The euro area's growth prospects over the coming decade

The European economy is showing signs of a turnaround from the economic and financial crisis. However, this has not been an ordinary cyclical downturn, as macroeconomic imbalances accumulated over many years. It is also not an ordinary cyclical upswing and return to growth. Structural trends in Europe have been weakening since the mid-1990s, most notably visible in total factor productivity. In addition, the credit boom that started in the early-2000s brought a misallocation of investment and resources, which now poses an additional weight on the recovery. The profound structural challenges in Europe are gradually being corrected. But the reallocation of resources remains slow, given the necessary deleveraging, the structural rigidities and the remaining weaknesses in the banking sector. Persistent efforts remain necessary to reverse long-lasting trends and to counter the forthcoming impact of ageing populations on growth. This chapter presents a simulation based on a "do-nothing"- scenario under which, over the coming decade, growth rates would be substantially lower than those enjoyed in the decade prior to the financial crisis, averaging less than 1%, which is about half the rate projected for the US. However, the chapter also shows that the euro area has enormous potential for catch-up growth, compared with the US. Consequently, with the introduction of a range of per capita income enhancing structural reforms, focussed in particular on the many unexploited growth opportunities linked to both labour and TFP, policy makers could significantly improve future growth prospects and ease the fiscal strains which any permanent deterioration in income growth inevitably implies. Over the last years with the reinforced economic governance, a strong framework has been created for advancing on the path of reforms, and Member States should implement the recommendations made to them.