Paris: Europe is pulling clear of recession, but now faces a long fight to unplug itself from government-funded life support as it struggles with extra debt, a strong euro and an ageing population, analysts say.

An AFP survey this week of analysts’ notes on hurdles ahead for European economies pinpoints a paradox: with each move towards recovery they begin a race against time to put growth, employment and public finances in step.

Eyeing growth: German chancellor Angela Merkel recently said that in saving alone she sees no chance of success. Markus Schreiber / AP

In remarks consistent with the broad tenor of analyst comment, they said: “Eurozone governments are likely to continue to stimulate their economies next year, but the exit from fiscal stimulus cannot wait too long."

In a specific warning about another looming crisis, they warned that “the future costs of ageing will soon turn from theory into reality and many European countries are far away from a sustainable public finance position."

ING economists acknowledge that government spending rigour is unlikely to come before 2011. But come it must if countries are to cope with the needs of their elderly.

Age-related spending in the euro zone could rise by at least 5% from 2010 to 2060, with countries such as Greece, 16%, and Slovenia, 12.7%, looking at double-digit increases, according to ING.

“At present no single euro zone country could cope with the costs of ageing without permanent adjustments to public finance. Ageing is a genie which cannot be put back into the bottle. Its fiscal cost cannot be neglected or ignored," analysts said.

The 13 biggest countries in the European Union (EU) have allocated almost €90 billion (Rs6.27 trillion) in tax cuts and fiscal spending this year to stimulate growth, complemented by nearly €230 billion in credits to consumers and producers, according to a study by the European economic research group Bruegel. But every bit as threatening to the financial health of Europe is the long-term debt, and the interest charge, that could be the legacy of anti-recession stimulus spending.

The euro zone’s executive commission has warned that the bloc’s debt level could reach 100% of gross domestic product (GDP) by 2016, up from 69.3% at present.

In France’s new budget, public debt is projected to soar to 84% of GDP in 2010, while in Germany finance minister Wolfgang Schaeuble said if the government wanted to reduce its debt to 60% of output (in line with EU rules) by 2020, the economy would need to grow 4.5% a year.

The current German government of Chancellor Angela Merkel has made clear that its immediate priority is growth at the expense of more budget deficit and debt, principally by means of tax cuts.

However, some analysts in Germany say that the programme may also carry the seeds of structural reform to strengthen the medium-term growth potential of the economy. That would help the government on the path to meeting a recently passed law requiring zero deficits by 2016.

“We made the decision to take a path fully directed towards growth, with no guarantee at all that it will work, but which offers the chance that it will work," Merkel said last Monday. “By saving, saving, saving, I see no chance of success."

However, after an outcry over the possible consequences for the deficits, she moderated her remarks.

Yet another cloud on the horizon is the euro zone single currency, the euro, which has lately been gaining steadily against the dollar, a trend that, if unchecked, could hamper European export earnings and stifle recovery.

The dollar paradoxically tends to weaken when there is good news from the US economy and prospects brighten on the world scene. Under such circumstances, investors are emboldened to branch out into currencies—such as the euro —that are seen as riskier than the dollar.

The euro is now being traded near $1.50.

“In the short term," said UniCredit Group chief economist Marco Annuziata, “I expect the euro will move even higher and the pain will get stronger." The effect of the appreciating euro “will start hitting the recovery at its most fragile juncture six to nine months from now."

European policmakers, he added, are saddled with “a frustrating impotence", as the European Central Bank, its interest rates near zero, has run out of its traditional ammunition.

The bank can no longer slash rates as a means of discouraging investors, whose appetite for the single currency boosts its value.

But some economists caution against exaggerating the negative effects of a strong euro.

“With global demand recovering pretty strongly, for at least a few quarters, the ongoing rise in the euro is unlikely to halt external sector recovery in its tracks," argued analysts at Capital Economics.

A strong euro reduces the cost of critical dollar-denominated commodities such as oil and, by lowering the price of imports, acts as a brake on inflation.

“The good export earnings of the last seven years illustrate that the pain of a strong euro can be limited," said analysts at ING.

They recalled that between 2000 and 2007, the euro appreciated by at least 60%. During the same period, exports from countries using the currency to markets outside the euro zone grew by at least 45%.

Europe finally is facing a another painful spurt in unemployment, according to researchers at Morgan Stanley, who foresee the jobless rate in the euro zone rising from its current level of 9.6% of the workforce to 10.7% in the second half of next year, with new entrants finding it especially hard to land a job.

But Morgan Stanley analysts noted that the euro zone labour market has held up much better than its US counterpart in the recession.