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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, published on 4 January 2007.
After several false starts, the economic recovery has taken hold. Activity was strong in 2006, firms and households are more confident about the future, business investment has picked up and unemployment has fallen below 8% for the first time since 2001. There are encouraging signs that the recovery is broadening to embrace household consumption as well. If in addition structural reforms continue, the expansion will become durable and self-sustaining, a prospect also supported by sound corporate and household balance sheets and favourable financing conditions. All this is good news, though it should be kept in perspective. Growth of around 2¼ per cent per annum projected 2007 and 2008 is still modest by OECD standards, although the growth gap is smaller when measured on a per capita basis. Still, it could take until 2008 for cyclical slack to be fully absorbed.
With the recovery underway, attention can shift back to the euro area’s longer-term challenges: subdued potential growth and a lack of resilience due to structural shortcomings. The early years of monetary union have shown that less flexible economies can have a rough ride, missing out on the full benefits of the single currency. Structural rigidities tend to reduce growth, make inflation more persistent and reduce the economy’s ability to absorb shocks. Some countries are more flexible than others, and this matters because it implies that the common monetary policy will often be too loose for some and too tight for others. For that reason, the single currency would be more beneficial for everyone if structural reforms were put in place so that economies became more flexible and more tightly integrated.
The priorities for national and European authorities include: i) reducing labour market rigidities so that economies can cope with change more easily. A key part of this is to make wages more flexible; ii) boosting competition, especially in the protected service sector, to make inflation less sticky and take some of the pressure off monetary policy; and iii) continuing to integrate and develop financial markets. Some countries are already a long way down the road of structural reform, and are performing well as a result. Others have some catching up to do.
Monetary policy has succeeded in anchoring inflation expectations around the price stability objective, despite the energy price shock. The monetary and economic analyses composing the ECB’s strategy are intended to complement each other and thereby aim to develop a deeper insight into the risks to price stability at various horizons in order to ensure that the most appropriate policy decisions are made. However, the framework poses communication challenges, so the ECB should continue to enhance its communication strategy.
The recovery creates a golden opportunity to get fiscal policy back on track. Budget plans are falling short of what is needed to sustain welfare systems over the long term. Member states need to make greater efforts to achieve budget balance and pay down debt. An important tool to help achieve this would be to improve budgeting practices and national fiscal frameworks, for example with expenditure, deficit and debt targets, greater transparency and more focus on the medium term. It is too early to say whether the revisions to the Stability and Growth Pact in 2005 have helped. They have the potential to deliver better fiscal outcomes because the Pact may have more “ownership” by member states. However, it could also be less effective by making it easier to postpone adjustment. Thorough implementation is therefore important.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of the Euro Area 2007 is available from:
For further information please contact the EU Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by David Rae and Boris Cournède under the supervision of Peter Hoeller.