BNZ chief economist Tony Alexander was in London this week and wrote in his weekly overview yesterday that "this part of the planet is weak".
There was no reason for believing that the situation would change in the coming year.
"The United Kingdom economy has just slipped back into recession as has Spain, manufacturing sector indicators for the euro zone have plunged, the French presidential election may produce a Socialist winner intent on raising taxes and boosting government spending even further, the Greeks may soon elect a government opposed to austerity measures, the Dutch Government has just collapsed, and the much-vaunted fiscal pact aimed at making the euro zone workable could be falling apart."
On May 31, the Irish hold a referendum on whether they sign up to a fiscal pact needed to make the euro zone workable over the long term, he said.
If the Irish voted against the pact in the referendum, the questioning of the ability of the euro to survive would increase and break-up would be placed back on the table.
"That will cause immense disturbance in the financial markets, including selling of not just the euro but peripheral risky currencies like the New Zealand dollar, which tends to suffer when global worries become so strong investors rush to the safe-havens of the US dollar and the Japanese yen - currencies of countries with their own huge problems," Mr Alexander said.
Economic numbers recently released for Europe had been bad and there were growing demands for an easing off of fiscal restraint.
"If that happens, recent upward moves in bond yields and sharemarket falls will get worse and problems for governments and banks financing themselves will multiply."
The situation had many years left to run and there were going to be large bumps along the way, Mr Alexander said.
When the bumps came along, New Zealand exporters might want to take advantage of the inevitable bouts of New Zealand dollar weakness by hedging. But a return to 2008-09 conditions was not on the cards, he said.
S&P said it expected the Spanish economy to shrink both this year and next, raising more challenges for the Government.
It also said that euro zone-wide policies were failing to boost confidence and stabilise capital flows and that the region needed to find ways to directly support banks so that governments were not forced to take on those burdens themselves.
S&P placed a negative outlook on the new rating, a warning it saw "significant risks" Spain's fiscal situation would deteriorate and force another ratings cut.
