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Europe: Italian Official Says EU Needs To Reform Labor Markets

A top Italian official is warning that Europe's economic recovery may be short-lived if the continent fails to make its labor market more flexible. RFE/RL correspondent Ben Partridge heard the official, Italian treasury director Mario Draghi, speak recently in London from where he sends this report.

London, 17 November 1999 (RFE/RL) -- The head of the Italian treasury has warned that the present economic recovery in Europe may not be sustainable unless EU countries do more to reform their labor markets to make them more flexible.

Professor Mario Draghi, the director-general of the treasury (finance ministry) in Rome, spoke in London about future economic policy challenges facing the European Union. He says continental EU countries are seeing the first signs of an economic recovery after an "unimpressive year" in which the economies expanded on average only 1.6 percent and unemployment remained high at 10 percent.

"All over continental Europe, industrial production is increasing, fast in some cases, orders are going up, inventories are going down, and more or less, there's a sense that recovery is well under way. Then the question is: how long will this recovery be? How sustainable will be this recovery?"

Draghi says the answer will depend on two factors: what happens to the U.S. economy, and whether the EU countries introduce structural reforms to their labor markets.

He says the U.S. economy is set to experience what he called an "adjustment," in other words a slowdown, after an unprecedented period of growth because of its rising trade deficit and -- in the view of some -- inflated stock prices.

But regardless of whether this adjustment is mild or severe, Draghi says the challenge for European countries is to have in place economic policies that can continue to produce sustainable and non-inflationary growth.

Draghi says this will depend on structural changes to their labor markets that can create new jobs, boost the supply of goods and services, and decrease workplace discrimination by age and gender.

European economies have been widely criticized for being inflexible -- for emphasizing job security and high unemployment benefits over labor mobility and relatively low corporate and personal income taxes.

Draghi says EU countries should put in place an employment-friendly regulatory framework which strikes a balance between labor market flexibility and job security for workers. Labor markets need to be more innovative, to encourage working-time flexibility, and to remove obstacles to voluntary part-time jobs.

Draghi says social protection should be shifted toward policies designed to get and maintain people in jobs, rather than simply transferring public income to the unemployed, or facilitating the early exit of workers from the market through early retirement.

Draghi also says European countries should adopt labor market policies aimed at improving the skills and quality of workers.

"We have to promote equal opportunities, to reinforce life-long learning, to exploit the potential of the service sector, to create a better business climate, to re-examine the tax benefit system, to support participation of all the workers, and to promote the inclusion of disadvantaged groups."

Draghi says it is vital to reduce high taxes on workers which impede economic growth, lead to disincentives to create or take up jobs, and increase the number of jobs in the 'black' economy.

"Here, the record of several continental European countries is, as it is on the whole, rather abysmal. We talk about a tax [burden] which can reach 50 percent of the take-home pay. So it's difficult to think how can one promote job creation with a tax rate of this size."

Draghi says the lesson from the U.S. is that new forces are bringing about change on global labor markets. These forces, driven by technology, mostly in computing and telecommunications, bring new opportunities, new products, new competition. The EU needs to be flexible -- or its economic recovery will prove short-lived.

Draghi was speaking to the Royal Institute of International Affairs in London.