jean - claude trichet : how can we increase growth potential in europe? speech by jean - claude trichet, president of the european central bank, at the suomi areena 2007, pori, finland, 20 july 2007. * * * dear governor liikanen, i would first like to thank you very warmly for inviting me on the occasion of the “ suomi areena 2007 ” event. it is a pleasure and a honour to be here today and to share with you my views on “ how can we increase growth potential in europe ”. in light of the partly disappointing euro area economic performance in the past, it is a major policy issue. by contrast, the impressive performance of the finnish economy, with output and productivity growth over the second half of the 1990s among the highest in the european countries, [ real gdp and hourly labour productivity grew on average by 3. 8 % and 2. 7 % respectively between 1996 and 2006 ], offers a good illustration of what could be done to increase growth potential in europe. the transformation of the finnish economy over the last decades represents one of the examples of the “ knowledge based - economy ” taking hold in europe. against this background, i will first review the past economic growth performance of the euro area in comparison to the us and focus on some of the underlying factors of potential output growth. then i will elaborate on the reforms which i consider essential to increase the potential growth rate of europe. the economic performance of the euro area since the mid - 1990s since 1996, the annual growth rate for the euro area has averaged 2. 1 % per year compared to 3. 3 % in the us. what are the fundamental causes of this unsatisfactory low trend growth in the euro area? the answers can be found by looking at the factors that determine potential or long - term economic growth, namely 1 : • the degree of labour utilisation, • productivity growth, • and the demographic trends. - over the period 1996 - 2006, the euro area witnessed a slight improvement in the utilisation of labour, which increased on average by 0. 4 % per year ( compared with 0. 1 % in the us ) when defined as the total annual hours worked divided by the total population. labour utilisation reflects the extent to which the potential labour resources in an economy are actually utilised and therefore have a direct influence on output growth. this improvement in labour utilisation mainly reflects the significant rise in the euro area overall employment rate

from 58 % in 1996 to 64. 4 % in 2006, accompanied by a decline in the aggregate unemployment rate from 10. 7 % to 7. 9 %. although this is a very encouraging fact, which shows that the positive employment effect we witnessed over the last ten years has significantly helped us to partly counteract the growth differential to the us, one has to remain aware of the inferior starting position of euro area countries. despite the important progress recorded, the overall employment rate in the euro area remains low by international standards ( 64. 5 % in the euro area compared with 72 % in european commission – ameco database. hours worked data from oecd. the us in 2006 ) and the unemployment rate is still clearly too high ( 7. 9 % compared with 4. 6 % in the us on annual average in 2006 and 7. 0 % to be compared to 4. 5 % in may this year ). it has to be noted that in 2006 the estimated number of annual hours worked in the euro area was 1604 compared to 1804 2 in the us. moreover, while the prime - age male employment rate in the euro area is comparable to that observed in the united states, the disparities remain important when we look at the youth, female and older worker employment rates. in 2006 the female employment rate was 56. 5 % in the euro area and 66 % in the us, the older workers employment rate was 41. 7 % in the euro area and 61. 8 % in the us, and youth employment was 37. 1 % in the euro area and 54. 2 % in the us. these features appear to be consistent with an “ insider - outsider ” characterisation of the european labour market, where structural impediments prevent those groups “ at the margin ” from participating in the labour market. the performance of the labour market in finland has also been quite impressive these last years with the overall employment rate increasing from 62. 4 % in 1996 to 69. 3 % in 2006. however, some problems remain with regard to the institutional settings of the labour market, which may have to some extent inhibited the full realisation of employment gains from greater competition and innovation as illustrated by the still relatively high unemployment rate 7. 7 % in 2006 3. all in all, the rise in employment did not cancel out structural weaknesses of labour markets and there is still considerable room to increase the level of labour resource utilisation in europe. - productivity is the other major factor