Europe has little chance of making a strong economic recovery even if an impending recession proves mild and faces weak growth for the foreseeable future, burdened by debt that may not reach manageable levels until 2030, the World Bank said on Tuesday.
Only major reforms in governments and working habits will save Europe from a spiral where an ageing, shrinking workforce, high debt and unaffordable public spending strangles its future, the bank said.
Strong growth could make debt problems fade, yet the prospects for a strong rebound are feeble, the bank said in a report, predicting weak economic output until 2016 as households and governments cut debt and investors remain wary.
The euro zone sovereign debt crisis has left Europe dealing with a crisis of confidence that looks likely to push the continent into recession in early 2012, just as it was recovering from the 2008/2009 financial slump.
The European Union is focusing on cutting fiscal deficits to regain investor confidence and avoid another crisis, but the World Bank said that task remains huge, forecasting that Western Europe is unlikely to reach pre-crisis public debt levels of 60 percent of gross domestic product (GDP) until 2030.
For the 17 nations in the euro, only Estonia, Finland, Luxembourg, Slovakia and Slovenia will be below that level -- the EU's limit -- in 2012, according to EU data.
With the European economy slipping into a recession again, the EU faces a difficult dilemma in promoting growth and cutting debt, while confronting a growing productivity gap between the wealthy north and the poorer south and east.
The crisis won't be solved without growth, Philippe Le Houerou, the World Bank's vice president for Europe and Central Asia, said in presenting the report in Brussels.
Europe's governments will have to become smaller or more efficient, the report said, noting that a 10 percentage point increase in government size cuts the long-term growth rate of advanced European economies by about a third.
But ahead of an EU leaders summit on growth next week in Brussels, the World Bank also said that the region - long the envy of the world for its high living standards - needs a new social consensus to address even bigger issues.
Over the next 50 years, Europe's labour force is set to decline by 50 million people, which could threaten its ability to grow its economy at sustainable rates, and immigration, a difficult issue for Europeans at a time of high unemployment, must help to swell the workforce.
Ageing not only undermines growth but also makes it hard to improve public finances, the report said. Ageing is a direct cost ... especially for pensions and health.
Western Europe's pensions are more generous than the rest of the world, but pension benefits cannot keep up with workers' incomes and Europe needs to encourage people to work longer and find ways to penalise early retirement, the bank said.
By 2007, French men drew pensions for 15 years longer than in 1965 and Polish men more than a dozen, the report said.
INNOVATE, SAVE THE SOUTH
As Europeans work less, retire earlier and earn higher wages, productivity in Europe compared to the United States and Japan has also fallen sharply since the mid-1990s, with outdated infrastructure and machinery also playing a role.
To be competitive, productivity should have grown by about 3 to 4 percent each year during the 2000s, the bank said. Instead, it fell by about 1 percent each year.
In a sign that EU-mandated austerity will not on its own save Europe, governments and companies need to address a productivity divide between more advanced economies like Germany and Belgium and southern economies with declining productivity.
Too much focus on the construction industry and a lack of global companies that can attract foreign direct investment, combined with bureaucracy that stifles innovation, are much to blame for southern Europe's laggard status, the report said.
Between 2002 and 2008, productivity in Italy, Spain, Portugal and Greece fell markedly, while it rose across the rest of northern and eastern Europe.
In an all-too-common story in Italy and Greece, businesses that have been operating for more than 40 years prefer to remain small and family-run, rather than try to deal with costly government red tape and grow into successful global firms.
Do you know what I would have to deal with if my business were to employ 40 people? asked an Italian businessmen with half a dozen employees interviewed in the report. I would have to spend days running after inspectors, the businessman said.
(Reporting By Robin Emmott; editing by Stephen Nisbet)