Eurozone economic growth ‘will halve by 2030’ without reforms

Economic growth in the eurozone is forecast to halve over the next 25 years if there are no changes in its number of workers, productivity and structural unemployment.

In its economic survey of the eurozone published last week, the Organisation for Economic Cooperation and Development says economic growth is set to fall from 2% between 2005 and 2010 to 1.25% between 2010 and 2020. It will then drop to 1% in the following decade.

If this scenario is correct, the eurozone’s income gap per head with America will widen from its current 30% to 37.5% by 2020.

For the eurozone to achieve its target growth of 3% in 2010 and beyond, growth will have to at least double against its unchanged policies. For this to happen, productivity growth and labour force participation will have to “rise substantially”.

The OECD says the European economy is in better shape than it would have been as a result of the introduction of the euro. Introduction of the new currency has led to “sustained low interest rates and enhanced financial stability”. It blames the lack of any strengthening of growth on factors that must be tackled through structural reform rather than macroeconomic stabilisation.

The areas that need addressing include an improvement in the functioning of labour markets. While there are signs of change occurring slowly, particularly in small countries, the OECD says much needs to be done.

The OECD says: “Countries should reduce the long duration of unemployment benefits, ease strict employment protection legislation for permanent jobs, reduce incentives to retire early, cut the cost of low-skilled labour and lower tax on labour.” It adds that obstacles to labour mobility should be removed.

The EU must quicken the pace of integration, says the OECD. It highlights the need for integrating service markets and the adoption and implementation of the services directive.

The OECD adds that the EU needs to promote innovation, the lack of which has helped to limit productivity growth in the region.

Without any significant alteration in the rate of inflation, the OECD does not expect the European Central Bank to change interest rates from 2%.