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The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of the Euro Area 2005 published on 12 July 2005.
Boosting the poor growth performance to date requires stepping up the pace of structural reforms and restoring sound public finances
Economic growth in the euro area has been lagging that of the best performing OECD countries since the mid 1990s. Moreover, the euro area has been slow to recover from the 2001 03 downturn, but inflation has hardly eased. This suggests a lack of resilience in the face of shocks but also a longer-term problem since potential growth may also have been declining. Creating conditions that will ensure that the euro area grows more robustly while keeping inflation low will also contribute to raise potential growth and should involve as key measures:
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Utilising idle labour resources. Notwithstanding some improvements, high structural unemployment and low labour market participation of older workers have remained the hallmark of the euro area economy. Labour market reforms, such as reducing the labour cost of the less skilled, have improved performance to some extent, but the politically more difficult areas, such as easing employment protection legislation (EPL) for permanent workers, also need to be tackled.
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Ensuring the long-term sustainability of public finances. In a context of population ageing, a main challenge is to ensure long-term fiscal sustainability, which is far from assured in a number of countries. Boosting growth by structural reforms will make this easier to achieve. Both fiscal consolidation and structural reforms would boost confidence. Member countries should maintain, or restore, sound public finances. This requires more realistic and transparent budgeting, greater restraint and better quality of public spending contributing to higher growth.
The income gap
GDP per capita at constant prices and in 2000 PPPs
1. Includes Australia, Canada, Denmark, New Zealand, Sweden and United Kingdom.
Source: OECD, National Accounts.
The recovery has remained hesitant
Activity has been recovering since mid 2003, but growth has remained below the estimated potential of around 2% per annum. With the euro having appreciated considerably since 2002, net foreign trade has lent limited support to economic activity. Household confidence has been recovering hesitantly since early 2003, underpinning a gradual strengthening in consumer demand. Capital formation has finally begun to turn around after its virtually unabated decline since the onset of the downturn in 2001. Employment has remained relatively resilient all along, underpinned by wage moderation and policies to support the employment of the low skilled and temporary work in several countries. As a result, the unemployment rate has remained virtually stable at just below 9% for almost two years. Inflation, while moderate at close to 2%, has responded little to widening slack and the appreciating currency with energy and administered prices and indirect taxation offsetting some weakening of price pressures for other items owing in part to the absence of second round wage effects so far.
Demand and production
The short term growth outlook is fragile
While a gradual recovery is projected, a combination of new adverse shocks would be challenging. Growth is projected to slow to 1¼ per cent in 2005, slightly less than in 2004, and to firm to 2% in 2006. Domestic demand should be the main engine of growth, with both private investment and consumption picking up further, whereas net exports would contribute little. The unemployment rate is projected to decline slightly to 8¾ per cent in 2006. But there are significant downside risks to growth: on the external side, yet higher oil prices and the unwinding of global current account imbalances, which could result in renewed upward pressure on the euro exchange rate, could dent the recovery; a sharper than expected increase in long term interest rates in the United States could spill over to the euro area; and on the domestic side, household confidence and business expectations remain fragile. On the other hand, restored corporate profitability and balance sheets could spur business investment more strongly, especially if oil prices ease and consumption could recover once confidence has recovered more forcefully and lead to a lower savings rate than otherwise.
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Return to the Economic Survey of the Euro Area 2005 Homepage
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
Ein Policy Brief auf deutsch kann als pdf Datei heruntergeladen werden. Es enthält die Gesamtbeurteilung und Empfehlungen der OECD auf den Seiten oben.
To access the full version of the OECD Economic Survey of the Euro Area:
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Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
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Government officials can go to OLISnet's Publication Locator.
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For further information please contact the Euro Area Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Paul van den Noord, Boris Cournède, Line Vogt and Alexandra Janovskaia under the supervision of Peter Hoeller.
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