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In addition, observed GDP growth tends to be revised until several years after the first estimate

Our work is based on a simple Solow growth-accounting methodology.

A common feature of all economies is a collapse in productivity, which is typical of a big recession. In addition, Spain and Italy also underwent a very sharp labour contraction.

The additional effect of ageing.

A downside risk is that investment growth does not recover fully (for example, because banks fail to provide the necessary funding). In this case, we assume investment growth is only half what it was before the onset of economic turmoil.

We also estimate productivity through a convergence equation, which would slightly lift productivity in peripheral countries in the future.

This exercise suggests that in the absence of policy reforms, trend growth will have been damaged significantly, by at least one percentage point, post-crisis, compared with pre-crisis levels,

In the event that investment fails to recover quickly

 or unemployment levels take longer to fall than in previous recovery episodes, then trend growth would be significantly lower for longer. Trend growth might well remain negative in Spain and Italy, and may fail to increase for Germany or France.

this exercise shows the damage will indeed be long lasting, permanently impairing growth in a context of an ageing population that needs higher growth capacity than ever before.

That is the lowest level since 1972.

Its trade deficit has been shrinking — down 28 percent for the first 10 months of this year,

“From 2008, we suddenly realized that we had lost a lot of competitiveness and needed to work very hard to improve things, particularly in terms of labor issues and logistics,

Over all, Spain’s unit labor costs — a measure of productivity — are down 4 percent since 2008, according to Eurostat, the European statistics agency.

In a related measurement, the most recent Eurostat data put Spain’s average hourly labor cost at 20.60 euros which was well below Germany’s 30.10 euros and France’s 34.20 euros.

The car sector employs 280,000 people in Spain, including parts suppliers, and accounts for a tenth of the country’s economic output. About 85 percent of the industry’s workers are on long-term contracts.

"Supertankers" are the largest tankers, including very large crude carriers (VLCC) and ULCCs with capacities over 250,000 DWT. These ships can transport 2,000,000 barrels (320,000 m3) of oil/318 000 metric tons.[46] By way of comparison, the United Kingdom consumed about 1.6 million barrels (250,000 m3) of oil per day in 2009.[47] ULCCs, commissioned in the 1970s, were the largest vessels ever built, but the longest ones have already been scrapped; only a few ULCCs remain in service, none of which are more than 400m long.[48] Because of their great size, supertankers often can not enter port fully loaded.[28] These ships can take on their cargo at off-shore platforms and single-point moorings.[28] On the other end of the journey, they often pump their cargo off to smaller tankers at designated lightering points off-coast.[28] A supertanker's routes are generally long, requiring it to stay at sea for extended periods, up to and beyond seventy days at a time.[28]

As demand grew moderately in the United States and Western Europe, expanding economies such as China fueled exponential growth in demand.[60]

The average one-year time charter rate for a 5-year-old tanker of 280,000 metric tons of deadweight varied from $56,500 per day in December 2005 to $53,000 per day in September 2007 with a high of $64,500 per day in September 2006.[59]

The crisis has delivered a surprising degree of wage flexibility and labour mobility.

This means that the need for dissolving the euro back into national currencies at almost any cost has evaporated.

Sustained real growth should be the number one priority.

This involves massive moral hazard.

Austerity policies must stop, now.

Growth will not return unless bank lending is adequately available.

The ECB may act as lender in last resort to banks and governments, but who will bear the residual costs?

The only remaining option is public debt restructuring, a purging of the legacy.

This will lead to bank failures. This means that debt reductions must be deep enough to make it possible for governments to then borrow, to shift to expansionary fiscal policies and to bail out the banks that they destroyed in the first place, in effect undoing the diabolic loop.

Who will lend? Even the best-crafted bank restructuring will not allow an immediate recovery of market access. The ECB is the only institution in the world that can help out.

There is no easy option for the Eurozone after three years of deep mismanagement. Governments will not accept drastic action unless forced to. This means that we need another round of crisis worsening.

not surprisingly, Banco de España supervisors had little interest in discovering that Spain’s vaunted regulator had in fact missed the largest financial crisis in the history of the country

Already the first entity that was intervened (CCM) as far back as March 2009, showed that the real NPL levels post intervention (17.6%) were more than twice as large as the reported ones. This should have been the point for the Banco de España to get ahead of the curve by ordering an audit of the whole sector

Even more important was the role of these political connections in diluting the role of the supervisor after the crisis started, in what was meant to be the crisis resolution stage but which was in fact a crisis cover up stage.

What are the takeaways

I would suggest five.

