Europe is Looking  a lot like Japan

• Most of the European countries need 8 to 9 per cent of GDP-worth of permanent fiscal tightening which would lead to a huge deflationary spiral if carried out. But unfortunately the governments would have to take up this belt tightening if that were to happen.
•  All the governments in the G-20 will have to start cutting their fiscal deficit, which means that they will have to grapple with the prospect of a deflationary spiral as it will leave little room for further stimulus measures over the next three years. Europe will contract this year due to the greater emphasis on reducing fiscal deficit: Greece’s GDP has already contracted by 3.0% YoY, as of Q4, and is expected to contract 1.1% in 2010 and 0.3% in 2011 as a 13% deficit-to-GDP ratio is sliced from 13% to 3% (assuming this fiscal goal can be achieved politically). Portugal has a 9.2% deficit-to-GDP ratio that is in need of repair and Spain has a deficit ratio that is even worse, at 11.4% of GDP.
• Now governments are being forced to cut their spending, which will inevitably lead to great suffering a large scale rise in the already high unemployment. It is worth noting that about 25% of the Spanish youth are unemployed. At some point (though may not be immediately) we are bound to see a rise in social tensions across Europe).
• Greece has offered to cut between Euro 8 billion to 10 billion in budget. However, EU is demanding that they increase these cuts by a further 2-4 billion Euros. It has been pointed out that this year Greece will have to shrink its budget by upto 20% of its GDP – a disastrous recipe for accelerating pressure of deflation.
• Greece needs to raise about Euro 54 billion this year and has so far raised only about Euro 13 billion.
• More importantly international banks are still not safe. EU (as with most of the governments in different parts of the world) forced their banks to buy sovereign debt. Now that has become a problem issue. It is pertinent to note that about nearly 95% of the Greek debt issued by the government is owned by European banks. Apart from this U.K. banks have $193 billion of exposure to Ireland. German banks have the same amount of exposure and an additional $240 billion to Spain. Many international bond mutual funds also have sizeable exposure to sovereign debt of Portugal, Ireland, Greece and Spain as well. US banks have about US$190 billion exposure to the countries that are in trouble. So any problem of perception (need not be actual default) will lead to exactly the same type of consequences as those in the aftermath of the bankruptcy of Lehman Brothers in September 2008 – only this time it will be many times more severe because now various countries will be impacted. In the past two years various banks were buying the debt of the countries thinking that they are safe, if a country sinks then invariably the banking system of that country will also collapse.
• There is a very important structural problem for the troubled countries of Europe. Most of them have no product that they can sell and earn money in order to enable them to recover from their problems. Spain’s economic growth was because of Housing, where a nation of about 45 million was building more houses than the combined number of houses being built in Germany, France and Italy at that point of time(which had a combined population of 200 million). 
• Globalisation over the past few years has systematically deindustrialised countries such as Greece, Spain, Italy, Portugal as well as others who had a lower wages. Industrial production has now shifted to different countries of the emerging markets, especially China.
• Add to this the problem of the Aging Europe and we have a recipe for a disaster in the making. The only difference is that unlike Japan, EU is not one entity that can print money. EU doesnot have the reserves like Japan. 

So the only solution to the mess that Europe finds itself may be to go back to the state of individual nation states so that they can simply print money as they like and tax people as they like (and of course, if necessary run deficits as they like). EU better come up with a solution quickly as if the greater the delay, the greater the problem.

There seems to be only one certainity in this age of uncertainity: The people of those countries better prepare for greater suffereing, higher taxes and less government spending. After all this is not a new age as it was claimed, just a return to a forgotten chapter of our history.