Erosion and Crisis of the European Growth Potential. What Can the EU and the National Governments Do?

Abstract

We suppose that the dramatic decline in the European output is more than a cyclical diversion from the potential output. We performed a medium term quantitative analysis combining data based on the production function and growth accounting approach. Our results show that the erosion of the European growth potential has been a longer latent process. It began well before the outbreak of the latest economic crisis. Simulations suggest that the recovery in the rate of potential growth can only be partial in the medium term and further erosion of the European growth potential can be expected in the longer term.