In many European countries, the problem before the crisis was simple: The fact that growth outpaced potential growth did not lead to an increase in potential growth

- "We describe the problem that many European countries (France, Spain, Italy, Portugal, Ireland) are encountering these days, as follows:

• prior to the crisis, growth outpaced potential growth (due to the fact that demand was stimulated by indebtedness, the fall in unemployment, immigration);• but this did not lead to a rise in potential growth; the pre-crisis growth model was therefore unsustainable. This unsustainability can be presented as follows: as productivity gains remained too low, real pay rises were too low for demand to continue to increase quickly without the help of indebtedness (or later fiscal deficits);• potential growth did not increase because the growth model drawn on above all developed unsophisticated, not very productive sectors (construction, domestic services, etc.), which accounts for the fact that there was no acceleration in productivity and no increase in R&D spending. Policies to stimulate domestic demand normally lead to a development of services and construction (of non-traded goods) to the detriment of industry."

Natixis Flash Economics 465 20100916