The west’s leading economic thinktank warned yesterday that the struggling eurozone risked falling further behind the US over the next five years unless it embarks on a programme of deep-seated structural reform.
In a downbeat assessment of prospects for the 12-nation single currency area, the Organisation for Economic Cooperation and Development said plans to turn Europe into the most competitive and dynamic economy in the world by 2010 now looked ”very challenging”.
On the day that the European Central Bank kept interest rates unchanged at 2%, the OECD urged that the Frankfurt-based central bank should ”stand ready” to cut the cost of borrowing should there be any evidence of further economic weakness but said lower interest rates and bigger budget deficits were not the long term solution to Europe’s problems.
”Fiddling with budgets and interest rates is peanuts in comparison with the potential benefit of getting structural reforms right,” said OECD economist Paul van den Noord.
The Paris-based thinktank, which has 30 members from the world’s richest countries, predicted that even with interest rates unchanged for the next 12 months, growth in the eurozone would be only 2%, a cut of 0,4% points on its forecasts of only two months ago.
By contrast, figures from the US yesterday showed growth in the second quarter running at an annual rate of 2,4%, far higher than Wall Street had been expecting. Despite the drag on growth from America’s $500-billion yearly trade deficit, buoyant consumer spending and an expansion in military spending for the war in Iraq raised hopes in the financial markets that the US might at last be on the point of a sustained recovery from the slowdown that started in the spring of 2000.
Optimism was further strengthened by a third weekly decline in the number of new jobless claims to a five month low of 388 000 and an upbeat survey of manufacturing in the midwest.
Shares in New York rose strongly, while the dollar gained ground against a euro undermined both by the OECD report and by data from the eurozone. French unemployment rose to a three year high of 9,5%, while the European commission’s latest survey of economic sentiment showed a slight fall in July.
The OECD said that the eurozone had been affected by the weakness of the global economy but stressed that it had ”shown less resilience to these shocks than many other parts of the OECD area. This may reflect structural and institutional rigidities, which have inhibited a brisk rebound in domestic demand”.
It added that ”on unchanged policies, a growth gap between the US and the eurozone will persist. Labour productivity would grow by 1,5% a year over the period 2003-08, as compared with 2,25% for the US”.
The OECD said that living standards in the US had outpaced those in the eurozone by 0,4 points a year between 1996 and 2002, and the gap was set to persist for the next five years. ”With structural unemployment declining rather little and remaining, at 7,5%, 2,5 percentage points above the US rate, trend GDP growth would be 1,75% for the eurozone in per capita terms, as compared with 2,25% for the US.” – Guardian Unlimited Â