UNITED NATIONS - The increasingly precarious financial situation in Europe remains the biggest threat to the world economy, warns a U.N. report released here.

The "World Economic Situation and Prospects 2012" (WESP 2012) released Friday focuses on the need to avoid austerity measures and promote growth and job creation.

Rob Vos, director of Development Policy and Analysis Division of the U.N. Department of Economic and Social Affairs, told IPS, "The debt problems and financial sector fragility in Europe, but also in the United States, continue to be a source of 'de-leveraging' whereby businesses, households and banks are trying to restore their balance sheets, but this is holding back consumption and investment demand as well as normal credit flows."

Vos told reporters last week that Europe is struggling with a "vicious circle" based on high unemployment, banks' exposure to sovereign debts and fiscal austerity.

"The situation is very fragile and we could fairly easily fall into a trap," he said.

On Jun. 9, Spain accepted a 125-billion-dollar bailout from the European Union to rescue the failed banking system.

It is the fourth country in Europe to accept emergency assistance, after Portugal, Greece and Ireland. In March, Spain's unemployment rate was a whopping 24.1 percent.

However, Europe is not the only region facing these challenges.

Although there has been some economic improvement in the U.S., the world's biggest economy, the unemployment rate remains over eight percent, according to the report.

"Developing countries are already being affected through slower trade and more volatile capital and commodity markets," Vos told IPS.

The 48 least developed countries (LDCs) grew almost two percent less than originally projected in the WESP report of January 2012, making the growth rate 4.1 percent.

Emerging nations are affected by the weakening of the international trade not only from developed countries but also among developing countries.

"World trade growth already started slowing in 2011 and this slowdown has continued this year. Manufacturing production in China is already showing signs of stagnation over the past few months and this is also bringing trade among developing countries to a halt," Vos said.

To all of this is added uncertainty in markets and political instability in areas such as the Middle East, which creates a risky world economic situation.

The report concludes that the current policies chosen by the developed countries, especially Europe, are heading in the "wrong direction". The fiscal austerity programs implemented in several European countries are ineffective to help the economy emerge from crisis, it said.

Jomo Kwama Sundaram, U.N. assistant secretary-general of the Department of Economic and Social Affairs, told reporters Thursday, "There is a strong recognition all over the world that fiscal austerity pursued by many governments has been the main cause for the protracted economic downturn."

The updated report recommends avoiding fiscal austerity measures and encourages policies that help to create direct jobs and promote green growth.

The debate over green growth and sustainable development goals has gained new momentum with the major Rio+20 Summit on Sustainable Development later this month.

According to Vos, official development aid fell for the first time in many years, but it is unclear to what extent this will affect the funding of proposals in Rio, such as the Global Environmental Facility (GEF.)

However, is it clear that "the economic problems in developed countries may affect willingness to agree on costly adjustments for cleaner energy, sustainable agriculture and other costly adjustments to their economies," he added.

This should not tarnish the event. On the contrary, Vos told IPS, green growth may be the solution to the crisis and "investing in sustainable development has a great potential for job creation and poverty reduction."

"Rio+20 provides a great opportunity for the world to come together to find a solution for both crises," Vos said.