The sharp contraction in euro area activity appears to have ended sooner than anticipated, with further improvements in financial conditions, fiscal stimulus measures and stabilisation of export demand. However, headwinds from financial sector deleveraging and rising unemployment suggest that the recovery will be gradual. Bank lending standards are tight, credit growth to households and firms is weak and property prices are declining in many countries. Despite the improved outlook, core inflation should continue to moderate until the end of 2010 due to substantial economic slack.

The euro area is in a deep recession, with external demand collapsing and domestic demand being weakened by tight financial conditions, rising unemployment and heightened uncertainty.

The euro area economy has slipped into recession this year, with tighter financial conditions, negative wealth effects, weaker housing market activity and greater uncertainty all reducing domestic demand. Growth is expected to remain below potential until the middle of 2010, before picking-up as the effects of monetary policy easing and the dissipation of stress in global financial markets emerge. Lower commodity prices and the emergence of a sizable negative output gap as production slows below potential will dampen inflationary pressures, with headline inflation projected to fall to around 1.5% during 2009.

Investment in Europe’s roads, railways and inland waterways has taken an upswing in recent years, particularly in eastern countries, says the International Transport Forum.

Can cutting down on sugar subsidies lead to healthier trade competition and trimmer prices? The 2005 European Union market reforms aim to thin EU farmers’ sugar subsidies and cut out obsolete sugar mills. Sugar Policy Reform in the European Union and in World Sugar Markets maps out how this might work.

The gap in productivity and economic performance between the US and Europe has been a source of much debate in recent years, but many experts seem agreed on one point: that a lack of progress on reform in labour and product markets has not helped the European cause.

One of the main challenges for the future will undoubtedly be the migration of a highly skilled workforce from Asia (see for instance, “Globalisation and Labour Markets: Policy Issues Arising from the Emergence of China and India”, OECD Social, Employment and Migration Working Paper No 63, November 2007, www.oecd.org/migration).

The world economy faces challenges from the new powerhouses of China and India (see Nos 263 and 264/265, 2007). In order to compete, there is a case for closer co-operation between developed countries and, in particular, tighter integration in Europe.

The expansion has continued but at a slower pace than in 2006. Higher interest rates, a stronger euro and tighter credit conditions are all damping activity. But the outlook remains relatively good, with growth projected to return to its potential rate following some slight near-term weakening. Rising employment and a moderate upturn in wage growth will underpin household incomes and consumption. Inflation has veered up due to a sharp rise in energy and food prices, but is expected to decelerate to below 2%.

Destination Europe is a slightly misleading title since its subject, the political development of Europe from 1945 to 2003, is a journey with a point of origin when Europe, which a generation earlier dominated the world, lay in ruins with no destination.