European Central Bank (ECB) president Jean-Claude Trichet told EU leaders yesterday that comprehensive reforms were necessary to avoid reduced economic growth and a lowering of living standards.
He also warned that Europe's ageing population is likely to become a major source of concern in the long term as the number of people of working age starts to shrink within a decade or two across the euro area.
The ageing population could cut economic growth rates in the euro zone to below 2 per cent in the period up to 2010, he added.
"If fertility rates do not rise, the adverse consequences arising from this particular feature could only be solved by an extension of the working life and/or substantial inward migration," said Mr Trichet in a speech to business leaders in Brussels.
Mr Trichet forecast that economic growth in the euro zone would fall below 2 per cent in the period up to 2010 and below 1.5 per cent in the decade up to 2020 due to these adverse demographic factors.
Only ambitious and comprehensive reforms would provide some scope for raising medium to long-term output growth, he added.
Mr Trichet also called on the European Commission to strengthen its benchmarking exercise of "naming and shaming" poor performing states in an effort to stimulate the reform process in these countries.
The strategy, which has proved controversial among some member states, is currently being reviewed under the commission's relaunch of its Lisbon strategy designed to promote European competitiveness.
"It remains to be seen to what extent 'naming, shaming and faming' will be strengthened Some people have argued that the commission should not assume the role of a schoolmaster faming good and naming bad pupils," said Mr Trichet.
"However, I would suggest that benchmarking member states' performance can indeed provide incentives for reform and thus shore up the commitment to reform."
Mr Trichet, who has been a strong advocate of economic reform since taking over as ECB president in 2003, noted that the employment rate in the euro zone was just 63 per cent compared to 71 per cent in the US.
Just three euro zone states met the interim target of the EU's Lisbon strategy of an employment rate of 67 per cent employment in 2004 and just one achieved overall employment greater than 70 per cent. Employment rates needed to increase much more rapidly if a target set under the Lisbon strategy was to be met by 2010, said Mr Trichet.
Mr Trichet's speech was made just hours before a meeting of the Eurogroup, which he attended alongside the finance ministers of the euro zone states.
Economic reform was one item on the Eurogroup agenda as well as oil prices.
