Economic Potential Recovery '" A European Challenge In The Medium Term

The waves of the worst global financial and economic crisis since World War II have seriously affected the economy of the Euro Area. The first wave of the global crisis determined the worst recession in decades for the member states of the region. At present, the Monetary Union is confronted with the second wave of the crisis '" the public debt problem. Despite the efforts adopted and implemented by the European policymakers over the past quarters, the sovereign debt crisis is far from over. Spain has recently become the 'favourite target' of the financial markets. Among the consequences of the waves of the crisis for the Euro Area one can mention the potential output decline and the economic divergence (asymmetric evolution of member countries). In this context, the potential output recovery and the relaunch of the real economic convergence process represent the main challenges for the policymakers in the medium run. This paper analyses the evolution of potential GDP of the member countries of European Monetary Union (12). I employ the Hodrick-Prescott methodology on data from the World Bank Database. According to the results, the economic potential of the member states of the Euro Area (12) decreased to the lowest level of the past decades. At the same time, the analysis presents the differences exiting across the member states in terms of potential output. Some countries suffered an important potential output loss over the past quarters (it seems that Greece and Portugal have become asymmetric shocks in the Monetary Union). For these countries, the first wave of the global crisis transformed in a permanent shock. The decline of investments and the depreciation of human capital over the past quarters express a huge probability that potential output is going to maintain at a low level in the Euro Area over the following years. The recovery of potential GDP towards the pre-crisis levels is dependent on a higher participation rate of active population, strong reforms of labour markets and, importantly, the return of investment flows. Other measures in order to attain the objectives of Europe 2020 (smart, sustainable and inclusive growth) would also help the process of potential GDP recovery in Europe.