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The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of the European Union published on 20 September 2007.
It is fifty years since the Treaty of Rome was signed. The treaty created the European Economic Community, set the goal of ever closer union among the peoples of Europe and laid down the “four freedoms” where goods, services, people and capital could move freely among the member countries. The results have been impressive. It has brought prosperity, the single market for goods among 500 million consumers works fairly well, and there has been good progress in reshaping network industries and financial markets. The Union has grown from six to 27 countries, thirteen of which now share a single currency. The EU now has a larger GDP than the United States, it is the world’s biggest exporter, and European companies are among the global leaders in most industries.
Economic reforms are paying off, especially in the countries that started early. Various member states have improved their welfare and pension policies and to a lesser extent employment policies, which has helped raise labour market participation and cut joblessness. The slide in productivity growth through much of the 1990s and early 2000s has stopped. Short-term prospects look bright as a strong cyclical rebound is underway. Output grew by just under 3% last year and prospects are for above-potential growth in 2007 and 2008 as well. So long as world economic growth remains buoyant, the short-term outlook for the EU economy looks good.
The gap in GDP per capita
Percentage point differences in PPP-based GDP per capita relative to the United States, 2005
1. Hours worked per capita (or employment per capita for EU12 and its members).
2. GDP per hour worked (or GDP per employed for EU12 and its members).
Source: Eurostat; OECD, Productivity database, September 2006.
Yet, the European project has faced important challenges during the past few years. The constitutional treaty was not endorsed by some member states, the debate around the services directive was difficult and protection of domestic companies remains a problem. While some countries have learned that liberalisation works, others are lagging behind. The process of harmonising laws across member states is proving harder, partly because the low hanging fruit has gone but also because the policy agenda is colliding with differences over economic and social objectives and the best way to achieve them. At the same time, the EU is facing the challenges of technological change, globalisation, population ageing and climate change. Globalisation is a great opportunity for adaptable economies but punishes rigid ones. Ageing populations will weigh on medium-term growth prospects and put Europe’s health and pension systems, some of which are financially unsustainable in the long term, under pressure.
Structural reforms would help boost growth
Further structural reforms are needed to cope with these challenges. While economic prospects are improving, there is no room for complacency. Average incomes in the EU15 are almost a third lower than in the best performing OECD countries and more than a third of the working-age population remains inactive. The employment rate has risen, but it remains below the EU’s target of 70%, and nearly half of the unemployed have been out of work for at least a year. The need for reform is also highlighted by differences within Europe itself. Some countries have performed very well, both in terms of productivity and job growth. The challenge is for Europe’s laggards to learn from its best performers. The potential gains in terms of higher incomes are large, especially for the countries furthest behind the frontier. And as some European countries have shown, economic reform and stronger growth do not necessarily come at the cost of a country’s social goals. With well-designed tax and benefit policies, a dynamic business environment can be combined with high levels of equity and social inclusion. In this context, the Lisbon Strategy for Growth and Jobs provides a comprehensive framework that focuses on both community and member state structural reform measures. Member states commit to and implement national reform programmes within common policy orientations agreed and monitored at the EU level, thus reinforcing policy co-ordination across the EU.
Regulation is not necessarily delivering on social objectives
1. Job security is a combined index of survey responses to questions about perceived job security (from Eurobarometer and ISSP).
Source: Eurobarometer and ISSP; Förster, M. and M. Mira d'Ercole (2005), “Income Distribution and Poverty in OECD countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Papers, No. 22; OECD calculations.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the EU 2007 is available from:
For further information please contact the EU Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by David Rae, Boris Cournède and Marte Sollie under the supervision of Peter Hoeller.