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OECD Economic Surveys: Euro Area 2012

image of OECD Economic Surveys: Euro Area 2012

OECD's 2012 Economic Survey of the Euro examines recent economic developments, policy and prospects.  In addition it includes special chapters cover Euro Area imbalances and Euro Area governance and  structural reforms and their short-term impact.

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Structural reforms to create balanced growth and resolve imbalances

Structural reforms are needed to restore sustainable and balanced growth in the euro area. Medium-term growth prospects in the absence of reform are weak and there are downside risks to future labour productivity growth. An ambitious programme of structural reforms could transform this outlook and raise medium-term growth substantially, improve the sustainability of public and private debt, and create jobs and boost incomes. Achieving these gains would require measures across a broad range of areas including product market regulations, labour market institutions, social benefits and tax systems.Some reforms would have positive effects on growth even in the short run, even though the full long-run benefits of reforms are likely to take time to materialise. There is a risk that some reforms could have a negative immediate impact, but this is often over-stated. Reform packages should be designed to achieve the best trade-off between short- and long-run effects, as well as take into account political economy considerations. Good communication and credible commitments, in addition to a well-functioning financial system, can boost the short-run growth benefits.Weaknesses in structural policy settings contributed to the build-up of euro area imbalances, for instance through restrictive product market regulations that held back investment or wage-setting institutions that allowed pay to get out of line with productivity or generated weak growth. Reforms would help to resolve and avoid imbalances by tackling their underlying causes. In surplus economies, structural reforms especially in the service sectors could facilitate investment and domestic activity. In countries with high levels debt and large imbalances, reforms should be focused on raising productivity to improve debt sustainability, avoiding structural unemployment, attracting foreign capital and facilitating wage and price adjustment to regain competitiveness. These reforms should create favourable conditions for the development of new activities, particularly in export-oriented sectors.

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