The continued escalation of the euro-zone debt crisis suggests that some form of break-up of the currency union is now likely to come sooner rather than later. We expect Greece to leave the euro in 2012, with at least one further departure in 2013. And there is a clear risk of a bigger break-up.

A euro-zone break-up could well bring economic benefits over the long run. But in the near term, it is likely to have severely adverse economic and financial consequences. We have cut our already pessimistic forecasts for euro-zone GDP growth to -1% in 2012 and -2.5% in 2013, giving a total fall in output similar to that seen in 2008-09. However, a bigger break-up – perhaps involving the exit of Italy – could cause much greater economic damage.