The pace of structural reform in the European Union is losing momentum due to its ageing population and high public debt, according to a report from Moody's Investors Service.
The study stressed the importance of reforms in the labour market and the need to boost product and services sectors. Support for innovation was also found to be generally weaker in EU countries compared to global peers.
"Europe faces a significant structural reform challenge," said Sarah Carlson, senior vice president at Moody’s and the report's co-author.
"In the face of often-high levels of public indebtedness and ageing populations, the future creditworthiness of European sovereigns will partly reflect decisions that governments take on reform in the near-term,” Ms Carlson said.
“Structural reform boosts economic growth and increases wealth levels,” the report said.
“Countries which successfully implement structural reform build economic resilience to structural economic shifts, such as those caused by technological change, and are more likely to enjoy stronger economic growth over time. They also create an environment that is supportive of innovation, which can also raise potential output.”
While countries in the Nordic region and United Kingdom need relatively limited labour market reforms as a result of changes implemented decades ago, Spain, France, Italy and Portugal require action despite measures introduced during or since the sovereign debt crisis in the eurozone, Moody's said.
Labour market segmentation, including a high reliance on temporary contracts to supplement permanent employment, is a significant issue in a number of EU countries. It has worsened the plight of younger workers who are disproportionately kept on temporary deals.
Some member states have more than 15 per cent of their labour force on temporary contracts. In Spain, Slovenia, Poland, Portugal, Italy and Croatia, younger workers constitute more than 60 per cent of temporary employees.
“This can have quite lasting implications for a country's economic strength – it weakens labour market equity, lowers worker productivity and concentrates the burden of market adjustments on those employed on temporary contracts.”
In some countries, such as France, the contribution of services to economic activity is more or less in line with levels in the US, but other EU countries – most notably Germany – are well behind, the report said.
German services are strictly regulated by international standards, which is one of the reasons why the sector has had fairly weak productivity growth compared to manufacturing, Moody's said.
The retail sector also performs particularly badly in much of the EU, said the report, listing significant barriers to market entry in many countries, including burdensome authorisation processes, restrictive requirements governing shop size and location, and operating restrictions on discounts, promotions or store hours as reasons.
“Almost all member states would need to record a sizeable productivity boost over the next decade to meet the European Commission's [growth] assumptions, relative to the actual rates observed over the last 20 years,” Moody’s said.
