ANN CAHILL: Euro crisis ‘threatens world economy’

The eurozone crisis poses the single biggest risk to the global economy, with cutbacks in countries hardest hit by the crisis particularly vulnerable, the OECD warned.

The only glimmer of optimism for the Irish economy appeared to be the upgrading of growth expectations for the US, though UK growth is likely to be flat.

The Paris-based OECD,which represents 34 advanced economies, lowered its growth forecast for the eurozone to 0.1% this year and predicted an increase to 0.9% for next year — but this is provided the debt crisis is contained.

For Ireland, it expects growth to be 0.6%, well down on its prediction this time last year of 2.3%. It suggests 2.1% growth for next year, higher than the European Commission’s recent forecasts of 0.5% and 1.9% respectively.

They say that with recovery in Europe and North America, exports should be boosted next year, the labour market situation will turn around slowly, and unemployment stabilise.

Cutting debt and deficits is the only way to gain confidence from the financial markets but they refer to growing mortgage arrears, saying they should be solved rapidly. Reforms to public employment services and job training would help cut unemployment.

In the eurozone generally, the OECD said hopes that Germany would give impetus to eurozone growth were not well-founded because the recovery in healthier economies was not strong enough to offset flat or negative growth elsewhere in Europe.

In fact, the report warned that adjustments in the eurozone during this period of slow or negative growth and deleveraging could turn into a vicious circle of high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation, and lower growth.

“In Europe, business and household confidence is weak, financial markets are tight andthe adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis,” the report said.

Weak competitiveness needed to be addressed in countries with large external deficits, while structural adjustment and higher wages in surplus countries would contribute to a growth-friendly rebalancing process. Germany, with the highest trade surplus, has already suggested it would allow wages to rise.

Underlining that there were no short cuts to growth, the OECD secretary general, Angel Gurría, launching the report in Paris, said: “With slow growth, high unemployment and limited room for manoeuvre regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence.”

The report reiterated the message from the European Commission that fiscal consolidation and structural measures must proceed together to make the adjustment process as growth-friendly as possible, and that finding the right balance between spending cuts and revenue increases was critically important.

On the eve of the EU leaders’ summit in Brussels, the OECD recommended:

* Comprehensive structural reforms in areas such as education, innovation, competition, and green growth;

* Further enhancing the firewall to prevent contagion of the eurozone financial crisis;

* Increasing European Investment Bank funding for infrastructure projects;

* Making better use of ECB balance sheets.

“Failure to act today could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy,” said the OECD, reinforcing the message from many world leaders at the G8 meeting in the US.

It called for a further cut in ECB interest rates despite rates being at a record low of 1%.


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