Fringe nations face huge cuts to living standards

The heavily indebted nations on the fringe of Europe face cuts to their living standards greater than Britain faced in the Second World War, a leading economic think tank warns today.

The Centre for Economics and Business Research (CEBR) will say that to keep the euro in its current form, consumer spending would have to be cut by 15 per cent or more in Ireland, Greece, Spain, Portugal and Italy. It puts the chances of the single currency surviving at just one in five.

It will be published as Ernst & Young's winter eurozone forecast warns of the creation of a "three-speed Europe" and urges the European Central Bank (ECB) "to stand ready to implement additional significant measures to support the European economy in case of a crisis".

The consultancy firm will say that while the eurozone economy has put in a robust performance for much of 2010, a slowdown is expected next year with GDP growth reaching only 1.4 per cent. It calls the ECB's rejection of a US-style stimulus plan "disappointing". Ernst & Young predicts Germany driving recovery thanks to GDP growth of 3.5 per cent this year and 2.1 per cent next. Closely linked countries will also do well but only modest growth is forecast in a second group of 'northern' European countries including France and the Netherlands (both 1.8 per cent).

GDP growth in the peripheral countries in 2011, however, will range from -3.3 per cent in Greece to -0.7 per cent in Portugal.

The CEBR says the cuts of 15 per cent needed in the peripheral countries for the euro to survive "would be greater than the fall in consumer spending faced by the UK in World War Two", when consumer spending fell by 14 per cent.

It has also revised down its global growth forecasts. It expects the world's economy to grow by 3.2 per cent next year, against a forecast 3.4 per cent, with 3.6 per cent in 2012, against a previous forecast of 3.9 per cent.