Eurozone must adapt or it will fall apart, warns top think-tank

 
Ben Southwood
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THE EUROZONE is likely to collapse within two years if countries in the bloc don’t take significant measures to increase fiscal, monetary and political union, an influential think-tank warned yesterday.

Dawn Holland, of the National Institute of Economic and Social Research (NIESR), said that the current situation could not carry on indefinitely, and that without significant reform the European Monetary Union (EMU) would be likely to break apart soon.

Her research, released today in the newest issue of NIESR’s quarterly journal, argues that Eurozone countries must create a banking union, move toward centralised fiscal control, and somehow effect real wage cuts in weaker nations, or risk catastrophic fallout.

Greece would face a 50 per cent devaluation and gigantic rises in prices, combined with emigration and potential banking collapse if it left the union, according to Holland.

She says that these factors mean that it is unlikely that Greece will leave voluntarily.

But she suggests a so-called Grexit may become inevitable if the Mediterranean nation continues to breach Troika targets.

Holland’s research was published alongside gloomy economic forecasts for the UK and the world as a whole. NIESR predicted a 0.5 per cent decline for the UK in 2012, followed by a slight recovery in 2013, with 1.3 per cent growth, mainly driven by building up inventories. The world was expected to grow 3.3 per cent this year, with the figure increasing to 3.7 per cent in 2013 as some of the aggressive headwinds die down.