Europe's 'vicious circle' threatens world, OECD says

By msnbc.com and news services

The United States and Japan are leading a fragile economic recovery among developed countries that could yet be blown off course by the European debt crisis, the?Organisation for Economic Co-operation and Development?warned on Tuesday.

"The eurozone crisis remains the most important downside risk to the global economy,"?the?OECD, which specializes in economic policy for advanced economies, said in a report.?

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"The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth," OECD?Chief Economist Pier Carlo?Padoan said in the?report.?Such a scenario "may materialize and spill over outside the euro area with very serious consequences for the global economy."?

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The comments were essentially a warning to European Union leaders as they prepared to gather in Brussels on Wednesday for meetings on how to restart growth and resolve the political impasse in Greece, where voters have rejected austerity measures in elections on May 6,?according to?Bloomberg.?

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Although OECD economies were on the mend, the eurozone's debt crisis could still spiral out of control with Greece struggling to remain solvent and Spanish banks needing to be recapitalized, Padoan said.?

The European Central Bank's injection of one trillion euros (about $1.28 trillion) into the eurozone's banking system and an increase in European bailout funds and IMF reserves had helped keep the eurozone's debt crisis from spiraling out of control, he said.?

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"We see a slow rebound of growth in the United States driven mostly by private demand, some pick-up in Japan and moderate to strong growth in emerging economies,"?OECD?chief economist Pier Carlo?Padoan?told Reuters in an interview.?

In Greece, a senior judge is to be put in charge of a caretaker government to run the country until a new General Election on June 17. Questions are growing over whether the country's finances will last that long. Hundreds of millions of euros have been withdrawn from Greek banks in recent days over fears of a departure from the euro - and return to a devalued drachma. Jonathan Rugman, Channel Four Europe reports.

"We also see flat growth in the euro area which hides important differences, with northern countries growing and southern countries in recession," he added.?

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The Paris-based group forecast that?the 17-member eurozone economy would shrink 0.1 percent this year before posting growth of 0.9 percent in 2013. The American economy, in contrast, would grow by?2.4 percent this year and 2.6 percent in 2013, it predicted.

Msnbc.com staff and Reuters contributed to this report.

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