The financial crisis and potential growth : policy challenges for Europe

The ongoing financial and economic crisis is taking its toll through an unprecedented drop in GDP – the Commission's spring forecast sets this loss at around 4% in 2009. Whilst financial market turbulence, credit shortages and higher unemployment will inevitably lead to a non-negligible loss of potential output, i.e of structural productive capacities, in the short run, the long-run impact on the potential output of the European economy is much less certain.Whilst acknowledging this uncertainty, this Economic Brief examines how the policy choices made now can determine the eventual outcome and recoup (some) of the losses.