Anthony Rowley; in Cannes
ON the eve of this week's G-20 summit in Cannes, the OECD warned yesterday that failure by leaders of the eurozone countries to fully implement the crisis-averting measures agreed to last week could have a dramatic impact on the global economy.
The warning came as leaders of the score of advanced and emerging countries that make up the G-20 prepared for a summit that is expected to be dominated overwhelmingly by the eurozone crisis because of its global importance.
Heads of the leading emerging economies, including those from China and Brazil, are expected to put strong pressure on their counterparts from Germany and France and others to ensure that the eurozone crisis is contained.
In return, these emerging economies, along with Japan, will probably offer to subscribe to new bonds to be issued by the European Financial Stability Facility (EFSF) to help finance the bailout of Greece and other economies at the periphery of the eurozone.
In a pre-summit briefing published yesterday, the Organisation for Economic Cooperation and Development (OECD) said that 'uncertainties regarding the short-term economic outlook have risen dramatically in recent months'.
A number of events, notably related to the euro area debt crisis and fiscal policy in the United States, are likely to dominate economic developments in the coming two years.
In an 'event-free' scenario and in the absence of comprehensive policy action to resolve current problems, real GDP is projected to grow about 3.9 per cent this year, 3.8 per cent in 2012 and 4.6 per cent in 2013 on average in G-20 countries.
'This average masks a wide divergence among country groupings, and emerging-market economies are much more buoyant, despite some softening,' the OECD said.
In the euro area, a marked slowdown with patches of mild negative growth is likely. Growth is also projected to remain weak in the United States, with a gradual pick-up from 2012 towards the end of the projection period. Unemployment is set to remain high in many advanced countries.
'A better upside scenario can materialise if the policy measures that were announced at the Euro Summit of Oct 26 are implemented promptly and forcefully. These measures go in the right direction and could help restore confidence and create positive feedback effects that could trigger a scenario of stronger growth.
'In contrast, the outlook would be gloomier if the commitments made by EU leaders fail to restore confidence and a disorderly sovereign debt situation were to occur in the euro area with contagion to other countries, and/or if fiscal policy turned out to be excessively tight in the United States.
'OECD analysis suggests that a deterioration of financial conditions of the magnitude observed during the global crisis (between the latter half of 2007 and the first quarter of 2009) could lead to a drop in the level of GDP in some of the major OECD economies of up to 5 per cent by the first half of 2013.'
To resolve the euro area crisis, it is important to clarify and implement fully and decisively the measures announced on Oct 26 to break the link between sovereign debt and banking distress, to deal with Greece, to ensure that the sovereign debt crisis does not spread to other European countries and to secure appropriate capitalisation and funding for banks.
Detailed information is needed on how the package will be implemented.