Is Europe Holding the Rest of the World Back?

Amid the global search for economic growth, it appears that Europe continues to be a drag. With the U.S. and Japan leading the way in global recovery, the Organisation for Economic Cooperation and Development forecasts overall growth of 3.1 percent in 2013, which is 0.3 percent lower than it had predicted last November.

The U.S. is expected to grow by almost 2 percent this year and at 2.8 percent in 2014 — all good news for the world’s largest economy. However, Europe is facing a contraction of 0.6 percent this year, with only around 1 percent growth slated for next year. Germany continues to carry the euro zone, as its growth is expected to more than double to 1.9 percent next year.

While the OECD urged the European Central Bank to be active and help banks lend, the European Commission is focusing on the domestic policy of its countries. Specifically, the commission is worried about labor and service markets, seeking to get member countries to adopt more competitive policies in the face of negative growth.

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Speaking at a news conference, European Commission President Jose Manuel Barroso told reporters that “member states should now intensify their efforts on structural reforms for competitiveness.” He added: “We need to reform, and reform now. The cost of inaction will be very high.”

Specifically the Commission targeted France, where the need for a more flexible labor market is hampering employers. Under the current law, it is difficult for French employers to fire someone on a permanent contract, creating stagnation in hiring. Moreover, the country has one of the highest minimum wage laws in the EU at 1,430 euros per month, or 9.43 euro an hour. That cost ultimately gets passed on to the consumer many times, and makes French goods less competitive.

The OECD thought that U.S. Federal Reserve Chairman Ben Bernanke’s potential rollback of asset purchasing may be wise, though it warned him to do so in a fashion that wouldn’t cause a market selloff, which could result in spiking bond rates.

Britain’s Help to Buy program, where the government helps homebuyers get loans and mortgage, continues to cause concern for those hoping for a strong U.K. recovery. There is worry that creating such credit for homebuyers could increase the price of housing in a bubble of sorts, especially if the overall supply of housing in the U.K. does not expand with rising purchases.

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The OECD praised the Japanese economy, lauding the central bank’s efforts to expand the monetary supply and tackle the issue of deflation, which has plagued Japan for years. The nation’s government, under President Shinzo Abe, is promoting massive monetary stimulus, with the Bank of Japan buying around 70 percent of newly issued government bonds. While there continues to be optimism over the results of these efforts, Japanese markets were behaving somewhat abnormally, as sales of bonds by private investors led to surprisingly higher yields. Bank of Japan Gov Haruhiko Kuroda said, “Communication and dialogue with the markets should be strengthened.”

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