Economic growth must rest on domestic-driven demand, says Solbes, which means production capacities need increasing

Brussels, 30/11/2000 (Agence Europe) - When presenting the volume "EU economy: 2000 Review", the European Commissioner for Economic and monetary Affairs, Pedro Solbes:

• confirmed that the EU's economic situation was the best in a decade and that the growth rate should be maintained at around 3% in the coming years, despite the hike in the price of oil;
• stressed that economic policy had to be based on pursuing this "long-lasting, sustained, domestic-driven recovery", so as to achieve a high level of employment in the medium term and reduce the rate of unemployment to an "acceptable level";
• explained that it will be essential to conduct policies aimed at enhancing the productive capacity of the economy so that supply can continue to match sustained domestic-driven demand;
• observed that the "new economy" should contribute in realising this objective, but that sustained higher labour utilisation and higher investment would be the key.

Prospects, challenges and the "three risks"

The volume presented proceeds with an in-depth analysis of the prospects and challenges facing the EU in general and the euro area in particular. Four subjects are looked at in depth: a) the viability of recovery in the euro area; b) the impact of the "new economy" (according to the report's authors, the first signs of the emergence of the new economy in the EU are visible); c) the relationship between growth and environmental sustainability (the use of tax incentives and other "market-based" measures is considered as essential to combat pollution); d) real convergence and catching up by the less developed regions of the EU (this gradual catching-up of economic imbalances between Member States has been clearly established, but the situation is less clear at regional level).

The volume analyses in detail "three risks": the rise in the price of oil; global imbalances; insufficient growth of the EU's productive potential. According to a summary by the Commission's services, the study's authors reach the following conclusions:

1. An analytic comparison with earlier oil price crises provides good reasons to believe that the steep rise in oil prices will not derail the recovery. The supply-side impact of higher oil prices is likely to remain modest and the significant demand effects caused by the deterioration in terms of trade are unlikely to have more than a transitory impact, provided the continuation of a balanced policy mix is maintained;

2. The resilience of domestic demand and strong employment growth should allow the euro area to weather an orderly adjustment of the global economic and financial imbalances that have been building up for several years. An abrupt and discordant unwinding, however, could threaten the durability of the expansion in the euro area. In this context, the protracted weakness of the euro s a source of concern.

3. For the euro area to be able to grow at a pace of 3% (or more) without creating inflationary tensions over the medium-term, its productive potential will need to be enhanced. The increasing mobilisation of the labour force, the brightening of investment conditions, and the productivity enhancing effects of technical advances in the ICT sector, all suggest that the productive capacity in the euro area has expanded, and may continue to do so, thereby allowing supply to increase broadly in tandem with demand growth.