Stagnant eurozone poses 'major risk' to world growth: OECD

[PARIS] The weak eurozone economy poses a key threat to global growth, the OECD warned Tuesday, urging more flexibility in fiscal rules for struggling EU members like France and Italy to prevent another recession.

Forcing the two major European economies to meet the EU's tough deficit criteria "would likely depress activity further and even risk tipping the euro area into another recession," it said.

France and Italy's "slower pace of structural fiscal adjustment... proposed in their 2015 budget plans seems appropriate," said the Organisation for Economic Cooperation and Development, which provides economic analysis and advice to its 34 industrialised members.

Its assessment came as the European Commission is due to deliver its verdict of member states' budgets this week, with France and Italy under fire after having submitted figures that fall short of the EU's criteria.

Tensions have been running particularly high between Berlin, which has preached fiscal discipline, and Paris, which is running not only running a budget deficit but also urging more stimulus spending.

France is set for a deficit of 4.3 per cent of GDP in 2015, way above the EU ceiling of three percent, while Italy's slow pace of structural reforms to reduce its massive debt of 133.4 per cent - more than double the EU ceiling - was under scrutiny.

But the OECD appeared to side with Paris and Rome, urging the eurozone to "slow down structural budget consolidation relative to previous plans to reduce the drag on growth".

It also called for further stimulus in the European single currency zone to prop up growth, although in Britain and the United States, policymakers can afford to pull back on such programmes next year.

"The euro area is grinding to a standstill and poses a major risk to world growth, as unemployment remains high and inflation persistently far from target," said the OECD's chief economist Catherine Mann.

In the semi-annual report the OECD lowered its forecast for global growth this year by a tenth of a percentage point to 3.3 per cent. For 2015 it cut the forecast by two tenths of a point to 3.7 per cent growth.

The OECD left in place its forecast for the 18-nation eurozone to expand by 0.8 per cent this year and by 1.1 per cent in 2015.

"Growth is set to be stronger in the United States and the United Kingdom than in the euro area and Japan," the report said, adding that unemployment "will remain particularly high in the euro area".

Among the emerging economies, "growth will edge down in China, remain weak in Russia and Brazil, but will recover steadily in India, Indonesia and South Africa," it said.

"This macroeconomic prognosis leaves us with a keen need for both continued supportive macroeconomic policy, as well as tailored structural reforms to raise both demand and supply throughout the global economy," it said.

Global concerns have mounted about the health of the eurozone just two years after the European Union said that the debt crisis which started in 2009 was over.

The euro area is "strongly exposed" to the risks posed by "potential financial volatility, lack of confidence about future growth prospects, and impaired and stretched balance sheets of banks and households," the OECD said.

The eurozone is also unduly dependent on a pickup in demand, it said, warning that the single currency area "could get stuck in persistent stagnation".

Policymakers must carry out "ambitious structural reforms... particularly in Japan and the core countries in the euro area, in order to boost employment and strengthen long-term potential growth," it said.

AFP