The Eurozone crisis: how bad could it get for Europe? | EEF

The Eurozone crisis: how bad could it get for Europe?

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Merkel and Sarkozy met earlier today, with both parties once again agreeing to work together to develop closer fiscal integration, arguing that deficit reduction is the way forward. For even a casual follower of the Eurozone crisis, this is not really news.

More interesting, perhaps, was Merkel's additional comment – that the next tranche of Greek aid cannot be paid out unless there is progress on negotiating the aid package –hints at just how close we could be to a Greek exit from the Eurozone.

Last week I blogged about EEF's central, best-case and worst-case scenarios for the UK economy in the year ahead. Needless to say, the outcome of the Eurozone crisis was a key variable.

But how might the different outcomes of the Eurozone crisis affect the Eurozone itself?

Other forecasters have suggested a best case scenario – a quick resolution which shows determination to hold the currency union together and allows the ECB to inject significant amounts of liquidity – would improve growth prospects in 2012. PWC say that in these circumstances, the Eurozone could grow by 1.5% (our central forecast is zero growth in 2012).

At the other end, PWC's worst case scenario would be for a Eurozone split, with the core retaining their currency and the periphery countries adopting different policies. The core countries could see modest growth in 2012, while the remainder would experience a significant GDP contraction of 5%.

But some forecasters are even gloomier. For example, ING offers up a doomsday scenario, with a total breakdown of the Eurozone leading to a contraction of 9% across the area.

Let's hope it doesn't come to that.


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