As the economy recovers, EU countries will need to phase out crisis measures. The question is when?

The worst recession since World War II has already wiped out the more than 4 million jobs created in Europe over the last decade. And with unemployment still rising – albeit at a slower rate – that number is expected to climb to 7.5 million by the end of 2010.

But the losses could have been much worse. An EU report issued today says the rise in joblessness was not as steep as could have been expected from the drop in production. The report credits a combination of crisis measures and EU financial support with blunting the impact on labour markets.

When the economic crisis engulfed Europe, most countries took steps to prevent mass layoffs. A number expanded welfare systems to include more people out of work and took steps to limit wages, mainly among public employees. And many increased financial support for schemes that encourage businesses to allow employees to work fewer hours instead of being dismissed.

The report says such measures saved tens of thousands of jobs. But they were supposed to be temporary. Now the economy is recovering, the commission warns that they could undermine economic growth and prolong unemployment.

The report says countries with the strongest economies should begin phasing out job subsidies and other worker-protection schemes and proceed with long-term reforms to make labour markets more flexible and secure.

But what about countries where the outlook is not as bright – in particular those that ran up high budget deficits while trying to shore up their economies? The commission recommends that they redirect their efforts from protecting to creating jobs, so the unemployed do not remain inactive for long. But it does add that countries facing the heaviest job losses next year would be justified in keeping existing measures in place for now.

The report now goes to European employment ministers, part of preparations for a new EU-wide jobs and growth plan. The previous one, the ‘Lisbon strategy’, expires in 2010.