Future of currency at stake, says OECD

DEBT CRISIS:EUROPEAN LEADERS must act decisively to save the euro and avert a deep worldwide recession, the Organisation for Economic Co-operation and Development (OECD) has warned.

In its latest economic forecast, the Paris-based think-tank said the euro zone’s debt crisis had become the biggest threat to the global economy and the future of the single currency was now at stake.

It cut its forecasts for growth in Europe, and called on the European Central Bank (ECB) to play a wider role in tackling the crisis.

The report said Europe needed “credible and large enough firepower” to stop the sell-off in sovereign debt.

It found the euro area appeared to be in “mild recession” and cut its growth forecast for next year to just 0.2 per cent.

Chief economist Pier Carlo Padoan said European leaders had so far failed to put in place strong plans to tackle the crisis.

“The scenario so far is that Europe’s leaders have been behind the curve,” he said.

“We believe this could be very serious. Everyone should be clear that the euro is at stake, and everyone should do what is needed to avoid the worst.”

The OECD said firm plans were needed for fiscal integration in the euro zone.

With unemployment set to rise and inflation to fall, it called for the ECB to reduce interest rates and keep up its purchases of Spanish and Italian bonds.

The report said “rapid, credible and substantial” increases were needed in the capacity of the euro zone’s bailout fund “together with, or including, greater use of the ECB balance sheet”.

“The numbers we have seen floating around are not enough,” Mr Padoan said.

He added that what was needed was a multiple of what was currently on the table.

Euro zone leaders initially planned to leverage the European Financial Stability Facility up to €1 trillion, but the fund has had trouble selling its own bonds to raise funds and has yet to attract the pledges it hoped to get from countries with sovereign wealth to invest.

The OECD said unanswered questions about the euro zone’s response to the debt crisis had raised doubts about even the bloc’s most solid economies, as demonstrated by Germany’s difficulties selling bonds last week.

“So the first thing, the absolute priority, is to stop that [contagion] and in the immediate the only actor that can do that is the ECB,” said Mr Padoan.

He urged the central bank to commit to creating a cap on government bond yields as a way of calming the crisis.