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As Eurozone Economy Shrinks, Government Debt Loads Grow

Europe's economy is being held back for several reasons:

Austerity. Whether they got into trouble by overspending or after rescuing banks from a real-estate collapse, European governments are tackling their debts the same way: by raising taxes and cutting spending, including wage cuts for public sector workers. Italy slashed its deficit by 2.8% of GDP this year, but economists estimate that reduced growth by 1.5 percentage points. Less spending by the government and less spending by consumers who gave more of their income to the government were a drag on the Italian economy.

Shaky banks. Banks reeling from the financial crisis are making it harder and more expensive for businesses in the hardest-hit countries to borrow. That's crimping investment and hiring by these companies across southern Europe. Companies in Greece or Portugal are often paying twice as much interest on loans as their German competitors.

Consumers are holding back. Wage cuts have weighed on family budgets, and people are saving more because they're worried about further economic shocks. Together, these trends have reduced consumer spending by about 1% this year.

Antibusiness regulation. Laws in many European countries make it hard for companies to lay workers off in lean times, and that makes employers reluctant to hire. Bureaucracy chokes the process of starting a business or exporting goods. Greece's tax accounting rules were so onerous -- permitting large penalties for minor paperwork errors -- that the EU demanded the entire rulebook simply be abolished. Parliament finally complied last week.

European governments are slowly trying to make their economies more competitive. But in a September survey on global competitiveness by the World Economic Forum, Greece, Portugal, Spain and Italy ranked low because of poor access to financing and rigid labor markets.

It requires 11 bureaucratic filings to start a business in Italy. Fellow euro member Slovenia requires two.

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