NEW YORK ( TheStreet) -- The whole of Europe is headed for a permanent recession--a depression. Austerity and labor reforms can't save it. Radical measures--abandoning the euro and deficit spending in Germany--are the only ways out.Unemployment exceeds Great Depression levels in Spain, many parts of Greece, Portugal and Italy, and is rising in northern Europe. Slashing government spending and labor-market reforms have neither restored Club Med economies nor their governments to solvency. Across much of Europe, gross domestic product is shrinking faster than governments can cut spending, and sovereign debt burdens are becoming worse, not better. In the south, labor-market reforms can work only if they are decisive enough to change investors' perceptions and export opportunities abound to sell what new factories could make. Europe's entitlement culture makes swift reform politically impossible, and the Club Med states' economic troubles have spread to their natural export markets; the German and other northern European economies are contracting, too. For Club Med governments, stimulus won't work either. They can't increase borrowing and spending fast enough to boost their economies without causing panic among bond investors and instigating a pan-European financial crisis.
What should keep German Chancellor Angela Merkel awake at night is that if southern Europe completely collapses, Germany and the other northern states, lacking southern markets for their exports, will be thrust into a permanent recession, too; all of Europe would be gripped by depression. Then it's either draconian austerity and double-digit unemployment for Germany and other northern states, or investors will desert their bonds, too. The European Central Bank would have to either preside over the demise of the euro or print enough money to finance governments and set off hyper-inflation. Europe would be gripped by double-digit inflation and unemployment. What technocrats behind Merkel's extreme austerity prescriptions for southern Europe won't acknowledge is that a significant measure of German and northern Europe economic success is premised on exporting to the south and amassing trade surpluses. Simple math requires the Mediterranean states to have corresponding trade deficits as long as the countries are locked inside the euro and can't devalue their currencies to escape. Those trade deficits must be financed by borrowing from the north--either by their governments spending and borrowing too much, as Rome and Athens did prior to their crises, or their banks financing real estate bubbles, as Madrid permitted prior to the global financial collapse.