Paris - The OECD cut growth forecasts for most countries in the European Union's eastern wing on Tuesday and urged Hungary to do a deal with international lenders even as most analysts give such a deal less than even odds of happening.
The Organisation for Economic Cooperation and Development said the euro zone crisis and austerity drives by emerging Europe's governments would sap recovery in most of the region.
In a regular report, the group said the economies of Poland, Slovakia, and Estonia would grow both this year and next.
It said inflationary pressure implied monetary easing was on the cards for Poland, but interest rate cuts in Hungary could destabilise price stability and undermine policy credibility.
The OECD said closing an aid deal with the European Union and IMF was "critical to growth" because it would lower Budapest's borrowing costs, improve investor confidence and boost domestic lending.
Under the assumption that a deal will materialise, the organisation forecast economic contractions of 1.6% this year and 0.1% in 2013.
In May, the OECD forecast shrinkage of 1.5% for 2012 and growth of 1.1% next year. Analysts give only a 30% chance that Prime Minister Viktor Orban will sign a deal.
The OECD said the fiscal deficit would narrow from 3% of gross domestic product (GDP) this year to 2.7% in 2013 and 2014.
It said recent interest rate cuts by the central bank risked upsetting price stability and undermining policy credibility, and it added that rate setters should ease monetary policy only once inflation fell back below the bank's 3% target.
"Failure to conclude a financial agreement with the multilateral organisations could undermine already weak confidence, endanger fiscal sustainability and destabilise the exchange rate," the OECD said.
The weak European economy and fiscal consolidation will hit Poland, according to the OECD, which cut its growth forecast for the region's biggest economy to 2.5% this year, from 2.9% in May. It saw growth of 1.6% in 2013.
It said headline inflation would fall to the lower end of the central bank's 1.5% to 3.5% target band. Along with the slowdown in growth, that implies that rate setters should ease policy to support the economy, the OECD said.
The fiscal deficit should fall to 3.5% of gross domestic product - in line with the government's target - before falling to 2.9% next year.
The organisation also said the government should push on reforms to sell state owned assets, improve the tax structure, reduce red tape for businesses, end special pension schemes and reform farmers' health and pension systems to boost growth.
The OECD deepened its forecast for a Czech economic contraction to 0.9%, from an estimate of 0.5% in May. It sees a recovery emerging in 2013 with 0.8% growth, expanding to 2.4% in 2014.
The organisation said the public finance deficit should stagnate at 3.3% of gross domestic product this year and next, above the European Union's 3% ceiling.
It will fall to 2.7% of GDP in 2014, it said, because of structural improvements in the budget and stronger growth.
Estonia should lead EU OECD countries with growth of 3.1% in 2012, the OECD said, raising its forecast from 2.2% in May. That should accelerate to 3.7% next year.
The country's public finances should fall into a deficit of 1 percent of GDP this year, but then creep closer to a balanced result over the next two years.
The OECD sees Slovakia's car-export-driven economy expanding by 2.6% this year, unchanged from a May forecast. It said a weak labour market and fiscal retrenchment would squeeze growth to just 2% in 2013, down from an earlier estimate of 3%. The following year, however, growth should pick up to 3.4%, the OECD said.
Austerity measures and deleveraging by foreign-owned banks and companies will hit Slovenia's economy next year, the OECD said, predicting a contraction of 2.1%. It saw the fiscal deficit hitting 4.3% of GDP in 2012 and falling to the EU's 3% ceiling only by 2014.
The OECD said growth should slow from 3.1% this year to 2.9% in 2014, while an acceleration in price growth that should begin in the second quarter of next year would require monetary tightening.
It added that the government's deficit targets of 3% and 2.75% for 2013 and 2014 would be hard to hit, and instead forecast shortfalls of 4.1% and 4%.