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Europe Risks 'Endless Depression' in Pursuit of Austerity

One of the U.K.'s largest asset managers has warned that the continued focus on austerity in Europe could lead to "almost endless depression" for the region.

The comments come as George Soros and the U.S. Treasury Secretary Jack Lew have urged Europe's leaders to do more to boost growth after Portugal's top court rejected some of the country's austerity measures, on which its bailout depends.

(Read More: Portugal Fires Warnings Shot at Austerity)

"The prospects for GDP [gross domestic product] recovery in the euro zone in 2013 or 2014 are diminishing by the month," John Greenwood, chief economist at U.K. asset manager Invesco Perpetual wrote in his quarterly outlook on Tuesday.

"My forecast is for real GDP growth of -0.2 percent, compared with an estimated -0.5 percent in 2012. In short, there will be no meaningful recovery in 2013, and there is a risk of the downturn extending into 2014."

Greenwood added that the precedent set by Cyprus's creditor-funded 10 billion euro ($13 billion) bailout meant that euro zone banks will opt to be far more conservative with lending in the future, leading to extended deleveraging.

(Read More: Cyprus Reaches End of a Long and Sleazy Road)

"In view of this outcome, it is clear that the euro area orthodoxy implies further austerity and almost endless depression," he said.

On Monday, Jack Lew, the newly installed U.S. Treasury secretary, urged European officials to adopt more growth-friendly policies. His comments echoed those of his predecessor, Timothy Geithner, who repeatedly called on Europe to ease up on austerity.

"We have an immense stake in Europe's health and stability," Lew said at a joint press conference with European officials. "I was particularly interested in our European partners' plans to strengthen sources of demand at a time of rising unemployment."

(Read More: In Effort to 'Rebalance,' Europe Sticks to Austerity)

Greenwood said the euro zone could also face deflation in the future, particularly in peripheral countries, due to low money and credit growth, high rates of unemployment and spare economic capacity.

"The longer term danger is a 'Japanization' of Europe, as growth stalls and deflation takes hold," he said.

Greece entered into deflation for the first time in 45 years in March, according to data it posted on Tuesday. Consumer prices fell 0.2 percent year-on-year in Greece's first month of deflation since 1968.

Portuguese Prime Minister Pedro Passos Coelho warned this weekend that he will still pursue further spending cuts, despite the Constitutional Court ruling on Friday that wage and pension cuts to public sector workers were unlawful.

However, analysts said that fiscal austerity is failing to help the country.

"Portugal's 2011 bailout program went off track some time ago. If it were not for the troika's leniency and the dramatic rally in Portuguese debt, the program would have already failed by now," Nick Spiro of Spiro Sovereign Strategy told CNBC.

--By CNBC's Katy Barnato

Contact Europe: Economy

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