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News : EU Economy Last Updated: Jul 6, 2009 - 10:26:48 AM

European Commission warns of likely permanent loss in Eurozone potential economic output because of global economic crisis
By Finfacts Team
Jul 3, 2009 - 7:28:50 AM

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The European Commission says in its latest quarterly report on the Eurozone that the economy is still deep in recession territory but the EU's strong and coordinated policy response is providing tangible support to economic activity with evidence of some tentative signs of improvement. However, the report warns of a likely permanent loss in potential economic output as a  result of the global economic crisis.

The Commission says economic and financial crisis is likely to result in a lower growth potential in the years ahead due to lower employment and productivity levels as research and development and capital investment are likely to decrease or stagnate. It says Eurozone potential growth averaged 1.8% in the period 2000-2006 but is estimated to have fallen to 1.3% in 2008 and to be only 0.7% this year and next. The report says historical evidence shows that financial crises tend to have a deeper and more lasting impact than recessions caused by other factors and can be followed by lower productivity growth. A return to pre-crisis potential growth is also likely to be much slower. The Commission says this calls for timely and appropriate policy responses to create new jobs, for example in low-carbon industries, and by upgrading skills through apprenticeships and the fight of early-school leaving. It says it is also important to avoid the policy mistakes of the past (e.g. protectionist policies undermining the Single Market or measures reducing labour supply).

The report notes that beyond the crisis, population ageing is expected to weigh substantially on growth during the next decades, becoming apparent already from 2020. It says being active and healthy well into old age is now a realistic prospect for a very large number of people. But an ageing population also raises challenges for societies from a cultural, organisational and economic point of view. The working age population is assumed to start to decline early next decade. This will have a negative impact on potential growth as well as on budgetary conditions.

The Commission says the priority is now clearly to concentrate the efforts in resolving quickly the crisis and to swiftly return to sound public finances. The Commission says structural reforms required by demographic change should be pursued vigorously. In particular, these should aim at raising employment rates substantially and at encouraging the ageing baby-boomers to stay in the labour market rather than retire early.

The quarterly report says that even before the crisis, the Eurozone’s potential economic growth rate was projected to decline from 2.2% in 2007-2020 to 1.5% in 2021-2030 and only 1.3% in 2041-2060.

Eurozone public debt is forecast to rise to 83.8% of GDP (gross domestic product) in 2010 from 66% in 2007. Ireland's debt ratio will be 80% in 2010; Belgium, Greece and Italy will have debts above 100% of GDP; France’s debt will be 86% and Germany’s debt will be 79%.

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