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European Governments Blamed For Poor Growth

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European governments blamed for poor growth

By George Sivell

(Taken from: Times Online - 22 May 2006)

Economic growth in Europe is under threat from “inadequate macroeconomic policy” believes the OECD. The warning came the day before the international think tank is due to release its influential forecasts for member states.

At the same OECD Forum, the president of the European Central Bank called for increased wage flexibility and reductions in employment protection legislation to ease high rates of unemployment.

The OECD warning and the ECB call follow a policy of economic patriotism adopted by the French prime minister over foreign takeover bids for French companies and a successful mass revolt by the French earlier this year against a new job contract that would have made it much easier for youngsters in France to get jobs. The French are also running a high budget deficit, although have recently said they would make cutting it a priority.

Jean-Philippe Cotis, the chief economist at the OECD, singled out fiscal and labour market policies as the chief source for his concern. He said: “At the OECD we are worried about Europe’s growth prospects. We are worried because slow growth in our view largely reflects inadequate macroeconomic and social policies.”

The European Commission and the European Central Bank expect economic growth in the 12 countries using the euro to accelerate to 2.1 per cent this year from 1.3 percent in 2005 despite high oil prices and rising interest rates. Economic growth in the eurozone has been weak of late, with many blaming the euro. Eurozone growth has been weaker that the UK’s and looks feeble on a world scale. The OECD pointed to the growing productivity gap between the euro zone and the United States and the widening difference in gross domestic product per capita.

M Cotis told an OECD conference: “Growth has been hampered by inappropriate fiscal policies -- policies prone to cutting taxes and boosting spending at the peak of the cycle when it is necesary to save ammunition for the bad times when fiscal expansion is needed to kick start the economy.

He added: “Consumer demand has also suffered from weak channels of transmission which provided little support to activity in downturns”. He explained that some governments have implemented wrong labour market policies, discouraging older people from working to make room for the young, and cutting working hours to spread the existing workload among a larger number of people.

M Cotis pointed out: “Huge sums of public money have been thrown away to convince people not to work”

On economic reform Jean-Claude Trichet, president of the European Central Bank, said: “We expect a lot from this relaunching of the Lisbon agenda” adding “the earlier this happens, the earlier economic activity,employment and innovation in Europe can be lifted to a higher level and standard.”

On wage and employment legislation reform M Trichet said: “High unemployment rates in the euro area and in particular high youth unemployment rates, amounting to 17.8% in 2005, clearly suggest the need to spur labour demand.

“In this context, there is a need to promote wage flexibility and to address labour market rigidities. Furthermore, adjustments to the level of employment protection legislation are needed where they impede the hiring of younger and older workers."

While the OECD was drawing attention to Euro zone problems Brussles announced that the euro zone unexpectedly swung to a trade surplus in March from a month earlier,, confirming economic strengthening in the single currency area despite expensive oil. Eurostat, the European statistics office, said the surplus came to 1.2 billion euros ($1.5 billion) without seasonal adjustment, compared with a 3.1 billion deficit in February and beating economists’ consensus forecasts of a 3.1 billion euro shortfall. The surprise was attributed to good growth in exports from Europe.

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  • 302 Brexit, House prices and Summer 2020

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      • down 5% +
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