Analysis: Half-way to lost decade, Europe's growth task as tough as ever

Wed Jun 19, 2013 10:19am EDT
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - Half-way towards a lost decade for Europe's economy, pessimism persists about the political will to halt a worrying slide in the region's potential growth.

Without sweeping reforms to boost productivity, Europe's output will remain sub-par, making it harder for governments to reduce debt burdens that are unsustainable financially and unemployment rates that are unsustainable socially.

Leaders of the 27-nation bloc will have another chance to cut this Gordian knot at a summit in Brussels next week.

True, the euro zone has belatedly made impressive efforts to contain its debt and banking crisis.

The European Central Bank's promise to buy the bonds of vulnerable member states if necessary has averted the threat of a break-up of the single currency.

Spain has wiped out a current account deficit that had reached 10.6 percent of GDP by 2008. Greece has narrowed its competitiveness gap by half since 2010, according to the International Monetary Fund.

And in its Spring 2013 forecast for the euro zone, the European Commission concluded that the crisis would have no impact on longer-term growth dynamics even though it had resulted in a permanent loss of output of about 5 percent.

It said potential growth, estimated at just 0.4 percent this year, should recover gradually as structural unemployment falls. Potential output is the fastest rate that an economy can sustain without generating inflation as demand exceeds supply.   Continued...

Commuters walk to work across London Bridge, heading into the City of London June 19, 2013. REUTERS/Luke MacGregor