European Commission says ‘reform or suffer

The financial crisis could have “a lasting effect on Europe’s potential growth”, the European Commission said today, predicting annual economic expansion of just 1.5% next decade if the region’s global competitiveness is not improved.

The EC said in its Annual Growth Survey: “Given its cyclical nature, recovery alone cannot provide the impetus for leading Europe back to the pre-crisis economic situation, and absorb the deficit accumulated.

“Member states’ actions in 2011 and 2012 will be critical in averting a ‘lost-decade scenario’. The most urgent task is to break the vicious circle at work in some states of unsustainable debt, financial market disruption and low economic growth,” it added.

The body said signs of economic recovery remained “uneven” and “periods of renewed confidence in the return to growth alternate with setbacks due to the risks associated with the sovereign debt market”.

Economic contraction in 2008 and 2009 wiped out four years of the region’s growth, and it would take until mid-2012 for the zone to return to its output levels of early 2008, the EC predicted.

It urged member states to accelerate the consolidation of public finances and act on structural reforms this year.

It also advocated restructuring of banks, particularly recipients of state aid, and flagged a second round of bank stress tests, with results expected in June.

Nations that have not yet increased their retirement age should do so, it said, and they should reduce early retirement schemes “as a priority”.

The commission also called for a widening of the scope of the EU European Financial Stability Facility, established to bolster the most indebted nations, and reiterated its support for a permanent mechanism to replace the EFSF from mid-2013.

The commission added it would propose allowing EU-based venture capital funds to operate across borders, to stimulate growth in small- and mid-sized businesses.

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