OECD: EU Must Revive Reform Push To Narrow Income Gap

The European Union must reduce barriers to the cross-border provision of services, make its energy markets more competitive, and aid the integration of retail banking if it is to close the income gap with the U.S. and other top performers, the Organization for Economic Cooperation and Development said Thursday.

In its first review of E.U. economic policy, the OECD said that while the performance of the 15 countries that were members of the bloc before it was enlarged in 2004 has improved, "there is no room for complacency." "Average incomes in the EU15 are almost a third lower than in the best performing OECD countries and more than a third of the working-age population remains inactive," the OECD said. The bloc stands accused of resting on its laurels, with the OECD noting that most of the reforms that have boosted growth date back to the 1990s. "Progress has slowed down recently," it said. The OECD identified the dominant services sector as a key source of weakness. Following years of debate, E.U. governments have agreed to a modest deregulation of the sector. But the OECD said trade in services among member states amounts to less than 5% of gross domestic product, with consumer protection and other regulations acting as barriers to the cross-border provision of services. "They can be out of all proportion to their objective and have the effect of shielding local firms from competition," the OECD said. The OECD said further liberalization of "network industries" such as electricity, gas, telecommunications, transport, ports and postal services is also a priority. It added that increased competition in those sectors could raise GDP by 1.5% to 2% annually. The energy sector is a particular source of concern, the OECD said. "Energy markets need to be linked together more tightly and opened up to competition," the OECD said. "This would lower prices for consumers and make energy supplies more secure." The OECD said vertically integrate "energy giants" that control networks, generation and supply "can treat competitors unfairly and shut out potential entrants." "Market concentration is high, with dominant firms often able to control wholesale prices," it said. The OECD said cross-border connections remain weak, thus limiting competition within the bloc. "Capacity is not expanding quickly enough because the financial incentives to do so are weak and the rules and responsibilities surrounding cross-border issues are unclear," the OECD said. The Paris-based think tank for the world's most developed economies said vertically integrated energy companies must be broken up "to prevent abuse of power and create a level playing field." In contrast to capital markets, which have been aided by the launch of the euro, the retail financial system has also been slow to integrate, the OECD said. "Retail banking - and mortgage markets especially - are mainly national," the OECD said, noting the government guarantees and resistance by supervisors make cross-border mergers complicated. The OECD said labor mobility within the E.U. remains very low, with only 4% of workers ever living or working in another member state.