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Depression fears as Europe debt crisis deepen -

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Depression fears as Europe debt crisis deepens

Peter Ryan reported this story on Tuesday, October 25, 2011 08:24:00

TONY EASTLEY: The global pension fund advisor, Towers Watson has drawn up a list of the 15 extreme
risks confronting the world.

At the top is the possibility of a full blown economic depression brought on by the European
financial crisis.

The second biggest risk is catastrophic debt default by a major developed economy.

Towers Watson's head of global investment, Roger Urwin, spoke about the spectre of a depression
when he met up with our business editor, Peter Ryan, in Sydney.

ROGER URWIN: Well certainly the debt crisis has made us think of it as an elevated risk. And of
course they reason for that increase has been related to the eurozone problems in particular, where
a series of relatively weak political responses, and what we seem to refer to all the times these
days as kicking the can down the road, have led to the problems of sorting out Greece and of course
the potential for this to be a contagion through to Italy and Spain.

All of these things make the eurozone a pretty fragile type of institution at the moment.

PETER RYAN: Depression, which after all is the number one risk, is a pretty emotive word,
particularly for older listeners who might have grown up in the Great Depression or its aftermath,
but how would this potential depression be different?

ROGER URWIN: This particular one is just so much linked to the difficulties that developed
countries within the eurozone would have if there were some implosion in the eurozone structure.

So that would involved, potentially, the complete dismantling of the euro would be the worst event
that we could envisage in that situation. You know there could be a partial fracture that probably
wouldn't lead to a depression but if the whole thing could potentially go pear shaped, the economic
response, pretty much from let's say Germany through to Italy, there would be a very severe
ramification through those countries.

PETER RYAN: And you've noted that protectionism is a rising risk ...

ROGER URWIN: Yeah.

PETER RYAN: ... and that was a feature of the Great Depression?

ROGER URWIN: No, totally agree. And basically there are quite severe imbalances in the world
economy and in the political system. And we obviously, therefore, have countries that want to, kind
of for political reasons, look after their own interests at times.

Now, leadership in the recent past of the more significant economies hasn't really seemingly done a
great job. And they are being challenged in their own markets to be a little bit populist. And a
populist response to these conditions is to draw back. I would argue that there are already
instances of minor elements of protectionism have already crept in.

PETER RYAN: And how do you rank the indecision or the lack of unity from EU leaders as really
exacerbating all the risks that we're seeing?

ROGER URWIN: Basically that indecision has been felt by the market. And one thing's for sure, it
looks like the market has kind of come out, you could say, on top relative to the politics and the
leaders here. All the political leaders have tried to kind of get through the market, but they
found that the market ultimately kind of sees through the limited responses that have come about so
far. We've had too little and too late from the political leaders in Europe in relation to the
problems of Greece and obviously the related problems that are there in these other countries as
well.

PETER RYAN: And is all this adding up to a potential breakup of the euro or a division between
strong and weak economies in the eurozone?

ROGER URWIN: Yes. If you think about scenarios, I think the more probably scenario is that we will
muddle through. So we're identifying here, though, the potential for this to be still a series of
mini problems, mini crises in order to get through this difficulty. That's probably the most likely
outcome.

But there is what you might regard as a distinct possibility that we'd have a breakup of the euro.
We would be staring at a number of very unattractive economic prospects for a number of countries.

TONY EASTLEY: Towers Watson's head of global investment, Roger Urwin, speaking there with our
business editor Peter Ryan.

And there'll be a longer version of that interview on our website later this morning.