usa. during the 1990s, hourly labour productivity in the euro area grew on average by 1. 8 %, decelerating to 1. 2 % at the beginning of this decade. by contrast, us hourly labour productivity growth rose from a yearly average of 1. 5 % in the 1990s to 2. 8 % in the present decade. these disparities can broadly be explained by technological progress and the diffusion of innovation. for example, total factor productivity ( tfp ) growth, which is rightly considered as a pertinent proxy of technological progress, significantly declined in europe from an annual average of 1. 1 % during the 1990s to 0. 7 % between 2000 and 2004, while it accelerated from 0. 7 % to 1. 2 % over the same periods in the us. in addition, ict investment, which is a good indicator of the diffusion of innovation, represented 6 % of gdp in the us over the period 2000 - 2004 compared to 3 % in the euro area. groningen growth & development centre database ( ggdc ) of groningen university. second quarter 2005 eurostat lfs data. eurostat. eurostat. oecd ( 2006 ) factbook. figures for 2005 not yet available. bureau of labor statistics. eurostat. eurostat. source groningen database. the need for structural reforms the lack of sufficient structural reform in europe is, in my view, a major cause of the gap in economic growth between europe and the us. i will therefore now turn to structural reforms that have the potential to increase both euro area labour productivity growth and labour utilisation and therefore the long run growth potential. these structural reforms must aim at what the netherlands ’ former prime minister, wim kok, once summarised as “ europe needs more people in work, working more productively ”. looking ahead, the euro area economy is facing a number of important challenges, including rapid technological change, ageing populations as well as accelerating globalisation. these challenges will require major efforts to increase the adjustment capacity of the euro area in general and of workers in particular. without aiming to be exhaustive, i should like to highlight some of the key priorities for reform in four main areas, namely getting people into work, increasing competition, unlocking business potential and supporting an innovative environment. first of all, well - functioning labour markets are extremely important in fostering high economic growth. the divergent pattern displayed by growth and labour utilisation in the us and in europe has prompted

some economists to suggest the existence of a ‘ european model ’ and a ‘ us model ’, related to the trade - off between labour use and productivity. 10 one view is that the lower levels of gdp per capita growth in europe reflect european preferences for more leisure. however, we should bear in mind that lower participation rates are not necessarily solely associated with personal preferences, but are also triggered by legal and regulatory environment, tax systems and social institutions. benefit systems that are too generous discourage job search, early retirement schemes encourage early withdrawal from the labour market – employment rates for older workers aged 55 - 64 stood at just 40. 2 % in the euro area in 2005 11 and at around 60 % in the us 12 – and marginal tax rates that are too high discourage labour market entry and have a downward effect on average hours worked. to increase labour utilisation and get people into work, necessary labour supply side measures include the reform of tax and benefit systems to address these problems and increase incentives to work. measures aimed at reconciling motherhood with professional life, such as the provision of child care would contribute to raising participation rates. furthermore, the use of flexible forms of work such as part - time and temporary work would also provide further working incentives. 13 high unemployment rates in the euro area and in particular high youth unemployment rates, amounting to 17. 8 % in 2005, stresses the need to spur not only labour supply but also labour demand. 14 in this context, there is a need to promote wage flexibility and to address labour market rigidities. furthermore, adjustments to the level of employment protection legislation are needed where they impede the hiring of younger and older workers in particular. increasing competition towards establishing efficient and well - functioning product markets is another prerequisite for higher medium to long - term growth. 15 a lack of competition harms productivity trends by limiting production efficiency and by reducing the incentive to innovate. in the eu, some progress has been made in this regard. for example, several network industries, like telecommunications and air transport, are now fully or largely open to competition. and the reforms do pay off : the remarkable labour productivity growth performance in network industries in europe over the last ten years provides a perfect example of the positive impact on labour productivity growth of easing regulations and fostering competition. for example, in the telecommunication sector which was largely liberated in see blanchard, o. ( 2004 ) : “ the economic future of europe ”, the journal of economic perspectives, vol