By Richard Webb
Expect China's economy and Australian tourism to come under pressure.
GREECE is doing it. Portugal and Spain are doing it. Ireland has done it. Hungary is trying, and Britain is about to start. Even the European economic powerhouse of Germany is about to do it.
We are talking about eye-watering multibillion-euro (and pound) cuts in government expenditure on welfare, infrastructure and public sector jobs at a time when these European economies are barely growing.
These country-sized austerity measures are said by some to be excessive - particularly among the populations being affected - and by others as just in the nick of time. But they are broadly designed to get government debt levels in Europe back on an even keel.
By any context, they are incredibly large and as new British Prime Minister David Cameron puts it, their impact will be broad. ''The decisions we make will affect every single person in our country,'' he says. ''And the effects of those decisions will stay with us for years, perhaps decades to come.''
Debt levels in most European economies have spiralled out of control in the past decade, culminating in the announcement of the recent EU-IMF led €750 billion ($A1.1 trillion) bailout of the euro zone financial system as Greece teetered on the brink of collapse.
Economists say these additional government-driven austerity measures will eventually get Europe out of the crisis and back on a more solid financial footing. But they will also severely erode domestically driven economic growth as spending is slashed.
This, in turn, will put a huge brake on economic growth in the European region, which does an awful lot of trade internally. It means the euro is likely to remain weak for quite some time.
Brian Redican, senior economist at Macquarie Bank, says there are broadly two ways in which weaker European growth will affect Australia - the direct impact on Australian exports to Europe, and the impact it has on Australian exports to countries that do a large export trade with Europe, namely China.
''In terms of direct trade links, Europe is not so important any more. For example, Australia exports more to Thailand than it does to Germany and France combined,'' he says.
''But it is much more important in terms of our trade with China, which exports more than 20 per cent of its goods to Europe. Whether China will slow too fast on the back of what's happening in Europe is an important question.''
Michael Workman, senior economist at the Commonwealth Bank, says Australia imports much more from Europe (cars, home fittings and clothing) than we export there and the weak euro will keep the prices of these imported items down.
''I think the problem will be more on the financial side, 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 [companies],'' he says.
Mr Workman says the weaker euro means European countries will be considerably more competitive exporters, and will also affect things like tourism. It has become cheap for Australians to travel to Europe but means we are now expensive as a holiday destination for Europeans. This is particularly important as the Australian tourism industry thrives on European visitors.
It's also a long-term issue, says Macquarie's Mr Redican. ''Europe has a rough five or six years ahead of it.''
Deutsche Bank foreign exchange strategist John Horner expects the euro to remain particularly weak against the $US and $A in the near term. But he expects it to lift towards the end of the year as the main European economies benefit from the export advantages of a weaker euro. ''When you look at places like Germany, the softer euro has put it in a pretty competitive position,'' he says.