'Lost decade' all the rage as Europe recession bites

Caught in a vicious circle of economic problems, leaders in Europe now openly fear a "lost decade" ahead with data pointing towards a fresh recession in the New Year.

Weighed down by debt, a downward growth spiral appears to be setting in thanks to a perfect storm of slashed government and household spending and a related bank lending squeeze.

"I'm afraid Europe ... is facing a 'lost decade' similar to the one in Japan in the 1990s," Czech President Vaclav Klaus, an avowed euro-sceptic and former economic forecaster, wrote recently.

"A decade without economic growth, a decade of permanent cuts and austerity packages, a decade of social unrest," he warned.

This analysis is increasingly shared by the leading actors in political efforts to solve the crisis in the eurozone.

International Monetary Fund managing director Christine Lagarde took the exact same tack while visiting China -- which is being asked to stump up cash for the likes of Italy by investing in Europe's bailout fund.

"If we do not act together, the economy around the world runs the risk of a downward spiral of uncertainty, financial instability," Lagarde said.

"The debt crisis will not be solved all in one go, (and) it is certain that it will take us a decade to get back to a better position," added German Chancellor Angela Merkel.

Brazilian Finance Minister Guido Mantega has also echoed the mantra.

"We must expect problems of low world growth for many years," Mantega said.

"I tend to agree with the managing director of the IMF that we are going to have a lost decade. Clearly advanced countries may face a lost decade, but I believe that won't be the case for Brazil."

The expression "lost decade" is a direct reference to the years when a burst real-estate bubble plunged Japan into a spiral of falling prices, rising debts and anaemic growth.

European Union leaders are acutely worried, as they try to placate citizens and voters amid market-led pressure to cut historically high deficit and debt levels.

The markets are increasingly sensing a landmark moment ahead -- default by a westernised industrialised nation.

"The entire system is based on the premise that (such) a state cannot default, but this premise no longer holds the same weight it once did," says a senior official with an international credit rating agency speaking on condition of anonymity.

The average eurozone debt level is already 90 per cent and will only rise as populations age.

Cutting public debt while stimulating private economic output is the dilemma that has beset most of US President Barack Obama's White House tenure.

"Structural reforms can only begin with sacrifices," said French asset manager Frederic Buzare of Dexia -- whose parent bank has been bailed out by the French, Belgian and Luxembourg states.

Italy is just the biggest and most symbolic economy yet to be caught in the trap, with EU and IMF officials already in Rome trying to bring about a total re-configuration of the economy there.

"Technocratic" leaders such as incoming Italian and Greek premiers Mario Monti and Lucas Papademos forged their political experience at the heart of EU institutions.