What’s holding the Euro zone back?

While economists have forecasted growth in the neighborhood of 3.5-4.0 percent for the global economy in 2005, the Euro zone is expected to deliver a much weaker performance around 1.6 percent.

“There is a disconnect between the Euro zone and the global economy,” notes Thorsten Fischer, senior economist at Economy.com.

What’s holding the Euro zone back? Economists point to so-called “structural” challenges, which limitgrowth potential over the near term.

“The problem in Europe is a structural problem,” says Carl Weinberg, chief economist at High Frequency Economics. “Europe is adjusting to monetary union and the accession of eastern European countries. Workers in Germany are finding that they are no longer competing with workers in Germany or even France for the next job. Companies have discovered that they can build factories in the Eastern European region. Convergence might mean wage reductions in the higher wage countries, which makes it harder to generate an increase in spending.”

Overall, analysts point to excessive regulation, red tape, an over-regulated labor market, and rising pension and health care costs (which are funded through payroll taxes) as negative pressures on Euro zone growth prospects.

Germany, the largest economy in the Euro zone, produces nearly one third of the entire Euro zone’s output, according to Fischer.

However, Weinberg calls the German economy “flat at best, but it is probably contracting.”

4cast’s Webster adds, “Clearly, slow growth in Germany has been biasing down the total GDP numbers.”