Europe has come under mounting pressure to take action to boost growth as the OECD warns the euro crisis has worsened and poses the most serious risk to a recovery for the global economy.
In its latest report, the Organisation for Economic Development and Cooperation held its forecast for global growth this year steady at 3.4%.
But it lowered its outlook for the eurozone to a 0.1% contraction from an earlier prediction of growth of 0.2%.
It urged more easing of monetary policy and euro-wide measures to boost growth.
The OECD also cut Ireland's economic growth forecast for this year from 1% to 0.6%.
It predicts the economy will grow by 2.1% in 2013, which is also lower than its previous expectations of 2.4%.
In its latest forecast, it said that Ireland's inflation rate will reach 2% in 2012 and will fall to 1.2% in 2013. Unemployment will hit 14.5% this year and will ease to 14.4% next year.
"The crisis in the euro area has become more serious recently, and it remains the most important source of risk to the global economy," OECD chief economist Pier Carlo Padoan warned.
The policy forum of 34 advanced economies forecasts global growth will pick up to 4.2% in 2013 and 0.9% in the euro zone, provided it contains the debt crisis.
While the eurozone gained some breathing space at the beginning of the year from the European Central Bank pumping over €1 trillion into banks, tensions have soared in recent weeks after inconclusive elections raised the spectre of a Greek exit from the euro after an indecisive May 6 election.
There is no guarantee Greeks will elect next month parties committed to pursuing austerity policies required under its massive international bail-out and key to keeping it in the euro.
"Elections in a number of euro area countries have signalled that reform fatigue is increasing and tolerance for fiscal adjustment may be reaching a limit," noted Padoan. Recession, "rising unemployment and social pain may spark political contagion and adverse market reaction" with countries outside the eurozone also at risk of being hit, he added.
OECD says ECB should make more rate cuts
The Paris-based group also said today that the ECB should cut interest rates further. It said the EU should take bloc-wide measures to boost growth and ease the fiscal adjustment in the euro zone where crisis risks are intensifying.
The OECD called for "a further easing in the euro area" despite the ECB having official rates at a record low 1% and that "credibility and confidence would be enhanced'' by such measures.
The OECD forecast euro zone unemployment to rise to 10.8% this year and 11.1% next. With EU leaders meeting in Brussels tomorrow to contemplate measures to boost growth, the OECD said "credibility and confidence would be enhanced by euro area and EU-wide measures".
Speaking in London, IMF chief Christine Lagarde said the euro zone had made a "serious improvement" in dealing with its crisis but "more needs to be done in relation to supporting growth, particularly by way of structural reforms."
Analysts say structural reforms could eventually add several percentage points of growth, but are often politically difficult to undertake and the results take years to appear.
New French President Francois Hollande has called for a growth pact to complement the EU fiscal pact, pitting him against German Chancellor Angela Merkel who has pushed for euro nations to pursue austerity policies.
Merkel said today she found it "astonishing" that her drive for European governments to balance their budgets has provoked such a debate. The current discussion in Europe and even beyond its borders "gives the impression that, for us, saving, as such, is pleasurable," Merkel said.
"It's just about not spending more than you collect. It's astonishing that this simple fact leads to such debates," she added.
Mr Obama said Europe's leaders needed to be on the same page. "What is most important is that Europe recognises this euro project involves more than a currency, it means that there must be more effective coordination" on fiscal and growth policies, he said last night.
The OECD bumped up its forecast for US economic growth this year to 2.4% from 2%, and sees 2.6% growth in 2013 provided it does not cut government spending too sharply and monetary policy remains loose.
Japan should see 2% growth this year with the OECD trimming its forecast for 2013 to 1.5%. However Fitch cut its credit rating by two notches, citing "growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios."
Japan has a huge national debt that amounts to more than twice its gross domestic product, the highest among industrialised nations.
There was better news for China as the OECD predicted the world's second biggest economy should post 8.2% growth this year and 9.3% in 2013.
