In its half-yearly update, the Organization for Economic Cooperation and Development said that protracted economic weakness in Europe could evolve into stagnation with negative implications for the global economy.
The OECD again slashed its forecast for the 17 European Union countries that use the euro, saying they will shrink by 0.6% this year, after 0.5% drop in 2012. The OECD had predicted a 0.1% decline for the eurozone in its report six months ago, and this time last year, it forecast growth of nearly 1% for 2013.
The US economy will continue to outpace Europe, the OECD said, with growth of 1.9% in 2013 and 2.8% in 2014. For global gross domestic product, the OECD forecasts an increase of 3.1% for this year and by 4% for 2014.
Noting that eurozone policymakers have often been behind the curve, the OECD warned that Europe was still beset by weakly capitalised banks, public debt financing requirements and exit risks.
Meanwhile, the eurozones 12.1% unemployment is likely to continue to rise further...stabilising at a very high level only in 2014, the OECD said.
The eurozone economy shrank 0.2% in the January-March period, the sixth consecutive quarterly decline, making it the euro zones longest ever recession.
Austerity measures have inflicted severe economic pain and sparked social unrest across the continent. Europes young people are especially suffering, with unemployment of around 50 percent in some of the hardest-hit eurozone countries such as Spain and Greece.
With a population of more than half a billion people, the EU is the worlds largest export market. If it remains stuck in reverse, companies in the US and Asia will be hit.
Last month, US-based Ford Motor lost $462 million in Europe and called the outlook there uncertain. Other major economies have faltered this year but none are in recession, like Europe . The US economy grew 2.2% last year and China, the worlds No. 2 economy, is growing around 8% a year.
The OECD urged Europe to bolster efforts to support economic recovery. While the European Central Banks loose monetary policy has helped, more can be done through further non-conventional measures, and the establishment of a Europe-wide banking union, the organisation said.