In its first economic survey of the European Union, the OECD has said the 27-nation club must embrace liberalisation, make its workforce more mobile, undertake structural reforms and complete the internal market if it is to have a bright economic future in the long term.
According to the Paris-based economic think-tank, the immediate economic outlook for the EU is bright, but it must keep up with its internal reforms, which it says have slowed.
"So long as world economic growth remains buoyant, the short-term outlook for the EU economy looks good," says the wide-ranging report.
"The slide in productivity growth through much of the 1990s and early 2000s has stopped. Short-term prospects look bright as a strong cyclical rebound is under way. Output grew by just under 3 per cent last year and prospects are for above-potential growth in 2007 and 2008."
But the report says there is no time for "complacency", noting that most of the bloc's growth-inducing reforms took place in the 1990s. "Progress has slowed down recently," it said.
"Average incomes in the EU15 are almost a third lower than in the best-performing OECD countries and more than a third of the working-age population remains inactive."
It points out that further structural reforms are needed to cope with challenges such as globalisation, technological change and an ageing population, but notes that Europe is having difficulty agreeing on the remaining big liberalisation areas it has to deal with because of different ideological approaches among member states.
"The policy agenda is colliding with differences over economic and social objectives and the best way to achieve them. While some countries have learned that liberalisation works, others are lagging behind."
It points to completion of the services market as one of the key areas where Europe has to make progress.
Europe did attempt to push through an extensive Bill on liberalising the internal market in services in 2004, but it proved too controversial, with fears in countries such as France and Germany that their high-welfare, high-wage states would be undermined by cheap labour.
In the end, the European Commission managed only to get a substantially watered-down version through the European Parliament after resubmitting the proposal - something the report said was not enough.
"Trade in services among member states amounts to less than 5 per cent of gross domestic product, with consumer protection and other regulations acting as barriers to the cross-border provision of services," says the report.
Although liberalisation of the air transport and telecommunications sectors has meant lower prices for consumers, substantial barriers to competition remained in place, it said. It urged further market opening in electricity, gas, telecommunications, transport, ports and postal services.
Coinciding with the major push announced by the European Commission on Wednesday to open up the energy sector, the OECD said: "Energy markets need to be linked together more tightly and opened up to competition."
"This would lower prices for consumers and make energy supplies more secure." The Common Agricultural Policy also comes in for a bashing. It leads to consumers paying more for certain types of food and it "traps resources in a low productivity sector".
On top of all the internal market reform that is needed, the OECD notes that the European workforce is not mobile enough.
Only 4 per cent of the workforce has ever lived and worked in another member state - something it says that cannot solely be put down to language barriers.
Instead, other factors, such as the lack of pension portability and continued glitches with recognising qualifications from other member states, probably make people stay put.
On the other hand it notes that member states that decided to keep their labour doors open to workers from eastern European states that joined the EU in 2004 - as Ireland did - have "benefited through better job matching, a reduction in structural unemployment and the easing of labour shortages".
Summing up, the report says that the EU "has achieved a great deal but there is still much to do in order to create a more dynamic and integrated European economy".
OECD in the EU: Main Recommendations:
1. On the single market
* Continue to push for greater market openness in goods and services.
* In telecoms, implement proposals for phasing out regulation in competitive segments.
* Introducing a more market-based approach to spectrum management, facilitating pan-European service provision, strengthening regulators' enforcement powers and ensuring consistency in remedies.
* Keep pushing for an EU port policy that includes greater transparency and market access.
2. Financial services
* Push ahead with the existing reform agenda but avoid over-regulation.
* Full mutual recognition or harmonisation needed for retail banking services, especially mortgages.
3. The regulatory framework
* Use regulatory impact assessments for all proposals across all EU institutions.
4. Competition policy
* Defend internal market rules and continue modernising competition law and policy.
5. Agriculture and trade
* In the context of the Doha trade round, reduce the level of support to agriculture.
6. Cohesion policy
* Ensure that funds are allocated in the most effective way. This could involve: Introducing sunset clauses and independent project assessments so that programmes that are not performing are shut down.
7. Labour mobility
* Remove restrictions on workers from new member states.
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