of discipline can have on the climate of confidence. it seems that people in europe more and more have a “ ricardian perception ” of fiscal deficits. they are more aware of the enormous challenges and costs our ageing society entails. people in the different european countries are really worried about the long - term sustainability of public finances. high fiscal deficits will only worsen their anxiety and so incite them to increase their precautionary savings. in this context, the rules of the stability and growth pact are appropriate. it is not correct to describe it as a fiscal straitjacket. starting from a budget in balance or in surplus at the peak of the cycle, a country can let the automatic stabilisers fully operate when the activity is slowing down. the main problem with the pact is, i think, that better incentives are needed to respect fiscal discipline during good economic times. so i hope that the forthcoming recovery will be the right moment for the european governments now facing budgetary difficulties, to put their finances again on the right track, so that in that field it will be possible to reconcile short time flexibility with long term sustainability. in that case fiscal policy may again become an element of the required lasting macroeconomic stability. it is by paying more attention to the quality of public finances and by rendering the structure of taxes and that of expenses more growth oriented that governments can contribute to stimulating europe ’ s growth potential. i refer to expenditures such as education and improvement of human capital, public investment in infrastructure and research and development. r & d could become a comparative advantage of europe. at the moment europe invests 1. 9 p. c. of gdp in r & d and is thus lagging behind the us figures and the lisbon target ( 3 p. c. ). over the past years, european policymakers have become more aware of this growth problem europe is facing. so, in march 2000, during the lisbon summit, an ambitious strategy was adopted aiming to increase the rate of sustainable economic growth and even to enable europe to become the most competitive and dynamic knowledge - based economy in the world in 2010. in order to achieve such a strategic goal the lisbon agenda has brought together the different strands of reform policies on product, labour and capital markets aiming at promoting a more efficient allocation of resources and at higher growth potential. moreover, in order to facilitate monitoring of progress with reforms, quantitative targets have been fixed to measure progress in particular on the labour market in achieving for instance higher

to external shocks as those which have reduced its growth in the latest years and to increase its long term growth potential. europe has to cope with a structural problem of low economic growth. the growth performance of the euro area is weak from an international point of view, in particular vis - a - vis the united states : over the past 10 years the american economy has shown an average gdp growth of 3. 3 p. c., while the euro area could only reach an economic growth of 2 p. c. the euro area only succeeded in achieving a higher growth rate in 2001 when the united states were hit by a severe but short slowdown. the following years the american economy however showed a much stronger recovery than the euro area and now again acts as the main growth engine for the world economy. yet it is important to note that data for the eurozone are averages for twelve countries and that a country like finland in the euro area ( and more generally the nordic countries ) has booked in the most recent decade performances in the field of growth and employment rates which are comparable to those of the us and are much better than those of countries like germany and italy. given an unequal population growth - it is higher in the us - a further analysis shows that the gap in real gdp growth between the us and the euro area that opened up in the mid - 1990s is half the size if measured in per capita terms. the remainder is due to differences in productivity growth ( the increase in overall labour productivity in the us, measured by real gdp per person employed, reached on average 1. 9 p. c. in the last 10 years, almost twice as much as the 1 p. c. recorded in the euro area ) and to a much lower level of labour utilisation in the euro area. in the euro area unemployment rates are currently around 3 percentage points higher, labour force participation rates more than 10 percentage points lower and annual hours worked per employed person lower by more than 300 hours. europe is of course not the us. it has its own specificities which should be taken into account. so at least part of the gap in average hours worked between the us and the euro area should be attributed to structural preferences rather than to structural rigidites. however, when discussing this issue it has to be borne in mind that households also take into account the institutional environment, including tax, social security and pension systems when deciding on their labour supply. moreover, the problem to what extent the present european system is sustainable