An endless European depression?

According to one of England’s largest financial managers, focusing on deficit reduction could result in an “endless depression” for the United Kingdom.

"The prospects for gross domestic product (GDP) recovery in the euro zone in 2013 or 2014 are diminishing by the month," said John Greenwood, chief economist at Invesco Perpetual.  "My forecast is for real GDP growth of -0.2%, compared with an estimated -0.5% in 2012. In short, there will be no meaningful recovery in 2013, and there is a risk of the downturn extending into 2014."

Greenwood went on to scrutinize the precedent set by Cyprus's $13 billion bailout. From now on, banks in the European zone will be far more conservative in loaning money, which could lead to severe deleveraging.

"In view of (the Cyprus bailout), it's clear that the euro area orthodoxy implies further austerity and almost endless depression," said Greenwood.

Greenwood’s prediction comes on the heels of newly appointed United States Treasury Secretary Jack Lew urging the European Union to enact more pro-growth legislation.

"We have an immense stake in Europe's health and stability," said Lew at a recent press conference. "I was particularly interested in our European partners' plans to strengthen sources of demand at a time of rising unemployment."

But, according to Greenwood, "the longer term danger is a 'Japanization' of Europe, as growth stalls and deflation takes hold.”

In March, Greece suffered from similar economic deflation for the first time in nearly half- a-century. Others countries may soon follow.

Portuguese Prime Minister Pedro Passos Coelho, a staunch supporter of fiscal responsibility, reiterated this week his intent to cut government spending, while some, like Nick Spiro of Spiro Sovereign Strategy, aren’t convinced that austerity is the answer.

"Portugal's 2011 bailout went off track some time ago,” said Spiro. “If it weren’t for the troika's leniency and the dramatic rally in Portuguese debt, the program would have already failed by now.”

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