Europe risks fresh credit crunch

THE combined eurozone economy could fall by 3% over the next two years, with a fresh “credit crunch” problem arising if decisive action isn’t taken to tackle the sovereign debt crisis, according to a new study.

The warnings form part of the latest Eurozone Economic Forecast from professional services giant, Ernst & Young. The forecast claims that the eurozone’s main bailout fund, the European Financial Stability Facility (EFSF), needs to be increased in value sevenfold, from its current level of around €440bn, in order to create what it calls “a clear and credible firebreak to prevent financial market contagion.”

The report states that the eurozone’s GDP levels could fall by 2% next year and by a further 1% in 2013 in a “disorderly default scenario”, but adds that the probability of this happening is only around the 20% mark. Another consequence of this, however, could be an 8%+ fall in bank lending within the region in the next two years.