Vidon, and desk economists for euro area countries in the European Department. DISCLAIMER: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate. EXECUTIVE SUMMARY Unprecedented actions have been taken by European countries and institutions to deal with severe economic and financial stresses plaguing the region. At the country level, this has included steps to rein in fiscal deficits and the recapitalization of weak banks. At the pan-European level, risks and contagion have been contained by the progressive strengthening of the firewall, comprehensive ECB liquidity support, and a new fiscal compact. Yet the rise in unemployment and recession indicators has undermined stability and policy effectiveness. Without a clear path for recovery of employment and growth, which was tepid even before the crisis, it is hard to see fiscal revenues recovering, debt ratios declining, the weakened financial sector regaining its health, and social support for adjustment taking hold. In short, a revival of growth seems key to reversing the vicious cycle of poor confidence, flagging growth, fiscal weakness, and bank vulnerability. Policy measures on both the supply and demand sides are needed, the former to anchor the medium-term growth prospects, the latter to support growth in the interim. These should be put in place quickly, not least because the public and markets have become accustomed to years of debate over structural reforms. Reforms also must be granular, targeting, in Southern Europe, labor market duality and the reduced competitiveness of the tradable sector, including relative price misalignments; and in Northern Europe, higher labor participation and a more vibrant services sector.