OECD Warns Of 'Severe Recession' In Eurozone

Pressure is mounting on politicians and the European Central Bank (ECB) to intervene in theeurozone crisis after the OECD warned the bloc could face a "severe recession", which risked bringing down the global economy.

In its latest global economic outlook, the Organisation for Economic Co-operation and Development cut the euro area's average economic forecast for 2012 to -0.1%, from a previous estimate of 0.2%.

But it warned that the 17-country economy could contract by as much as 2% this year in the worst case scenario.

The policy forum of the world's 34 most advanced economies expects the bloc to return to meagre growth of 0.9% in 2013.

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

The outlook for the UK economy remained unchanged at 0.2% growth for 2012.
OECD Chief Economist Pier Carlo Padoan said: "Today we see the situation in the euro area close to the possible downside scenario, which if materialising could lead to a severe recession in the euro area and with spillovers in the rest of the world."

Mr Padoan called on governments and Europe's central bank to act quickly to keep the slowdown from dragging down the global economy.

He said eurozone leaders should adopt a "growth compact" to promote growth even while reducing deficits and advocated so-called eurobonds - debt issued jointly by countries in the currency bloc - to recapitalise banks.

French President Francois Hollande has made securing such a pact and the creation of uurobonds, which would share the cost burden of borrowing between eurozone countries, the focus of his European diplomacy in the first weeks of his administration.

But this is at odds with Germany, which continues its hard-line austerity stance and says eurobonds would be the "wrong medicine".

Mr Padoan also reiterated his call of six months ago for the ECB to do more to stem Europe's crisis by measures such as lowering interest rates and further monetary easing.

The OECD figures also show the eurozone is increasingly split between a wealthier north continuing to grow and a southern rim that is sliding deeper into recession.

Germany, Europe's largest economy, will accelerate to 2% growth next year after 1.2% growth in 2012, while France, the eurozone's second-largest economy, will expand 1.2% next year after 0.6 percent growth this year, the Paris-based think-tank said. Greece's battered economy, by contrast, will shrink by 5.3% this year after a 6.9% slump in 2011.

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

The outlook came as Alexis Tsipras , leader of Greece's radical leftwing party Syriza, visited France and Germany to meet their leftist political parties in the hope of building on the momentum which saw his party come second in an inconclusive May 6 vote.

In Berlin, he said Greece would remain in the eurozone if his party win the next Greek elections.

"A vote for the left does not mean that we would leave the euro.

"Quite the opposite, we would keep the euro," said the anti-austerity leader who is tipped to win another round of elections expected on June 17.

But Mr Tsipras kept up the attack on the austerity measures he says have brought Greece to its knees, with the economy slumped in recession for a fifth year.

"There's nothing to negotiate in the (debt accord) because you don't negotiate with hell," he said while in Paris.

EU leaders, especially German Chancellor Angela Merkel, have insisted that Greece must stick to the terms of the bailout deal or risk losing access to aid funding, a step which would in effect force it out of the eurozone.

EU leaders are due to meet on Wednesday night to ponder their next step.

Meanwhile, the International Monetary Fund has warned that the eurozone crisis could prolong the recession in the UK and urged the Bank of England to take action to boost growth.