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The following is the Executive Summary of the OECD assessment and recommendations, taken from the Economic Survey of the Euro Area 2005 published on 12 July 2005.
Economic policy in the euro area pursues the objectives of achieving solid economic growth, a better performance of labour markets and restoring sound public finances in the context of a single monetary policy which aims at maintaining price stability. Although inflation has remained just above the ECB’s definition of price stability, longer-term inflation expectations remain firmly anchored to price stability. However, progress towards the other goals has been disappointing thus far partly owing to adverse shocks such as higher oil prices or exchange rate shifts. On unchanged policies and with population ageing the euro area’s potential output growth is set to decelerate over the next decades and eventually stabilises at around one per cent per annum by about 2020, as illustrated in the following scenario:
This would widen the income gap with the United States considerably. Determination in pursuing structural reforms is needed to boost growth prospects and resume economic convergence with the OECD’s best performers. At the same time macroeconomic stability needs to be assured:
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Monetary policy is expected to remain accommodative as long as the medium-term inflation outlook is in line with price stability. The recovery has been sluggish thus far and inflation has responded little to widening slack. Since the start of the recovery, the ECB has kept its main policy rate on hold at 2%. It would seem reasonable for the ECB to hold its rate stable as long as the outlook for price developments remains in line with price stability over the medium term, although policy would need to act if the inflation outlook were to change. Structural reforms would help to reduce inflation persistence and enhance the effectiveness of a stability-oriented monetary policy.
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Labour market institutions must be overhauled so as to remove obstacles and disincentives to work. To establish a well-functioning labour market across the euro area, reforms should include adapting wage formation systems, easing employment protection legislation, cutting incentives to retire early, or claim disability, lowering the tax wedge on labour and removing the obstacles to mobility.
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Regulations impeding competition within and trade across countries should be removed and innovation fostered. It is particularly important to preserve the core of the provisions of the proposed services directive. Further progress is needed in reducing segmentation in financial and transport markets. Policy settings for innovation should be improved. Changes should comprise implementing the Community Patent and, at the national level, deregulating product markets and basing research funding and researchers’ pay on the results achieved.
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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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Readers at subscribing institutions can go to SourceOECD, our online library.
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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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