It was the buzz word of 2008: decoupled. Australians were told our nation’s economy wouldn’t be injured by the turmoil in the United States, because we had decoupled from North America and instead aligned our interests with Asia.

It didn’t work then. And it’s not likely to work now. And for much the same reasons: the twin drivers of China and international finance, and the serious sidenotes of tourism and the strong dollar.

The cuts in many European government budgets, while their economies are barely in recovery mode, has lead billionaire investor George Soros to predict that the turmoil seen in financial markets this year is only the beginning. These cuts are huge and will effect benefit payments, infrastructure spending, and public sector jobs. They’re intended to return government debt levels to manageable proportions and, depending upon whom you ask, are either excessive and dangerous, or prudent and timely.

“The decisions we make will affect every single person in our country,” said David Cameron, the new British prime minister. “And the effects of those decisions will stay with us for years, perhaps decades to come.”

The cuts will balance European government budgets in the long term. But more immediately, they will act as a severe brake on European economic growth and consumer spending, which in turn will weaken the Euro versus its international trade partners’ currencies.

Commonwealth Bank senior economist Michael Workman said that the weaker Euro would help contain costs for their trade merchandise imported into Australia, such as cars, clothing, and home furnishings. It would also make Europe an affordable holiday destination for Australians. But it would make Australia expensive for vacationing Europeans, hitting an important support for our tourism industry.

“I think the [major] problem will be more on the financial side,” said Mr. Workman, “with the volatility of financial markets and the increase in the wholesale cost of funds, which will affect the funding costs for banks and major [corporations].”

“’In terms of direct trade links, Europe is not so important any more,” said Macquarie Bank senior economist Brian Redican. “But it is much more important in terms of our trade with China, which exports more than 20% of its goods to Europe. Whether China will slow too fast on the back of what’s happening in Europe is an important question.”

The problem also has long-term scope, said Mr. Redican. “Europe has a rough five or six years ahead of it.”

Source: http://www.theage.com.au/