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Who Lost Europe?

Europe urgently needs a short-term growth strategy to supplement its financial-support package and its plans for fiscal consolidation. But the greatest obstacle to implementing such a strategy is the EU’s largest economy and its putative leader: Germany.

CAMBRIDGE – Financial meltdown has been averted in Europe – for now. But the future of the European Union and the fate of the eurozone still hang in the balance. If Europe doesn’t find a way to reactivate the continent’s economy soon, it will be doomed to years of gloom and endless mutual recrimination about “who sabotaged the European project.”

Having suffered a deeper economic collapse in 2009 than the United States did, Europe’s economy is poised for a much more sluggish recovery – if one can call it that. The International Monetary Fund expects the eurozone to expand by only 1% this year and 1.5% in 2011, compared to 3.1 and 2.6% for the US. Even Japan, in a deep slump since the 1990’s, is expected to grow faster than Europe.

European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members. As the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have collapsed, bringing output down with them. European leaders have so far offered no solution to the growth conundrum other than belt tightening.

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