Eurozone recession alarm

The 17-nation eurozone was "close to a scenario" that would lead to a 2-percent contraction of economic activity this year, the Paris-based think tank of 34 industrialized countries said Tuesday.

In the first of its biannual growth reports, the OECD warned that the present situation in the eurozone was making this "downside scenario" increasingly likely, upsetting earlier predictions of an 0.1-percent contraction in 2012 and weak growth of 0.9 percent in 2013.

OECD chief economist Pier Carlo Padoan said the eurozone risked falling into a "vicious circle" of rising sovereign debt, weak banks, excessive fiscal consolidation and lower growth.

"The crisis in the eurozone remains the single biggest downside risk facing the global outlook," he said, with the United States and Japan set to grow modestly, and emerging economies such as China and Brazil in for a cyclical upswing this year.

Tightrope walk

Padoan called on eurozone leaders to agree on a "policy compact" that would spur economic growth while at the same time reduce budget deficits.

"Finding a careful balance between spending cuts and revenue increases is critically important," he said, adding that the eurozone should adopt structural reforms while at the same time pursue consolidation "at a speed depending on country-specific circumstances."

In addition, Padoan urged the European Central Bank (ECB) to lower interest rates - which are already at a historic low of 1 percent - and to renew its bond purchasing program to help finance debt-stricken eurozone countries.

For Germany, the OECD forecast growth of 1.2 percent this year and two percent in 2013, adding, however, that growth in the country was not strong enough to prop up the rest of the eurozone.

In addition, the organization said that higher wages in Germany could bolster domestic demand and contribute to a less painful readjustment for other eurozone members.

The OECD also called for the introduction of eurobonds, which is debt issued jointly by eurozone countries - a move vehemently opposed by Chancellor Angela Merkel who fears that Germany would be saddled with other governments' debt.

uhe/ng (dpa, AP, AFP)