Western Europe’s total factor productivity growth had been falling steadily even before this crisis. With little growth in the labor force, and substantial amounts of capital per employee, it is hard to see where trend growth will come from. Add to this the effects of the high debt load and the weak banking system, and it is hard not to be pessimistic about Europe.
Of course the neoliberal economist can always find a silver lining. Rajan adds:
Yet, in all this pessimism, there may be a silver lining in that it prompts structural reforms and greater liberalization of closed markets in Europe.
This rather reminds me of Marxists back in the day, who used to profess glee that things were bad and getting worse, because this meant that le Grand Soir was just around the corner. To be sure, Rajan is one of my favorite neoliberals. He was among the few who didn't think that all was for the best in the best of all possible worlds before the crisis. In fact, he issued a warning of weaknesses in the financial sector before the crash and was accused of raining on Alan Greenspan's parade. But it does seem to me that, post-crisis, economists need to be a little more precise when calling for "structural reforms and greater liberalization."