Decisive policies must be implemented urgently if the risk of contagion in the euro area is to be reduced, according to the Organisation for Economic Cooperation and Development’s (OECD) latest Economic Outlook report.

In the report, the OECD stated that without fast action, pressures on bank funding and balance sheets would increase the risk of a credit crunch, GDP growth would continue to slow and unemployment would remain high.

As a result, the OECD has proposed that country-specific policies should be introduced if the macroeconomic situation continues to derail, and that “governments should provide fiscal support while strengthening fiscal frameworks to reassure markets that public finances can be brought under control.”

In addition, in order to stem the growing problem of unemployment, effective labour market policies should be introduced. OECD chief economist, Pier Carlo Padoan, commented: “In the euro area, the risk of contagion needs to be stemmed through a substantial increase in the capacity of the European Financial Stability Fund, together with a greater ability to call on the European Central Bank’s balance sheet.

“Much greater firepower must be accompanied by governance reforms to offset the risk of moral hazard.”

According to figures published in the report, the OECD predicts that GDP across the OECD countries will slow from 1.9 per cent this year to 1.6 per cent in 2012. Unemployment is expected to remain at around 8 per cent over the next two years.

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