The International Monetary Fund yesterday called for decisive leadership from the European Union to help free up labour markets and encourage longer working hours across the euro zone.
In its latest report on the region, it also urged the EU to "name and shame" governments that stall on reforms, saying the euro zone's "key structural challenge" was "raising longer-term growth, in the first instance by strengthening the incentives to work".
Growth in the euro zone has been lacklustre, with its problems widely blamed on inflexible labour markets, particularly in Germany and France, the zone's two largest economies.
The Washington-based institute revised up its euro zone growth forecast for 2004 from 1.75 per cent to 2 per cent. But it revised down by half a percentage point, also to 2 per cent, its estimate of the potential growth rate, which takes account of factors such as demographic change.
It warned that the greater use of labour or "labour utilisation" in the economy was essential to sustain generous welfare systems.
Separately, in an apparent clash with the European Central Bank, the IMF suggested that the fragility of domestic demand put "more weight on the need to signal patience" on when it might move on interest rates than the ECB's current stance that "all options are open". However, the IMF saw no need to cut interest rates.
It also said government attempts to create industrial "national champions" would not be compatible with fostering free competition.
The IMF's comments follow ground-breaking labour deals struck this summer by German companies DaimlerChrysler, Siemens and Bosch to increase working hours.
The European Commission has put more emphasis on the deterioration in euro zone productivity growth since the mid-1990s.
But Michael Deppler, head of the IMF's European department, said productivity levels were "basically on a par" with the US.
"The real lag is in terms of the use of labour and that is where the catch-up needs to be," he explained.
While welcoming steps taken by individual companies, Mr Deppler urged a "change of mindset". National governments were attempting reform, but "we see a need for Brussels to take a leadership role".
The IMF said the EU's Lisbon agenda, agreed in 2000 and aimed at making the region the most competitive knowledge-based economy by 2010, should be reworked to give greater priority to boosting work incentives.
In the discussion by the IMF's executive board, most directors considered that peer pressure on governments could be strengthened, including through ranking and publicising country performance.
Mr Deppler said the Lisbon agenda reflected a Brussels agenda where "everything is a priority and thus nothing is a priority". - (Financial Times Service)
