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The economic crisis that is sweeping Europe is starting to hit Britain really hard. Over the last couple of years economists have been warning that we can’t let the “contagion” spread from troubled nations such as Greece and Portugal to the rest of Europe. Well, it is too late for that now. Spain and Italy are coming apart at the seams at this point, and even “stronger” nations such as the UK and France appear to be deeply troubled. According to numbers that were released just this week, the UK economy has now contracted for three quarters in a row. During the second quarter of 2012, the UK economy shrunk by 0.7 percent. That was a much larger contraction than the 0.2 percent contraction that economists were forecasting. At this point we have got a definite trend going. During the fourth quarter of 2011, the UK economy shrunk by 0.4 percent. During the first quarter of 2012, the UK economy shrunk by 0.3 percent. And now in this latest quarter the contraction of the UK economy appears to be accelerating. This economic downturn in the UK is being called “the longest double-dip recession for more than 50 years“. So will Britain soon look like Greece and Spain and Italy or will it be able to pull out of this nosedive in time?

The UK construction sector was hit particularly hard during the second quarter. It contracted by 5.2 percent, which was the biggest decline since the first quarter of 2009. Consumer confidence has reached a historic low in Britain and economic gloom is seemingly everywhere.

So what does the future hold for Britain?

Unfortunately, things do not look promising at all right now.

At this point, the budget deficit of the UK government is still about 8 percent of GDP, and British politicians are promising to reduce that significantly.

That means that more austerity measures are coming for Britain and less government money will be flowing into the economy.

So the economic slowdown is very likely to get even worse.

But of course we have been seeing the same kind of thing happening all over Europe.

Economists are warning once again that Greece is on the verge of declaring bankruptcy.

On Tuesday, the Telegraph ran a story with the following startling headline: “Debt crisis: Greece to run out of money by August 20“.

Haven’t we heard this before?

Yes, we have.

And every time, European leaders have gotten together and “fixed” the problem.

But of course they didn’t really fix anything. They just kicked the can down the road a little while and things just kept getting worse.

At this point the Greek economy has been in a depression for several years. In fact, the Prime Minister of Greece is now even openly using the word “depression” to describe the state of the Greek economy.

So just how bad are things in Greece right now?

It is being projected that the Greek economy will contract by a total of 7 percent during 2012.

Ouch.

But Greece is not alone.

Other southern European nations are on the exact same path that Greece is on.

For example, Italy is rapidly becoming a gigantic mess as well. The national government is drowning in debt, the economy is in recession and today came a warning that 10 major Italian cities are on the verge of bankruptcy….

The cities at risk of running out of money include Naples, Palermo in Sicily and Reggio Calabria, on the toe of the Italian boot, according to the Italian press. “The situation is becoming worse by the day,” said Graziano Del Rio, the president of a national association of municipal councils. The warning came just days after Mario Monti, the prime minister, expressed fears that Sicily, which has a high degree of fiscal autonomy, was on the brink of a default.

But the country making the biggest headlines this week has been Spain. Spanish bond yields have been soaring, the Spanish stock market has been crashing, the Spanish banking system is on the verge of collapse and now regional governments all over Spain are coming forward and asking for bailouts.

As the national government attempts to impose even more austerity measures on the Spanish people, violent protests are erupting all over the country.

You can see footage of some of the recent violence in Spain right here.

So why is all of this happening?

Well, the truth is that this is not a liquidity crisis. If it was, the central banks could flood the system with money and solve the problem.

No, what Europe is facing is an insolvency crisis. There is way, way too much debt in the system and it is inevitable that an “adjustment” is going to happen.

A recent Marketwatch article detailed how the global debt bubble has continued to grow even in the midst of the economic problems of the past few years….

Balance sheets of major central banks have increased to $18 trillion from around $6 trillion, reflecting an unprecedented 30% of global gross domestic product. Mr. Economy is now addicted to monetary heroin. Increasing doses are necessary for the patient to function at all. Mr. Economy has not made the changes necessary for a return to full health. He seems to have taken rock star Steven Tyler’s advice: “Fake it until you make it.” Borrowing levels remain unsustainable. Debt levels for 11 major nations have increased to 417% of GDP in 2012 from 381% of GDP in 2007. Debt has increased in Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the U.K. and the U.S.

These debt levels are not sustainable.

A collapse is going to happen.

Hopefully the collapse will be at least somewhat orderly, but there is also a good chance that it could be completely chaotic.

Some that have analyzed the situation are very pessimistic at this point. For example, the following is from a recent article by Graham Summers….

In simple terms, today we are facing a Crisis that is far, far worse than 2008. Before it ends, it is quite possible that we will see the entire Western Financial System collapse and a new system put into place. This will mean: Many major banks disappearing, as well as numerous potentially lengthy bank holidays (think Argentina in 2001) Multiple sovereign defaults as well as broad economic contractions and their commensurate unemployment/ civil unrest/ erasure of retirement accounts/ pensions (this process has already begun in some US municipals, e.g. San Bernandino and Stockton California as well as Harrisburg Pennsylvania). Possibly new currencies being introduced or new denominations of currencies (say one new unit being worth 1,000 of the old one) Massive wealth destruction to the tune of tens of trillions of Dollars (think MF Global i.e. the money is gone… only systemically… in fact we just had another such instance with PF) A global contraction that will result in new political/ power structures being implemented as well as the breakup of various countries/ unions. Very serious trade wars to begin (see Obama’s recent attack on China) and very possibly a real war.

Many Americans do not pay much attention to what is going on over in Europe because they do not believe that it will affect them much.

But the truth is that Europe has a bigger population than we do, a bigger economy than we do, and a much bigger banking system than we do.

The global financial system is more interconnected than ever, and what goes on over in Europe is going to have a dramatic impact on the United States.

In fact, already there are a whole host of signs that the U.S. economy is starting to tip into another recession.

So let us definitely hope for the best, but let us also get prepared for the worst.

A great storm is on the horizon, and it would be quite foolish to ignore it.