OECD: Europe’s public finance reforms beginning to bear fruit

7 Apr 14
European countries are beginning to turn the corner toward recovery following the successful implementation of public finance reforms, the Organisation for Economic Co-Operation and Development has said

By Judith Ugwumadu | 7 April 2014

European countries are beginning to turn the corner toward recovery following the successful implementation of public finance reforms, the Organisation for Economic Co-Operation and Development has said.

Two OECD reports – on the eurozone area and on the European Union as a whole – set out the policies needed to reinforce sustainable economic growth and tackle the increase in inequality across European society.  

The economic survey of the euro area noted that six eurozone economies – Spain, Portugal, Greece, Germany, France and Italy – had account deficits that were now in surplus but government debt and joblessness were still too high. The report said debt should be brought down to more prudent levels, while fiscal consolidation needed to continue and focus on inclusive growth and employment. Further structural reforms could put the rebalancing process on a more sustainable footing, the OECD said.

With inflation rates remaining below the European Central Bank’s objective and output below potential, it proposed that monetary policy should remain accommodative for an extended period of time. 

Presenting the report in Brussels last week, Ángel Gurría, OECD secretary- general, said fiscal consolidation had a lot to do with economic progress, but he warned that government debt in many countries was still too high. 

He said: ‘Continued consolidation is needed, but without losing sight of the need to support inclusive growth and job creation.

‘Structural reforms are essential for creating employment and fostering productivity growth. In the euro area, labour productivity has increased by only 0.6% annually since 2000. This is half the OECD average of 1.2%.

‘There is much that can be done in this area. Our simulations show that if European countries were to implement best practices in a range of different structural reform areas, gains in aggregate output could amount to around 6% over the next decade. Potential gains are higher in countries such as Greece, Poland and Slovakia, where they amount to 10% or even 15%.’

To reinvigorate the Single Market and boost jobs, the report said that the European Services Directive, designed to make it easier for businesses to provide services in all member states must go further.  

Gurría said: ‘There are large potential growth effects of removing obstacles to competition, not least because services support many other sectors of the economy.

‘The proposed [European Services] Directives on the free movement of workers and on pension rights have the potential to considerably improve labour mobility across the EU. But reforms could be more ambitious by eliminating double taxation of pensions, developing automatic qualification recognition and eliminating unjustified and disproportionate national barriers in regulated professions.’

The OECD’s second report, The economic survey of the EU, noted that high tax burdens, rigid labour laws, barriers to competition, and slow innovation dynamics had weighed on economic growth. It stated that it was essential for economies to promote the labour and product market mobility necessary for economies to thrive. 

Praising economies like Ireland, Greece, Portugal and Spain for making considerable progress in implementing the structural reforms needed to modernise their economies, the report noted that deeper and broader action was needed across the whole Europe.

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