Second, career concerns of supervisors are crucial.

Third, dynamic provisioning is a good idea, but the supervisor must be mindful it may delay decision making in problem cases

Fifth, supervision and an appropriately tough resolution regime must go hand in hand.

Greece is one of the world's top 20 tourist destinations, traditionally drawing about half of its visitors from other European Union countries—especially from Germany and the U.K.

Prices are down some 15% from last year, according to SETE, following a 10% cut in rates charged by hotel and tour operators in 2011.

Leading German tour operator TUI AG says its Greek vacation bookings were down 30% up to March. European travel agency Thomas Cook TCG.LN +0.23% said German bookings for Greece so far are also down by 30% compared with 2011, despite discounts of as much as 20%.

It is deeply troubling that it took Europe’s leaders so long to see something so obvious

What is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion. But politicians are good at repackaging, and, by some accounts, the new money is a small fraction of that amount, and even that will not get into the system immediately. In short: the remedies – far too little and too late – are based on a misdiagnosis of the problem and flawed economics.

The euro was flawed from the outset, but it was clear that the consequences would become apparent only in a crisis.

Workers may leave Ireland or Greece not because their productivity there is lower, but because, by leaving, they can escape the debt burden incurred by their parents.

Germany worries that, without strict supervision of banks and budgets, it will be left holding the bag for its more profligate neighbors. But that misses the key point: Spain, Ireland, and many other distressed countries ran budget surpluses before the crisis. The down

turn caused the deficits, not the other way around.CommentsView/Create comment on this paragraph

Mario Boselli, chairman of the Italian Chamber of Fashion, frets that larger emerging economies still account for only 10% of total Italian exports. "This is not enough" to offset the weakness in developed economies, he says.

Both Mr. Boselli and Philip Halpin, an adviser to the Irish Exporters' Association, say the euro would have to fall as low as $1.10 (from about $1.23 currently), to produce a robust export-led recovery.

Ludovic Subran, chief economist at French trade-credit insurer Euler Hermes, warns that might not be enough. Such a depreciation would have little effect in France because high taxes and rigid labor costs reduce the potential benefits, he says.

Any euro-zone economy would benefit from a drop in the euro to the extent that it can redirect more resources to external markets. But the willingness and ability of businesses to do that differs across the region. Nadio Delai, chairman of Italian research and consultancy firm Ermeneia, say a host of smaller, less prestigious Italian shoe and textile companies have started to export to emerging markets, riding the coattails of more famous names.

Consider an Italian corporation that owed a foreign bank 5 million euros, with a loan agreement struck under Italian law. If Italy left the euro, the bank might have less chance of getting euros back after the exit. In that case, the financial firm might be exposed to a new, less valuable currency.

Recognizing that threat, some banks are trying to move contracts into new jurisdictions like the United States or Britain. By transferring such loan agreements to English law, the banks may increase the chances of getting repaid in euros after an exit, according to legal experts.

Mr. Lim notes, however, that some large banks, including Deutsche Bank, still have a lot more loans than deposits in countries like Italy and Spain.

but it also forced losses on bondholders — a credit event, and therefore a trigger, for the swaps.

Before investors doubted Greece’s solvency, the swaps offered insurance at what turned out to be an extremely cheap price. At the start of 2008, an investor buying protection on Greek debt had to pay only $22,000 annually to insure against default on $10 million of Greek bonds over five years, according to Markit, a data provider. Now, the protection would cost about $7.6 million.

Investors will most likely continue to want default swaps to protect against losses on Greece’s new bonds. These bonds, to be issued Monday, are expected to have yields of well over 15 percent, according to advance pricing. This suggests investors have strong doubts about Greece’s creditworthiness even after its restructuring. Fitch Ratings said on Friday that it would probably give Greece’s new bonds a low, junk-bond rating.

More importantly and less known to German taxpayers, Greece will also default on 155 billion euros directly owed to the euro system (comprised of the ECB and the 17 national central banks in the euro area). This includes 110 billion euros provided automatically to Greece through the Target2 payments system—which handles settlements between central banks for countries using the euro. As depositors and lenders flee Greek banks, someone needs to finance that capital flight, otherwise Greek banks would fail. This role is taken on by other euro area central banks, which have quietly lent large funds, with the balances reported in the Target2 account. The vast bulk of this lending is, in practice, done by the Bundesbank since capital flight mostly goes to Germany, although all members of the euro system share the losses if there are defaults.

No responsible bank would claim these sums are minor risks to its capital or to taxpayers. These claims also amount to 43 percent of German Gross Domestic Product,