And given the euro area’s weak demographics, this has to be principally achieved by policies that raise productivity, which in turn comes down to raising investment. Investment is crucial because it is today’s demand and tomorrow’s supply. Yet, investment in the euro area has fallen by 18% during the crisis, and 35% in stressed countries.
This is where the process of repairing the banking sector can help lift potential growth as well. Evidence from euro area firms shows that financial constraints have strongly affected firms’ investment decisions during the crisis. This has come both from the supply side – banks that will not lend to firms – and the demand side, i.e.