It said the costs to the world are even greater at more than one per cent of global gross domestic product and 0.8 per cent of GDP for the United States.
Bank governor Mark Carney said his estimate — which works out to 0.6 per cent of Canadian GDP — only represents the bill from Europe's current recession and would be much steeper if the continent is unable to contain its debt crisis.
"Europe is the biggest external threat to Canada without question," Carney said at a news conference after releasing the bank's latest quarterly monetary report on the economy.
"This is an economy, which through no fault of our own, faces considerable external headwinds, there are significant downside risks that are coming from ... notably Europe," Carney said.
The calculation marks the first time the Bank of Canada has attempted to put a hard number on the spillover effects of the ongoing European turmoil.
The bank's estimate means Canada's $16-trillion economy will be worth about $10 billion less at the end of the year, resulting in everything from fewer jobs, lower incomes and corporate profits and bigger government deficits.
On the ground, Carney said he has already perceived a softening in investment intentions among firms and delaying "of marginal projects ... until there's a greater sense of how this is going to unfold."
Generally, he said ,that's a bad idea on the part of Canada's corporate sector.
"Canadian business balance sheets are in their best shape in living memory," he said. "There is a competitive imperative for that investment."
The bank's monetary policy review, which was released Wednesday, explained that to this point, European difficulties have had relatively minor consequences.
But "over the projection period, the impact is expected to become more widespread, however, and to take the form of increased funding pressures, adverse confidence effects and reduced availability of credit. In particular, deteriorating funding conditions are projected to push banks to restrict access to credit for households and businesses in Europe and the United States, adding to the drag on economic growth."
The impact on Canada is less than on the U.S. and the world generally, because of the limited exposure domestic banks have to European banks and sovereign debt and because Canada's financial institutions remain in a position to lend.
The central bank notes that Canada will still be hit through lower exports to the continent, and through indirect channels — weaker financial conditions, lower consumer and business confidence and softer global commodity prices — a main component of trading on Canada's financial markets.
Europe is, of course, paying the biggest cost. The bank said it now expects the eurozone countries to be in recession for the next four months.
Overall, the bank expects Canada's economy to grow by two per cent this year, while world growth will be restricted to 2.9 per cent. In a separate outlook, the World Bank was even more pessimistic about global growth at 2.5 per cent.
Finance Minister Jim Flaherty, speaking to reporters after Carney, expressed frustration for the second day in a row over Europe's handling of the crisis.
Asked if Canada was in agreement with a proposal to create a $500-billion fund for the International Monetary Fund to deal with the fallout from Europe, Flaherty said he doesn't believe the eurozone's $200 billion contribution is enough.
"The Europeans must fully commit their own resources before others ought to be called upon to make any contributions ... $200 million is not a full commitment" he said. "I know what kind of resources they have, these are some of the wealthiest countries in the world."
While the costs of Europe's ongoing troubles mount, the bigger concern is that the situation will become worse, leading to a nation or a major bank default.
Analysts say if that happens, the aftermath would be similar to the Lehman Brothers collapse in the fall of 2008 — a freeze in credit in many advanced countries, possibly triggering a second global recession.
Carney said he believes the risk of a European meltdown has increased in the past few months, although the most likely scenario remains that leaders will continue to hold off catastrophe.
Europe is the key reason the bank has downgraded the pace of Canadian growth slightly in each of the next four quarters — starting this month — from its previous projection in October.
Although the 2012 average growth is one notch higher than previously anticipated, that is only because the last half of 2011 turned out significantly stronger than previously expected, meaning the economy is beginning the year from a higher perch.
Overall, the central bank says Canada's economy is unlikely to return to full capacity until the third quarter of 2013.
On Tuesday, the bank kept its trendsetting interest rate at the super-low one-per-cent level for the 16th consecutive month, although Carney said he believes that will entice Canadians down the garden path of higher debt. Household debt to income is already at a record 153 per cent, but Carney believes that will rise this year because Canadians won't be able to resist the low borrowing costs.
Carney said he's particularly worried "vulnerable households" won't be able to withstand a shock in the economy or afford payments once interest rates rise.
But the policy review document points out there is an upside to the sky-high household debt levels it fears. As weak as the economy is, it is because of the strong household market and consumers continuing to purchase everything from clothes to cars and homes that the economy is not doing even worse. Housing and consumption account for 70 per cent of this year's growth.
"Residential investment is ... now expected to remain strong, owing to its greater-than-anticipated momentum in the second half of last year and favourable mortgage financing conditions," the bank said.