OECD warns eurozone crisis stunting global recovery

On the eve of a European summit, the head of the International Monetary Fund added her voice to the clamour for decisive moves after US President Barack Obama called for more coordination.

Underlining the woes of the 17-nation bloc which uses the single currency, struggling Spain saw its borrowing costs surge as it raised 2.526 billion euros ($3.2 billion) in a debt auction.

Japan, another country mired in debt, was hit by a double downgrade to its credit rating, although the OECD predicted that its rival China was headed for an acceleration of its growth.

In its latest report, the Organization for Economic Development and Cooperation held its forecast for global growth this year steady at 3.4 percent.

But it lowered its outlook for the eurozone to a 0.1 percent contraction, urging more easing of monetary policy and euro-wide measures to boost growth.

"The crisis in the euro area has become more serious recently, and it remains the most important source of risk to the global economy," OECD chief economist Pier Carlo Padoan warned.

The policy forum of 34 advanced economies forecasts global growth will pick up to 4.2 percent in 2013 and 0.9 percent in the eurozone, provided it contains the debt crisis.

While the eurozone gained some breathing space at the beginning of the year from the European Central Bank pumping over a trillion euros into banks, tensions have soared in recent weeks after inconclusive elections raised the spectre of a Greek exit from the euro after an indecisive May 6 election.

There is no guarantee Greeks will elect next month parties committed to pursuing austerity policies required under its massive international bailout and key to keeping it in the euro.

"Elections in a number of euro area countries have signalled that reform fatigue is increasing and tolerance for fiscal adjustment may be reaching a limit," noted Padoan.

Recession, "rising unemployment and social pain may spark political contagion and adverse market reaction" with countries outside the eurozone also at risk of being hit, he added.

The OECD forecast eurozone unemployment to rise to 10.8 percent this year and 11.1 percent next.

There was more gloomy data from the International Labour Organization which said nearly 75 million youths or 12.7 percent of people aged 15 to 24 would be out of work this year, up from 12.6 percent in 2011.

With EU leaders meeting in Brussels Wednesday to contemplate measures to boost growth, the OECD said "credibility and confidence would be enhanced by euro area and EU-wide measures".

Speaking in London, IMF chief Christine Lagarde said the eurozone had made a "serious improvement" in dealing with its crisis but "more needs to be done in relation to supporting growth, particularly by way of structural reforms."

Analysts say structural reforms could eventually add several percentage points of growth, but are often politically difficult to undertake and the results take years to appear.

New French President Francois Hollande has called for a growth pact to complement the EU fiscal pact, pitting him against German Chancellor Angela Merkel who has pushed for euro nations to pursue austerity policies.

Merkel said Tuesday she found it "astonishing" that her drive for European governments to balance their budgets has provoked such a debate.

The current discussion in Europe and even beyond its borders "gives the impression that, for us, saving, as such, is pleasurable," Merkel said.

"It's just about not spending more than you collect. It's astonishing that this simple fact leads to such debates."

Obama said Europe's leaders needed to be on the same page.

"What is most important is that Europe recognises this euro project involves more than a currency, it means that there must be more effective coordination" on fiscal and growth policies, he said late Monday.

"We have offered to be there for consultation, to provide any technical assistance and work through some of these ideas in terms of how we can stabilise the markets there."

The OECD bumped up its forecast for US economic growth this year to 2.4 percent from 2.0 percent, and sees 2.6 percent growth in 2013 provided it doesn't cut government spending too sharply and monetary policy remains loose.

Japan should see 2.0 percent growth this year with the OECD trimming its forecast for 2013 to 1.5 percent.

However Fitch cut its credit rating by two notches, citing "growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios."

Japan has an eye-popping national debt that amounts to more than twice its gross domestic product, the highest among industrialised nations.

There was better news for China as the OECD predicted the world's second biggest economy should post 8.2 percent growth this year and 9.3 percent in 2013.