The euro-area economy is still deep in recession territory but sentiment indicators and financial markets have started to send some tentative signs of improvement. There is evidence that the EU's strong and coordinated policy response is providing tangible support to the banking sector and economic activity. This issue of the QREA provides a preliminary assessment of the effectiveness of banking support measures implemented by Member States since autumn 2008. It concludes that the measures have had a positive impact on banks' capital and access to wholesale funding, but the situation remains fragile. The report also includes a mid-year review of fiscal policy in the euro area which looks, in particular, at debt developments and sustainability.

Medium-tem challenges to economic growth

In a more medium-term perspective, the QREA also provides two focus sections analysing the growth challenges ahead. The first one assesses the impact of the economic and financial crisis on potential growth. Because of its negative effects on employment and capital accumulation, the crisis will lead to a sharp drop in potential growth in the euro area in the short term. This should be followed by a slow return to pre-crisis potential growth. However, risks of a more permanent downshift in potential growth due to a deceleration in productivity should not be ruled out.

The second focus section discusses the economic and budgetary challenges posed by population ageing in times of crisis. Beyond the financial crisis, population ageing is expected to weigh substantially on growth during the next decades, becoming apparent already from the 2020s. An ageing population raises challenges for our societies from a cultural, organisational and economic point of view. The priority is now clearly to concentrate the efforts in resolving quickly the crisis. Once out of the crisis, long-term prospects will depend on the degree of determination to achieve a swift return to sound public finances. Increased focus on the structural reform agenda is necessary to deal with the effect of ageing as well as the impact of the financial crisis on potential.