Here's How The Global Economy Gets Slammed If The Euro Crisis Spirals

Poverty in Philippines

Photo: AP

In their semi-annual Global Economic Prospects report, the World Bank offers two downside scenarios for global GDP growth over the next two years that could arise based on the outcome of the crisis in Europe.1) ORDERLY CRISIS: The first scenario involves “a relatively orderly crisis in a few countries,” and is described by the World Bank as follows:

It is assumed in this scenario that although borrowing costs in other European economies rise and banks tighten lending conditions due to losses in the directly affected economies and uncertainty, the banking-sector stress in Europe is contained and does not spread to the rest of the high-income world. However, uncertainty and concerns about further credit squeezes induces increased precautionary savings among both firms and households worldwide.

Here is how the World Bank expects such a scenario to reduce its current projections (see at the bottome) for GDP growth through 2014:

World growth in an orderly crisis

Photo: World Bank

2) DISORDERLY CRISIS: The World Bank describes the second scenario as such:

The freezing up of credit is assumed to spread to two larger Euro Area economies (equal to around 30 per cent of Euro Area GDP), generating similar declines in the GDP and imports of those economies. Repercussions to the Euro Area, global financial systems and precautionary savings are much larger because the shock is about 8 times larger.

Here are the reductions in current estimates for global growth that would result from a disorderly scenario:

World growth in a disorderly crisis

Photo: World Bank

For reference, here are the World Bank’s current baseline projections. Click to enlarge:

global economy

Photo: World Bank

SEE ALSO: The 10 US States Getting Slammed By The European Collapse >

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