The International Monetary Fund (IMF) has warned if the US Federal Reserve begins tapering monetary stimulus, the weakest eurozone countries could be pushed into a "debt-deflation spiral".
In its annual 'Article IV' health check on the eurozone, the Fund said the economic backdrop in the region "continues to deteriorate".
"Recovery remains elusive," the report stated. "Growth has weakened further and unemployment is still rising, and the risks of prolonged stagnation and inflation undershooting are high."
Talks of QE tapering has caused government bond yields to rise across the eurozone. Further action from the Fed to slow down monetary stimulus "could lead to additional, unhelpful, pro-cyclical increases in borrowing costs within the euro area", the report warned.
It also urged the European Central Bank to take action including cutting interest rates and injecting more liquidity into the system, as it did with the Long-Term Refinancing Operation, in order to prevent another crisis.
The IMF predicted austerity programmes being implemented across Europe could wipe as much as 1%-1.25% off annual growth this year.
It expects growth in the eurozone to shrink by 0.6% in 2013 and grow by 0.9% in 2014, which it said is not enough to solve the region's problems.
"There is a high risk of stagnation, especially in the periphery. Such an outcome could push the periphery toward a debt-deflation spiral," the report said.
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