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Drastic action needed to stave off new recession, warns ESRI

LONG-TERM renting, a massive drop in household income and tighter spending power is the new reality for young couples, the ESRI has said.

Ireland is now facing into another deep recession unless the ECB steps in with drastic action, the leading think tank has warned.

This year saw the country return to growth on the back of strong export performance.

But the knock-on effect of the crisis in Europe will stunt our nation's recovery.

The Economic and Social Research Institute (ESRI) had been upbeat about prospects for 2.3pc growth next year.

However, the possibility of widespread panic and austerity measures continuing in the eurozone means that Irish GDP could slump to 0.9pc growth as demand for exports from the UK and the rest of Europe halts.

House prices are expected to plummet by as much as 17pc within the next two years for first-time buyers. The ESRI housing economist David Duffy has advised young couples to stay away from purchases and to continue renting if house prices fall by another 4pc next year.

Dr Duffy said that there is "still significant adjustment to take place in house prices".

And senior ESRI economist Dr Joe Durkan said that Europe could slide into a 1930s-style recession.

"I have to say that unless there is intervention very soon, the eurozone will be in recession in 2012," he said. "We have the tools to stop it [the crisis]. So, we should stop it.

Solution

"The solution to my mind is that the ECB should partly recapitalise the eurozone banks. It does not matter how it is done -- it matters that it is done," he said.

The quarterly economic report says there is little scope for further cuts in capital spending, so future adjustments will come mainly from tax rises and charges for services.

However, the ESRI added that Ireland should be able to continue to meet its fiscal targets in the near future, "but it will become harder to do so as the external environment becomes increasingly unfavourable".

Separately, eurozone finance ministers meeting in Brussels signed off on ways to boost the strength of Europe's bailout fund -- the European Financial Stability Facility.

But the Dutch Finance Minister Jan Kees de Jager said that the EFSF is falling short and the IMF needs to come in to make available additional capital.

This morning, EU Monetary Affairs Commissioner Olli Rehn said that economic governance needs to be reinforced.

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the EU," he said.

The EU's 27 heads of government will meet next week to hammer out solutions to the euro's instability, which threatens to harm the global economy.

clairemurphy@herald.ie