Europe needs reforms to stimulate euro zone's economic growth

European employers were warned Tuesday to live wth strong euro, as higher oil prices and a borrowing crisis cast a shadow over the euro zone's economic growth.

Photo: Europe needs reforms to stimulate euro zone's economic growth

EU officials acknowledged Monday that the economy of the 13-nation euro area may grow by only 2 percent next year as forecast by the International Monetary Fund, but sounded unworried about the future.

EU Monetary Affairs Commissioner Joaquin Almunia said he broadly agreed with the IMF analysis. He had predicted on Nov. 9 that the euro-zone growth would slow to 2.2 percent in 2008 from 2.6 percent this year.

"If the information available today regarding oil prices or regarding the U.S. economy or regarding the financial market situation or regarding the exchange rates would have been integrated in our forecasts ... our forecast would have lower figures for growth," Almunia told reporters Monday evening.

But the EU's main business lobbying group, BusinessEurope, said tighter conditions mean many governments need to shift up a gear with labor market reforms that could boost growth.

"At a time when the competitiveness of the European Union should be the first priority, there is no alternative but for all policy decision-makers to live up to their responsibilities," said BusinessEurope secretary-general Phillipe de Buck.

The group warned that Germany was in danger of diluting earlier pension and unemployment benefit reforms, and criticized Italy for failing to cut high public spending and overall public debt or take action to entice people into the work force. But it gave French President Nicolas Sarkozy a cautious vote of confidence for trying to improve training and help small firms.

Companies that make their products in the euro area and sell in dollars - such as aircraft manufacturer Airbus - were justified in thinking about moving production out of Europe's industrial heartland, de Buck said.

"When the pain there is real, it's the duty of companies to look at other ways to produce their parts, their components at a competitive price," he said.

BusinessEurope economist Marc Stocker said companies had "a year or a year and a half to adjust to the situation."

"I think we have to live with a strong euro. The current level could continue for a while," he told reporters.

German Finance Minister Peer Steinbrueck told reporters on the margins of EU finance ministers' talks that his country was not suffering from the strong euro because 60 percent of its exports were within the European Union, while dollar imports were now cheaper.

"No one can objectively define a pain barrier" for exchange rates, he said.

Smaller European businesses are also upbeat about their prospects next year, according to a survey of 86,000 business people published by the EU chambers of commerce that said they feel "mostly unaffected by factors such as the weak dollar, rising energy costs and the recent credit crisis" although they were cautious about export sales.

Eurochambres president Pierre Simon said Europe's smaller businesses were confident that they could expand strongly in 2008 as more Europeans find work and they win more opportunities across borders.

In the wake of the subprime lending crisis, finance ministers from all 27 EU nations asked EU regulators to look at ordering national financial supervisors to cooperate with EU colleagues as part of an effort to step up financial stability and crisis planning across the bloc, an issue ministers will return to in April.

EU nations finally agreed - after years of debate - to change the way value added tax on business services is charged in an effort to curb fraud. From 2019, VAT on broadcasting and Internet services will be charged at the level where the customer is based, not where the supplier is headquartered.

Luxembourg, European home to Skype and eBay Inc., had earlier held up a deal for fear of losing a yearly 220 million EUR(US$323 million) in revenue that it has attracted by charging the EU minimum rate of 15 percent on e-commerce.

As part of the deal, the Czech Republic, Cyprus, Malta, Poland and Slovenia won the right to keep a 5 percent rate on building, restaurants and old-age care until 2010 - although EU states swore this would be the last time they would allow countries keep rates below the minimum.