Bloomberg reported that the Organization for Economic Cooperation and Development said growing doubts about the survival of Europe's monetary union has caused global growth to stall and represents the main risk to the world economy.
OECD said in its twice annual global economic outlook released recently that the 34 OECD nations will grow 1.9% in 2011 and 1.6% in 2012, down from 2.3% and 2.8% predicted in May 2011. In a separate report, Morgan Stanley cut its forecast for 2012 global growth.
Mr Pier Carlo Padoan chief economist at OECD wrote in the report that "Skepticism has grown that euro area policy makers can deal effectively with the key challenges they face. Serious downside risks remain, linked to loss of confidence in sovereign debt markets and the monetary union itself."
The remarks are the first from a major government body to highlight the possibility of a euro breakup and reflect the shift in the two-year-old crisis from the region's periphery to its so called core. Government bond yields for both Germany and France, Europe's two largest economies, climbed last week as a German bond auction failed to get bids for 35% of the 10 year debt on offer.
The OECD said that "The euro area crisis represents the key risk to the world economy. Contagion has entered a new phase and spread beyond euro area countries normally seen as fiscally vulnerable, suggesting that fiscal concerns are no longer the only driving force behind contagion."
The OECD, which advises members on policy, weighed in on a tussle about how involved the European Central Bank should be in crisis fighting, saying the lender needs to cut interest rates and to expand its balance sheet. The euro region's rescue fund or European Financial Stability Facility also needs to be strengthened.
Mr Padoan wrote that "Decisive policies and the appropriate institutional responses will have to be put in place to ensure smooth financing at reasonable interest rates for sovereigns. This calls for rapid, credible and substantial increases in the capacity of the EFSF together with or including greater use of the ECB balance sheet."
(Sourced from www.bloomberg.net)
