Demographics

Coupled with an expected increase in age-related expenditure and an adverse impact on potential output, this raises sustainability concerns and calls for robust exit strategies.

"The economic and financial crisis is also 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," the EC said.

Euro area potential growth averaged 1.8 per cent in the period 2000-2006 but was estimated to have fallen to 1.3 per cent in 2008 and to be only 0.7 per cent this year and next.

"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," according to the report.

A return to pre-crisis potential growth was also likely to be much slower. 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, as proposed by the EC".

Repeating what has become a popular mantra, the EC said that it was also important to avoid the policy mistakes of the past, such as protectionist policies undermining the single market or measures reducing labour supply.

Beyond the crisis, population ageing is expected to weigh substantially on growth during the next decades, becoming apparent already from 2020.

"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 the EU’s 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 priority is now clearly to concentrate the efforts in resolving quickly the crisis and to swiftly return to sound public finances. 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."

In a separate statement, the EC said that the Business Climate Indicator (BCI) for the euro area increased slightly in June. However, the level is still far below the previous historical lows of 1993.

In June, the Economic Sentiment Indicator (ESI) for the EU and the euro area continued to improve for the third month in a row. However, in both areas, the level was still below the lows reached in the previous trough at the end of 1992.

On June 25, Eurostat said that in April 2009 compared with March 2009, euro area industrial new orders index fell by one per cent. In March, the index decreased by 0.2 per cent.