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European governments should cut deficits, IMF's De Rato says

European governments must reduce budget deficits and encourage competition if the continent is to close the economic gap with the US, Rodrigo de Rato, the International Monetary Fund's managing director, said yesterday.

De Rato projected the economy of the 12 nations sharing the euro will expand „slightly” more than the IMF's September projection of 2% this year. Growth next year will be about the same, he said. Last year's expansion is estimated at „just above” 2.5%. European growth will lag behind the 2.6% pace the IMF projects for the US in 2007. De Rato noted that Europe's 7.5% unemployment rate is higher than the 4.5% in the US, and GDP per person in Europe has been one-third lower for three decades. „Europe is growing, but it starts from a position in which per capita output has remained stubbornly lower than that of the United States,” de Rato said in the text of a speech at Georgetown University in Washington. Europe should take advantage of its economic growth to reduce budget deficits, de Rato said.

He cited a European Commission report last year saying that public debt will rise to 200% of GDP by 2050 without measures to increase revenue or reduce spending. The problem will grow worse as an aging population puts a larger burden on a shrinking workforce. To lift growth rates, European governments should ease restrictions on labor markets, increase competition in the banking sector and develop capital markets, de Rato said. „There is very strong evidence that countries that adopt a package of labor market liberalization can achieve good outcomes in both employment and economic growth,” de Rato said. De Rato said yesterday that the world economy is poised for its fastest five-year growth streak in three decades as growth approaches 5% this year. In his speech today, he warned that European and global growth could be hindered by the breakdown in trade talks and a „possible resurgence of protectionism.” (Bloomberg)