Global Economy at Risk: OECD

According to the Organization for Economic Cooperation and Development (OECD), the euro zone debt crisis threatens not just Europe, but the world economy itself. And as Germany and France prepared to defend seemingly opposite positions at a European Union summit later this week, the chairman of India’s largest retailer of diamonds and gold jewelry looked to expand in Asia, pointing out that even in tough times many regard diamonds as a hedge.

Bloomberg reported Tuesday that in its semiannual report on the global economy, the OECD issued a warning to E.U. leaders in its commentsbefore a meeting Wednesday in Brussels. OECD chief economist Pier Carlo Padoan wrote in the report, “The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.”

He added that such events “may materialize and spill over outside the euro area with very serious consequences for the global economy.” Padoan acknowledged lower predictions of growth that presage continuing economic difficulties; the OECD has revised downward its earlier predictions in November of 0.2% growth for 2012 and 1.4% for 2013, instead foreseeing a shrinkage of 0.1% for 2012 and expansion of only 0.9% for the coming year.

In the report, Padoan said, “Such persistent weakness reflects underlying economic, fiscal and financial imbalances within the euro area, which have been the root cause of this crisis and barely begun to unwind. Recovery in healthier countries, while welcome, is not strong enough to offset flat or negative growth elsewhere.”

He went on to say that it was necessary to take steps to tamp down market turmoil, and advocated monetary easing as well as continued bond buying by the European Central Bank (ECB) for that purpose, warning that otherwise sovereign bond market volatility “could have repercussions for the stability of the banking system and ultimately public finances.”

On everyone’s mind, of course, is the situation in Greece, where the political parties committed to the requirements of the country’s bailout, New Democracy and PASOK, are finding themselves upstaged by a surge in popular support for parties, led by Syriza, advocating an overthrow of austerity conditions while still seeking to remain in the euro.

New elections scheduled for June 17 will test voters’ resolve in either case as a war of words continues among the party leaders. Should troubles escalate in Greece, the fear is that fiscal woes will spread to Spain and Italy, both with their own financial challenges.

The OECD is sensitive to the rebellion against harsh austerity in Greece and in elections elsewhere. Acknowledging that austerity was wearing on the countries on which it was imposed, the report said, “Tolerance for fiscal adjustment may be reaching its limit. With recession in a number of countries in 2012 and 2013, a combination of enduring financial fragility, rising unemployment and social pain may spark political contagion and adverse market reaction.”

The OECD also called for austerity measures to be “as growth-friendly as possible” to avoid adding to the risks already present in the situation. It said, “much can be gained in efficiency of public spending and through a composition of taxation that is least harmful to growth.”

And therein lies the rub, with growth pitted against austerity. Sparks are sure to fly at the Brussels gathering of E.U. leaders, with Chancellor Angela Merkel of Germany on the austerity side of the debate and President Francois Hollande of France espousing growth policies on the other.