The think tank slashed its economic growth forecast for 2011 from 1.5 per cent to 0.6 per cent, and predicts 0.7 per cent growth in 2012.
“A Lehman-style financial crisis in the Eurozone now looks highly likely – triggered by the unsustainable nature of the currency area in its current form and the failure of politicians to take decisive action to calm markets or make the necessary pro-growth reforms at a fast enough rate,” the think tank said.
Falling demand in the single-currency bloc is likely to hit UK exports and investment levels, it added.
A new fiscal stimulus would be damaging, the CEBR warns, as it would risk scaring bond markets and push interest rates up.
Mervyn King (left) could lead the Bank to carry out even more quantitative easing, the CEBR argued. “We are likely to see more, not less, quantitative easing,” economist Scott Corfe said, adding assets purchased by the Bank of England could rise to £400bn in a “very severe crisis.”
However, the Ernst & Young Item Club disagreed yesterday, stating QE is “unlikely to put the recovery back on track.”