Growth to return only slowly in second half - EU's Rehn

NEW YORK, April 22 Mon Apr 22, 2013 10:19am EDT

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NEW YORK, April 22 (Reuters) - Economic growth in the euro zone will return only slowly in the second half of the year as the region continues to work toward repairing the damaged financial sector, European Union Economic and Monetary Affairs Commissioner Olli Rehn said on Monday.

In contrast to the United States, the euro zone economy remains a bank-based system and the repair of the financial sector needs to be completed in order to unblock private investment, said Rehn.

"The ongoing process of deep economic rebalancing continues to impact on the European economy. We expect that growth will return only quite slowly in the second half of this year," Rehn told an audience at the Paris EUROPLACE New York Financial Forum in New York.

"While the United States by and large proceeded with its financial repair in 2008 and 2009 ... this process in Europe is still only partially achieved. This is acting as a critical drag on progress to our economic recovery," Rehn said, adding for the time being, dependence on financing by banks will still prevail.

Rehn said the European banking union was essential in this process and called the agreement on a Single Supervisory Mechanism an important step toward that union.

The EU has agreed that the European Central Bank would take over the supervision of all banks in the euro zone from July 2014 in what is called the Single Supervisory Mechanism.

The next step is to agree how the euro zone will deal with closing down failed banks and how it will pay for that in the interim period before enough fees from the financial industry accrue to cover the potential expense.

Europe's ongoing reforms have left it vulnerable to halting progress in reallocating capital to where it is most needed to spur economic growth.

"In my view this is caused by the still unfinished repair of the financial system and banking sector," said Rehn.

"One could argue that today's liquidity trap is in fact a financing trap, at least as regards businesses and households in Southern Europe. We are fully aware that we have to do something going forward to overcome this financing trap."

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