The euro zone economy is likely to grow by 1.5% this year and by 2.5% in 2005, the Organisation for Economic Cooperation and Development forecast today. And it warned the 12-nation euro zone that it must accelerate reforms to catch up with other major world economies.
The OECD urged euro zone countries to be more ambitious in putting their public finances in order, irrespective of the deficit rules in the Stability and Growth Pact, saying that healthy public finances were needed to cope with ageing populations.
Sound budgets were vital to economic confidence and efficiency and the tax burden, already heavy, should not be increased, the OECD warned.
The euro zone economy was set for 'timid' recovery of 1.5% this year, after 0.5% in 2003, but recovery would gather steam into next year, the OECD said in a 180-page annual report.
It called for the zone's leaders to further free up labour markets, create a single market for services and do more to balance their budgets to spur growth across the continent.
'The euro area has shown disappointing resilience to shocks and its income gap against the best performing countries remains large and is widening,' the Paris-based body said, noting that the euro zone had been recovering more slowly than elsewhere from the global economic downturn of recent years.
While GDP growth is set to continue to recover to 2.5% next year and inflation to ease below 1.5%, 'unemployment is projected to stay stubbornly high' in the zone which has shared a single currency for the last five years.
'The closer integration that monetary union was seen as bringing has not yet translated into any visible strengthening of trend growth or increased dynamism. While monetary policy has done relatively well and established its credibility, fiscal policies have fared less well. Many euro area governments failed to take advantage of the last upturn to establish better budgetary positions,' it said.
The European Commission, the EU's executive, has forecast growth of 0.7% this year, better than in recent years but still disappointingly sluggish compared with major partners like the US and key economies in Asia.
'Structural reforms, required to move the euro area economy towards the ambitious targets set by the Lisbon summit in 2000, have been hesitant and piecemeal,' the OECD report said.
'In the past three years the world economy has been hit by an unusual series of negative shocks: the bursting of the bubble in the information and communication technology sector, accounting scandals, epidemics, terrorist attacks and geopolitical stress,' the OECD report said.
'While it is not surprising that the euro area went into a downturn following the 1995-2000 upswing, it is striking that growth has been recovering much more hesitantly than in many other OECD countries,' it said.
