The euro zone economy will continue to fall further behind that of the United States unless critical policy challenges are tackled, according to a survey of the Organisation for Economic Co-operation and Development (OECD).

In a study published yesterday the Paris-based organisation predicted that the euro zone's capacity to generate growth will decline as a result of its ageing population, poor innovation and lack of reform in product and labour markets.

Compared to the United States, average growth rates in the gross domestic product - the value of goods and services produced in the economy - have, since the 1970s, underperformed in those countries that now form the euro zone. In 2000, a European summit meeting agreed to the so-called Lisbon agenda of structural reform, aimed at boosting growth in Europe by 2010. According to the OECD, insufficient progress has been made.

The OECD sees economic recovery in Europe as remaining hesitant, with poor performance set to continue into the future with trend growth - a measure of future potential economic growth - declining from 2 per cent per annum now to less than 1 per cent by 2030. A reduction in labour costs for less skilled workers and in employment protection legislation will be needed in order to stimulate more job creation, according to the report.

In addition, it calls for improved allocation of expenditure on research and development and greater stimulus for innovation and says that fiscal policy in the euro zone will need to react to spending pressures relating to the rising burdens of pensions and age-related health expenditure.

In a supplementary study of the euro zone services markets, the report calls for further liberalization of the services markets. The services sector accounts for an increasing share of jobs in the euro zone economy, but job creation in this sector is slower than in the United States due to the existence of barriers to trading in services between member states of the European Union.

The so-called services directive, forwarded earlier this year by EU commissioner for internal market and services Charlie McCreevy to liberalise trade in services, stimulated significant opposition from within the European Parliament and from trade unions, who fear it will have a negative impact on wage levels and employment rights.

The proposed directive was put in abeyance in advance of the French referendum on the EU constitution.