Adjustments should be made to employment legislation where it impedes the hiring of younger and older workers in particular. For instance, Denmark, Ireland and the Netherlands – which, by the way, are all three, de jure or de facto for Denmark, in the euro area – have achieved success in reducing unemployment and stimulating job creation, despite significantly different economic conditions 8 . In 2006 the unemployment rate in these countries stood below 4.5%, while their overall employment rate was above or close to the US level, namely 72 %. To achieve such remarkable success, these countries reformed their tax and benefit systems by reducing for example tax wedges on labour income and by carrying out a stricter enforcement of job search rules and a better surveillance of eligibility. They also increased, when and where needed, the flexibility of their labour market. 5  See “The economic costs of non-Lisbon: A survey of the literature on the economic impact of Lisbon-type reforms” by Directorate-General for Economic and Financial Affairs, European Commission Occasional papers No 16, March 2005 EC. See “Demographic change in the euro area: projections and consequences” ECB Monthly Bulletin October 2006. 6  See Blanchard, O. (2004): “The economic future of Europe”, The Journal of Economic Perspectives, vol. 18, pp. 3-26; and also Gordon, R. J. (2004): “Two centuries of economic growth: Europe chasing the American frontier”, CEPR Discussion Paper, No. 4415.
The economic performance of the euro area since the mid-1990s Since 1996, the annual growth rate for the euro area has averaged 2.1% per year compared to 3.3% in the US. What are the fundamental causes of this unsatisfactory low trend growth in the euro area? The answers can be found by looking at the factors that determine potential or long-term economic growth, namely 1 : •  The degree of labour utilisation,  •  Productivity growth,  •  And the demographic trends. - Over the period 1996-2006, the euro area witnessed a slight improvement in the utilisation of labour, which increased on average by 0.4% per year (compared with 0.1% in the US) when defined as the total annual hours worked divided by the total population. Labour utilisation reflects the extent to which the potential labour resources in an economy are actually utilised and therefore have a direct influence on output growth. This improvement in labour utilisation mainly reflects the significant rise in the euro area overall employment rate from 58% in 1996 to 64.4% in 2006, accompanied by a decline in the aggregate unemployment rate from 10.7% to 7.9%. Although this is a very encouraging fact, which shows that the positive employment effect we witnessed over the last ten years has significantly helped us to partly counteract the growth differential to the US, one has to remain aware of the inferior starting position of euro area countries.