OECD calls on eurozone finance ministers to take decisive action

Organisation for Economic Co-operation and Development's secretary general, Angel Gurría, says current level of funding is insufficient to restore market confidence

OECD secretary general Angel Gurria calls for decisive action on the eurozone crisis. Photograph: Francois Lenoir/REUTERS

The struggling eurozone needs the "mother of all firewalls" to provide the breathing space from its debt crisis needed to revive growth, the west's leading economic thinktank said on Tuesday.

In its annual health check on the 17-nation single currency area, the Organisation for Economic Co-operation and Development said decisive action was needed by finance ministers when they meet later this week.

The OECD's secretary general, Angel Gurría, said the current level of funding was insufficient to restore market confidence, still fragile despite the second Greek bailout finalised earlier this month. He called for a €1tn (£835bn) war chest to contain the sovereign debt crisis, noting: "Europe is stalling. It needs to get out of first gear and make growth the number one priority."

The OECD warned that the debt crisis was having a knock-on impact on the UK and that the 27-nation European Union faced a tough future. "Longer-term prospects are for growth to be weaker than over the past twenty years, influenced by population ageing and sluggish productivity gains."

Gurría said important advances had been made by governments in Spain, Portugal, Italy and Greece but the challenges remained daunting.

"Weak financial conditions, fiscal consolidation and economic adjustment are restricting demand in the short term before the long-term benefits on stability and growth are felt," Gurría said. "Decisive action to restore confidence and support demand is needed now."

Greek officials said the country was likely to hold a snap election on 6 Mayas it must implement more austerity cuts in exchange for its €130bn bailout agreed this month. Meanwhile Ireland is to hold a referendum on the EU's new fiscal treaty on 31 May, the government said on Tuesday – which will probably be the only popular vote on plans for stricter budget discipline.

The Paris-based OECD said the eurozone would slow to a virtual standstill this year, noting that there was a risk that austerity programmes and bank deleveraging would hit growth before the benefits of stronger public finances and economic reforms materialised. "High-risk spreads and self-fulfilling expectations could lead to unsustainable debt dynamics. There is a risk of global spillovers from these developments. This calls for both short-term action and long-term reforms."

The survey said economic, fiscal and financial imbalances in the area had led to weak banks, high unemployment and low growth. It urged an ambitious programme of reforms in product and labour markets, tax systems and education to rebalance economies, restore competitiveness, boost growth and bring down stubbornly high levels of unemployment, particularly among the young.