Friday, January 21, 2011

ECB: Crisis Had Lasting Effect on Growth Potential

Wall Street Journal
January 20, 2011

In its latest monthly bulletin, the European Central Bank warns that the financial crisis could have a lasting effect on the euro bloc’s potential output, and warned that potential economic growth is unlikely to return to its pre-crisis path for many years.

“It is likely that the financial crisis has led to a one-off permanent loss in the level of potential output, owing to the economic effects of the downsizing of some sectors, such as the financial and construction sectors, following their disproportionate expansion during the boom,” the ECB wrote in its January bulletin.

But the ECB’s concern extends beyond damage done by the financial crisis. Longer-term factors, particularly the aging of the euro zone population, could hold down potential growth for many years to come, officials warn. “Without far-reaching structural reforms supporting long-term economic growth, it appears unlikely that the euro area will achieve the previously measured potential growth rates of 2% or above in the coming decade,” according to the ECB.


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