These observations are calling urgently for structural reforms, in particular all the reforms that would augment the flexibility of all markets – labour, goods and services and financial – in the euro area economy. The need for structural reforms Understanding the reasons of these developments is very important. As also stressed by the OECD 5 , the lack of sufficient structural reform in Europe is a major cause of the gap in economic growth between Europe and the US. I will therefore now turn to structural reforms that have the potential to increase both euro area labour productivity growth and labour utilisation and therefore the long run growth potential. The euro area economy is facing a number of important challenges, including rapid technological change, ageing populations as well as accelerating globalisation. Moreover, the long-term sustainability of public finances in the euro area should be improved pursuing pension as well as health care reforms. These challenges will require major efforts to increase the adjustment capacity of the euro area in general and of workers in particular. The adverse consequences arising from an ageing population could only be solved by an extension of the working life and/or substantial inward migration. Other challenges, such as globalisation and increased competition, are also accompanied by increased opportunities: globalisation provides incentives for firms and workers to excel in what they do best while outsourcing some goods and services at lower costs on a global scale, providing consumers with substantial benefits 6 .
To increase labour utilisation and get people into work, necessary labour supply side measures include the reform of tax and benefit systems to address these problems and increase incentives to work. Measures aimed at reconciling motherhood with professional life, such as the provision of child care, may raise participation rates. Furthermore, the use of flexible forms of work such as part-time 8 and temporary work may also provide further working incentives. High unemployment rates in the euro area and in particular high youth unemployment rates, amounting to 17.8% in 2005, clearly suggest the need to spur labour demand. In this context, there is a need to promote wage flexibility and to address labour market rigidities. Furthermore, adjustments to the level of employment protection legislation are needed where they impede the hiring of younger and older workers in particular. Regarding the second priority area for reforms that I would like to mention, increasing competition and establishing efficient and well-functioning product markets is another prerequisite for higher medium to long-term growth. 9 The economic literature generally leads to the conclusion that competition is an important factor explaining both productivity and price developments 10 . A lack of competition harms productivity trends by limiting production efficiency and by reducing the incentive to innovate. Moreover, increased competition is generally associated with a lower price level brought about by a reduction in the mark-ups of firms, for given marginal costs.