DEFAULT BY a number of European Union states on hundreds of billions of euro in sovereign debt is now a “significant” risk, according to the UK’s top official economic forecaster, the Office for Budget Responsibility.
Describing “a disorderly outcome” to the euro crisis as “clearly possible”, the office said a “serious escalation” could put the global financial system under strain, leading to tighter credit conditions and further depressing global output and trade.
The risk of a euro collapse could not “be quantified in a meaningful way”, it said, adding: “Suffice to say, the probability of an outcome much worse than our central forecast is greater than the probability of an outcome much better than our central forecast.”
The office, set up by British chancellor of the exchequer George Osborne, is highly influential, since it delivers verdicts on whether the UK treasury can meet its own targets. In the opening words of his autumn statement in the House of Commons, Mr Osborne said “much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debts”.
He insisted he would not budge from cutting public spending: “We will do whatever it takes to protect Britain from this debt storm, while doing all we can to build the foundations of future growth.”
Quoting the office – that there could be “a much worse outcome for the UK” if the euro crisis were to deepen – he said: “I believe they are right. We hope this can be averted.”
The office said the situation had “deteriorated significantly” since March. Euro area growth would be no more than 0.5 per cent next year, it predicted, adding that fears of sovereign debt default had intensified and led to British banks having to pay higher interest.