The Euro Zone is already in a mild recession and the U.S. could follow suit according the OECD who sharply cut forecasts on Monday. The threat of an even more severe downturn will continue if Europe can not get their debt under control and if U.S politicians fail to come up with a spending-reduction plan they all agree on.
The ECB is the only institution left that can hold the euro zone together if European leaders fail to take more decisive action in resolving their issue. The OECD believes in the U.S. however, the Federal Reserve has little else it can do. The slow down in Europe affects the entire global economy including big emerging economies such as China. The OECD cut its twice a year Economic Outlook to 3.4% in 2012, down from 3.8% this year.
The OECD added that Europe is has entered a recession and has seen growth this year of only 0.2%, well short of what it fore-casted in May of 2%.
The euro zone recovery continues to look in doubt following Germany’s difficulties with their bond auctions last week. “What we see now is contagion rising and hitting probably Germany as well,” OECD chief economist Pier Carlo Padoan told Reuters in an interview. “So the first thing, the absolute priority, is to stop that and in the immediate the only actor that can do that is the ECB,” he added.
The main answer to this crisis seems to be the ECB committing to creating a cap on government bond yields.
In the U.S., the Federal Reserve can’t do much in the event of a major economic downturn. It’s already boosted liquidity in the financial system. Padoan said the failure of Congress to pass a deficit reduction plan could cause the U.S. to fall into another recession. “The resulting fiscal tightening, which would come automatically, would in our view likely generate a recession in the United States,” Padoan said.
If a plan is passed, the U.S. economy will grow 1.7% in 2011 and 2% in 2012.