The global credit crunch, created by uncertainty about the size of losses in the U.S. mortgage market, will curb euro zone economic growth in coming quarters, the European Commission said.
Financial market estimates showed losses related to rising default rates in the U.S. mortgage market could reach $250-500 billion compared to an earlier range of $50-100 billion, the EU executive said in a quarterly report issued on Tuesday.
Euro zone growth was also at risk from high oil prices and the strong euro, it said, but it added that activity would be supported by robust employment and record-high corporate profitability.
"Tighter financing conditions, reduced confidence in the aftermath of the financial market turmoil and rising inflation, among other factors, will weigh on growth in the next few quarters," the report said.
It said the global credit crunch would affect growth through higher market lending rates, lower consumer and business confidence and reduced consumption in the United States.
The Commission said euro zone growth would slow to 2.2 per cent next year from 2.6 per cent expected this year, mainly as a result of the market turmoil.
"Simulations show, however, that a deeper and more protracted financial crisis would entail significant additional losses in terms of economic growth," it said.
More risks stemmed from elevated oil prices, which have pushed inflation to its highest in six and a half years, as well as the strong euro.
"Any significant further appreciation would bring the euro outside the range that can be explained by fundamentals," it said.
"The impact of the strong euro on euro area exports, which has been limited so far, would then probably be felt more strongly."
The Commission said the euro was already shouldering an excessive share of the adjustment burden in rebalancing global trade and savings, and again urged China to let its yuan currency rise faster.
"Asian economies with large current account surpluses should contribute to this process through an appreciation of their currencies," the report said.
Economic and Monetary Affairs Commissioner Joaquin Almunia, the chairman of euro zone finance ministers, Jean-Claude Juncker, and European Central Bank President Jean-Claude Trichet visited China in late November to discuss exchange rates.
"The recent discussions between Chinese authorities and representatives of the Eurogroup are a step forward in this respect," the report said.
"The two sides reached an understanding that it is necessary to make concerted efforts to intensify structural adjustment and avoid drastic movements of exchange rates so as to make due contribution to the orderly adjustment of global imbalances," it said. (Reuters)