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Report| McKinsey Global Institute

European growth and renewal: The path from crisis to recovery

July 2011 | byCharles Roxburgh, Jan Mischke

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Europe is growing again, but the recovery is uneven and under threat from the continuing eurozone debt crisis. Europe has significant strengths on which to build but needs to address profound long-term challenges that could limit its future growth. MGI sets out a perspective on where the European economy stands today, the challenges it faces, and the very considerable strengths on which it can build. MGI also sets out seven priorities for action. Each requires joint action by policy makers and business leaders.

Findings include:

  • Economic growth is recovering unevenly. While most of Europe (defined in this research as all members of the European Union (EU-27) plus Norway and Switzerland) is expected to return to pre-crisis GDP levels by 2012, recovery in Southern Europe, Ireland, and the United Kingdom is forecast to take considerably longer. The debt crisis and speculation about the possibility of sovereign defaults cast doubt on the resilience of the recovery.   
  • Europe has very significant, and sometimes underappreciated, strengths on which to build a sustained recovery. As the world's largest integrated economy, Europe is home to 124 Fortune 500 corporations. Several European countries have successfully reformed labor and product markets and can now serve as examples for others to follow. Europe is home to some of the most vibrant cities in the world and has a high quality of life.   
  • All European economies face a set of profound long-term challenges that, if unaddressed, will limit their future growth potential. Private- and public-sector deleveraging is only just starting and could weigh on growth for some time. Structural imbalances have left Southern Europe with a 4.6 per cent current account deficit today. Old-age dependency is set to double. Labor utilization is 20 per cent below US levels, and Europe’s productivity gap with the United States is widening again. Rising energy prices and competition from emerging economies will place increasing strain on Europe.
  • Returning to a sustained path to economic growth and renewal will require innovation in European policy making together with bold leadership from the private sector. The seven priorities highlighted are:
    • Consolidating Europe's fiscal position
    • Expanding the supply of skilled labor mainly through senior participation
    • Using structural reforms to fuel innovation and growth in services
    • Boosting public-sector productivity
    • Unlocking the potential of sustainable resources
    • Winning in tradable goods and services
    • Supporting innovation

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