Flexible workforces are needed in Europe

Amid upbeat assessments for growth, the OECD and Brussels have focused on deregulation. Katherine Butler and Yvette Cooper report

The European Commission and the Paris-based Organisation for Economic Co-operation and Development (OECD) both joined the call for further deregulation in European labour markets yesterday, as they released upbeat assessments of the prospects for growth in Europe in the next few years.

In its annual economic report the European Commission went further than before in calling on European Union (EU) governments to embrace worker flexibility as the key to casting off the millstone of persistently high unemployment.

Meanwhile, the OECD's annual survey of the French economy said that although growth was likely to rise above 2.5 per cent in the next few years, unemployment would remain high without further structural reform. It also predicted that on current policies France would not meet the Maastricht criteria for joining a single currency.

The European Commission stops short of advocating the American economic model which for "social and political reasons" could not, it says, be emulated in Europe. The US approach to job creation had caused a "significant" drop in real wage income for the low- skilled, the report said. Nevertheless, the Commission calls for "pragmatic solutions" including below minimum wages for the low skilled, for young people or the long-term unemployed, more flexibility in working time and greater use of voluntary part-time work. Employers' contributions at the lower end of the scale should be lowered with any revenue loss offset by taxes on pollution or other environmental levies. A Commission spokesman stressed, however, that the choice of measures remained strictly for national governments to decide.

Sticking to the upbeat growth and budgetary forecasts it issued last November, the Commission anticipates steady growth in 1997 despite growing concern over the ability of Germany - where unemployment has reached post- War records - to meet the EMU deficit criterion. But the report concedes question marks over budgetary consolidation in many member states could tarnish the rosy picture.

The Commission also warned that one-off accounting tricks employed by some governments to help their economies meet the entry criteria for EMU would not be enough to create the long-term budgetary stability which membership demands. "The main risk to the broadly favourable outlook would seem to reside in the possible emergence of doubts on the determination of governments to accomplish the process of budgetary consolidation," it said. Eurostat, the EU's statistical watchdog, will give its verdict next week on the acceptability of a range of measures taken to help member states such as Italy become founding members of the euro in 1999. Rome could be warned that its "Eurotax" is an inappropriate weapon towards a sustainable low budget deficit.

The report praises Britain's economic performance: the Commission says the UK is experiencing "a recovery of longer duration than in the rest of the EU". Debt has risen as a percentage of GDP but consolidation of the public finances has helped slow the increase and it is expected to peak at 57 per cent in 1997. This just below the 60 per cent maximum stipulated under the EMU qualifying rules. Britain's public deficit has already been forecast by the Commission to be 3.5 per cent of GDP in 1997 but the report admits this did not take account of the latest cuts in government expenditure and new measures to combat tax evasion and fraud. The government expects to bring the deficit down to 3 per cent of GDP this year but the report steers clear of predicting whether this will be achieved.

The OECD forecasts that France will just miss the Maastricht deficit criteria. Its annual report on the French economy predicts government borrowing in 1997 of 3.2 per cent. However, the OECD say the Maastricht criteria are "within reach". Government borrowing is forecast to fall to 3 per cent of GDP by 1998. The French government has frozen nominal spending in the state budget for 1997, which will mean serious cuts in real terms. That, combined with social security reforms and the sizeable payment into the government coffers from France Telecom, is bringing the deficit steadily down.

The report said, "Even if, as foreseen by the OECD's projection, there is some deficit slippage, there should be room to take the measures needed to bring it back on track. In the absence of additional measures, further progress in fiscal consolidation will be slow."

After two years of economic slowdown, the French economy is now expected to pick up. The OECD said: "The sharp fall in interest rates since late 1995 and an improving international environment should set the stage for stronger growth in coming years." Tight monetary policy - as the French government kept interest rates high so that the franc shadowed the mark - at the same time as fiscal consolidation and a slowdown elsewhere in Europe put pressure on the French economy. However, the report predicts that the French economy should now grow by 2.5 per cent this year and 2.6 per cent next year.

The OECD points out that France has made progress in reforming its labour market, it believes that more could still be done. Unemployment stands at a record 12.7 per cent. The OECD forecast that unemployment will remain around 12.5 per cent this year, and will fall to 12.1 per cent in 1998.

The report also points out that much of the problem is due to rising unemployment among the unskilled - a problem faced by all European economies including Britain.