OUTLOOK 2012: PwC outlines four potential Eurozone outcomes for 2012

By bne IntelliNews December 19, 2011

bne -

What happens to Western Europe in the spring of 2012 is obviously key to the path that Russia will follow, but outside the scope of this report. All the banks have their own views, so we limit ourselves to reproducing an outline of four possible scenarios from PwC that covers the basics.

Scenario 1 - Monetary expansion: The European Central Bank is given the go ahead to inject significant liquidity to vulnerable economies. Recession is avoided, interest rates are kept low in the short term, but inflation rises well above its 2% target, while the euro depreciates.

Scenario 2 - Orderly defaults: A programme of voluntary defaults is agreed for the most indebted countries, which triggers a contractionary debt spiral and a prolonged recession, lasting between two and three years, and which results in a cumulative loss in GDP of around 5% in Eurozone.

Scenario 3 - Greek exit: Greece is compelled to leave the Eurozone, and then suffers a sharp deterioration in its economy, a rapid depreciation of its new currency and an inflation spike. The Eurozone seeks to protect its currency through tough fiscal discipline and other investor confidence increasing measures, but still suffers a recession that lasts up to two years.

Scenario 4 - New currency bloc: A Franco-German acknowledgement that the existing Eurozone is unsustainable paves the way for a new, smaller and more tightly regulated currency bloc. The 'new-euro' would be expected to appreciate dramatically and for the new bloc to benefit from a boom in domestic demand. Economies that are excluded suffer a sharp currency depreciation and severe economic contraction.

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