Europe's real problem: Lack of growth

By Fareed Zakaria, CNN

I was in Germany this week and the mood there is pretty grim: Europe is facing its most severe challenge since 1945. If the Greek crisis morphs into an Italian crisis - Italy being too large to bail out - the entire structure of post-World War II Europe could unravel.

Finally, European leaders seem to recognize that their strategy of kicking the can down the road has not worked. The result...

will not be a dramatic solution - that is not how Europe works - but, more likely, a series of steps that together will be more comprehensive than anything done before. But they will not address Europe's core problem: a lack of growth.

The Europeans - by which I mean the Germans - are trying to find some solution to this crisis that will not let countries like Greece and Italy off the hook. Germans feel these countries need to feel the pressure - only then will they reform their budgets and their habits. So the solutions will be complex - trying to stop a crisis while not bailing out these countries entirely.

The real problem - however - is not so much that Greece has been unwilling to make sacrifices. It has made many. But Greece's budget numbers look bleak because its growth forecast looks bleak. It needs to address a much larger question of competitiveness. What can the Greek economy do to attract capital and investment? And at what wage levels? These are questions most European countries will need to answer to fully solve their problems.

Italy's economy has not grown for an entire decade. No debt restructuring will work if it stays stagnant for another decade. Even Germany is not immune, with an average growth rate of only 1.5%. German officials know that with a declining population, in five to seven years the country is likely to grow at an annual rate of just 1%. That's not much of an engine for Europe.

Europe needs a crisis agenda to get out of its bind, but beyond that it needs a growth agenda, which involves radical reform. The fact is that Western economies - with high wages, generous middle-class subsidies and complex regulations and taxes - have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world).

If Europe - and, for that matter, the United States - cannot adjust to this new landscape, it might escape this storm only to enter another.