Governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs, in the United States, in Europe, and elsewhere.’’

According to the OECD report, “more needs to be done to tackle negative links in the euro area between public finances, bank solvency and risks that any country may have to leave the euro.

“In the long run, this requires a fully-fledged banking union with fiscal backstops. Recapitalization of banks should be undertaken where necessary.

The group suggests a possible positive outcome “if decisive policy actions are taken to improve business and consumer confidence, and to boost growth and jobs worldwide. The rapid and broad implementation of structural reforms, not least in labor and product markets, is key to this scenario.’’

OECD Chief Economist Pier Carlo Padoan said there is a bright potential to the gloomy forecast.

"The common element is that there is the possibility for policymakers to take defensive action. There is lots of room for upside scenarios," Padoan told The Guardian of Britain.

Gross domestic product growth across the OECD member countries is projected to match this year’s 1.4 percent in 2013, before gathering momentum to 2.3 percent for 2014, according to the report. In the United States, provided the fiscal cliff is avoided, GDP growth is projected at 2 percent in 2013 before rising to 2.8 percent in 2014.

In Japan, GDP is expected to expand by 0.7 percent in 2013 and 0.8 percent in 2014, the OECD said. The euro area will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1 percent next year, before growth picks up to 1.3 percent in 2014.

But “labor markets remain weak, with around 50 million jobless people in the OECD area. Unemployment is set to remain high, or even rise further, in many countries unless structural measures are used to boost near-term employment growth.’’

The OECD’s members include: The United States, United Kingdom, Japan, Canada, Italy, Israel, Ireland, Switzerland, Germany, France, Turkey, Sweden, Spain, Slovenia, Korea Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Belgium, Austria, Australia, Poland, Portugal, the Slovak Republic, Iceland, Hungary, Greece, Finland, Estonia, Denmark, the Czech Republic, and Chile.

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