Germany dragging down Europe

With the Iraq war over and oil prices stabilizing, inadequate structural reform by Germany, Japan and a handful of other countries remains one of the last obstacles to a rapid global recovery, the OECD says in its latest report.

"The apparent rapid resolution to the conflict, and the more settled geopolitical climate that is assumed to follow, should allow investor and consumer confidence to strengthen gradually," the Organization for Economic Cooperation and Development said in its Economic Outlook report.

Amid consumer-friendly interest rates and tax policies in the U.S. and elsewhere, and falling core inflation, oil prices now looked set to stabilize at around $25 per barrel, the Paris-based organization said.

"There remains, however, a degree of uncertainty regarding the underlying cyclical momentum of the OECD-area economy, relating to persistent imbalances and, in some economies, insufficient structural reform."

In its biannual Outlook reports, the OECD frequently cites U.S.-style structural policy objectives - including labor market flexibility and low entry barriers to product markets - as worthy goals for economies seeking to boost their potential growth.

The report singled out Germany, where it said failure to tackle labor market rigidities was damaging the euro-zone economy as a whole.

"In the case of Germany, structural bottlenecks undermine domestic flexibility," it said. "Given Germany's relative size, its lack of resilience has significant spill-over effects to neighboring European Union countries, dragging down the performance of the euro area at large."

On the other hand, economic growth in Australia, Canada, France and Spain had suffered relatively little from the global downturn, the OECD said.

Nevertheless, OECD chief economist Jean-Philippe Cotis said that France was not far behind Germany in terms of its need for structural reform.

"Japan and Germany are two countries where the situation is particularly bad," Cotis said. "Then of course you have other countries which also have serious problems, and France is one of them."

The OECD report endorsed the widely held view that French growth had been supported by consumer spending, in turn nurtured by tax cuts that have exacerbated a public deficit already stretched beyond the EU limit of 3 percent of gross domestic product.

It also noted that France shared some of Germany's structural weaknesses, predicting 9.3 unemployment in 2003 that would be slow to come down, even during a sharp recovery, because of the inflexibility of its labor markets.

Cotis said France needed drastic structural reform to boost employment while also slashing its spending.