The United Nations' economic think-tank UNCTAD has said the pursuit of austerity measures and deficit cuts is pushing the world economy towards disaster in a misguided attempt to please global financial markets.
Its "Post-crisis policy challenges in the world economy" report savaged US and European economic policies and called for wage increases, stricter regulation of financial markets, including a return to a system of managed exchange rates, and a conscious break with market-led thinking.
"The message here is very pragmatic: we need to reverse our course quickly," said UNCTAD Secretary General Supachai Panitchpakdi.
Supachai, a former head of the World Trade Organisation, said the policy response to the crisis, with an emphasis on budgetary tightening, was misconceived and inept.
The report's lead author Heiner Flassbeck said the global economic situation was extremely dangerous and, without more stimulus, a decade of stagnation was the best-case scenario.
The current policies were a disaster, said Flassbeck, head of the globalisation and development strategies division at the UN Conference on Trade and Development, and a former deputy finance minister in Germany.
"If interests rates everywhere are zero, and if governments stick to the policy of not only keeping fiscal deficits where they are but retrenching, cutting public expenditure, then we will end up in permanent recession," he said.
"Unemployment depends very much on demand. And if you have no demand then you need government to step in with a huge programme for stimulating the economy," he said.
Flassbeck said the recovery from the financial crisis was not only jobless, which was to be expected, but it was also "wageless", with Americans, Japanese and Europeans expecting their incomes to stagnate.
In its last report a year ago, UNCTAD said a premature removal of stimulus policies might cause a deflationary spiral with slumps in growth and employment around the world.
Flassbeck said that even if things went well, global economic growth would slow to about 1.5% in 2012, less than half the UN forecast of 3.1% growth for this year.
The report put much of the blame for the crisis on deregulation of financial markets, which it said invited destabilising "herd behaviour" by speculators, and allowed an over-concentration of banking activities.
"What we've seen in the past and we never learn is that countries seem to have excessive belief in the financial markets. And we've seen time and again that financial markets are not very sound in their judgement," said Supachai.
Flassbeck said the herd mentality was evident whenever equity markets and commodity markets all lurch in tandem on the same day, an effect that could not conceivably be caused by real swings in demand. But the world was ignoring it, he said.
"If the G20 negotiations were not confidential I would tell you that it's ignored even there," he said.
A November summit of the 20 biggest economies would reach "extremely weak" conclusions on tackling the crisis and would underestimate the influence of financial markets, he said.
The UN report said the world should introduce a system of rules-based floating exchange rates, which would kill off distorting "carry trades" in which investors borrow currencies with low interest rates to buy higher-yielding currencies.
The system would be based on divergences between the consumer prices or interest rates applicable to different currencies, and unlike the defunct Bretton Woods system, it would cater for continual adjustments in exchange rates.
