Fresh signs that Europe's banking problems were continuing caused havoc in most financial markets yesterday.
The euro fell further against the United States dollar after the Spanish Government's move to nationalise an ailing savings bank fuelled the concerns about Europe's economy.
The rescue of regional savings bank CajaSur, taken over by the Bank of Spain, could cost up to 2.7 billion ($NZ5 billion), a Spanish newspaper reported, burdening Spain's already strained public finances.
Spain has already unveiled major belt-tightening measures in the wake of a Greek public debt crisis that has shaken confidence in that country and other debt-riddled eurozone members such as Ireland, Italy and Portugal.
Italy is set to adopt a package of budget cuts and revenue-boosting measures with 24 billion for 2011-12, including a possible freeze on top civil- servant pay.
The cuts follow drastic austerity measures in Spain, Greece and Portugal aimed at stemming a loss of market confidence.
"Europe is undergoing a wrenching crisis as Asia did in the late 1990s," UBS analysts said.
Europe was starting to look like Japan in the early 1990s, Craigs Investment Partners broker Chris Timms said. "Unless European governments face up to the urgent need for meaningful reform to rebalance their uncompetitive, unproductive economies, the region faces losing what Japan lost - a couple of decades."
Europe not only had a debt crisis, it also had a growth crisis.
Craigs was forecasting GDP growth of just 1.2% in Europe next year, well behind the United States at 3.5%, Australia at 4%, New Zealand at 3.1% and Asia at a "staggering" 7.5%, he said.
Ominously for Europe, Japan was the only country with a weaker growth outlook. Craigs was forecasting growth of just 0.8% in Japan during 2011.
"Not only does Europe need to get its debt under control, but it also needs to generate more income, through GDP growth, to pay it back."
Currently, many European economies with their rigid labour markets, high taxes, large governments and unsustainable subsidies could not compete with more dynamic economies, such as those in Asia, Mr Timms said.
The answer was simple and the same as one that Japan had not been able to face up to for 20 years - meaningful economic reform, he said.
BNZ markets economist Stephen Toplis said the machinations of offshore markets were likely to be the central focus for economy watchers during the week ahead.
The big focus offshore was the ongoing fascination with the demise of the eurozone.
Officialdom throughout the region was doing its best to put a brave face and apply bandages to weeping wounds where and when appropriate.
"But the reality is that the massive sovereign debt issues will almost guarantee that Europe is destined for a protracted period of sub-par growth both relative for its own history and relative to the rest of the world."
Not only were fiscal matters constraining Europe, but so, too, was the existence of the euro, Mr Toplis said.
Currencies could play a major role in assisting countries facing significant imbalances to adjust.
Fixed currencies did not provide the same assistance.
What Greece, Portugal and Spain desperately required were much lower exchange rates.
It might appear they were achieving that with the slump in the euro but, in large part, that provided no assistance whatsoever, he said.
A significant proportion of the trade those countries did was to other eurozone states on which the drop in the Euro had no direct impact.
As for the adjustment with countries outside of Europe, that was helpful at the margin but more competitive countries, such as Germany and France, also got those benefits and again, there was limited relative assistance, Mr Toplis said.
Immediately, for New Zealand businesses, it was not the "real economy" impact of what was going on in Europe that was of concern but the flow-on effect into financial market pricing - both interest rates and the currency.
Heightened concern about the stability of global banking systems was again pushing up the cost of short-term borrowing to the New Zealand banking system.
As ever, those increased costs would find their way through to borrowers as well, Mr Toplis said.
