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THE economic turmoil in Europe and the US is nearing "catastrophic" proportions, one of the nation's leading banks warned yesterday, as it predicted a plunge in the dollar to less than US80c and three interest rate cuts next year.
James Shugg, Westpac's London-based senior economist, said the bank was preparing to slash its global growth forecasts from 3.2 per cent to 2.5 per cent for next year, to adjust to the deepening financial chaos in Europe.
And he called on Wayne Swan to abandon his "meaningless and unnecessary" commitment to a balanced budget by 2012-13 and instead consider new economic stimulus spending to buffer the Australian economy.
Mr Shugg said a halving of world economic growth rates in just two years was a sign of "really abnormal" financial circumstances.
"I've never been as scared about the outlook for global economy, and particularly in Europe, at any time in my past 25 years as an economist," he told a Westpac conference in Rockhampton, Queensland, yesterday.
"I've started smoking; I can't get to sleep at night. Markets are freezing up, banks are losing access to credit and funding; things are even worse than you are reading about.
"It is now a serious and considerable risk that we will see a collapse of European financial markets, one or more of the 17 members leaving the euro (currency) and the euro(zone) split up.
"This should scare the living daylights out of (everyone) . . . it's a global catastrophe and there are going to be impacts felt here in Australia."
Mr Shugg signalled Westpac was preparing to dramatically revise its view of the European economy, unless a political breakthrough was made in the next few days, from being in a slight recession to an economy shrinking by 4 per cent next year.
But he warned that if the EU split and its nations jettisoned the central euro currency the European economy could contract by as much as 10 per cent.
This dire scenario would collapse European financial markets, cause entire European states to fail and signal the start of a "real global catastrophe".
But Mr Shugg said the global crisis was not confined to Europe. He believes the US is "glossing over" its financial figures and is close to another recession or may have "nudged" into one.
He warned that the fallout for Australia would be profound, particularly if the signs of a Chinese slowdown were realised.
He said commodity prices would drop and the Australian dollar weaken, forcing the Reserve Bank to ease monetary policy and lower interest rates.