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EU warns Europe needs major economy reforms

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AOIFE WHITE | May 25, 2010 06:58 AM EST | AP

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BRUSSELS — Europe's economy will stagnate unless governments make major reforms to boost growth – just as they rein in spending to curb soaring debt levels, the European Union's economy chief warned Tuesday.

Low growth prospects and rocketing debt in many of the EU's 27 nations have alarmed financial markets in recent months, causing stocks to slide and the euro to fall sharply in value to a four-year low against the U.S. dollar.

EU Economy Commissioner Olli Rehn called for government action to speed up economic output, saying his forecasts show that growth will not top 1.5 percent and the jobless rate will stay close to current highs without reforms over the next five years.

"The big risk is that once the recovery gets more robust, we sit idly in self-complacency and forget the structural reforms. That would lead us to a sluggish recovery – or even a lost decade," he said in a speech at the Brussels Economic Forum organized by the EU's executive commission.

He said EU forecasts showed that "ambitious structural reforms" could help the economy grow by over 2 percent over the next ten years, creating more than 10 million jobs and taking unemployment down to 3 percent by 2020.

The reforms needed vary for each European country, he said, repeating a call for them to open up national markets and drop barriers that prevent foreign companies or individuals from doing business across the bloc.

Countries such as Italy and Greece have repeatedly ignored EU calls to liberalize markets. Even more business-friendly places like Germany have resisted EU moves to allow foreign services companies – anything from Polish plumbers to French telecoms companies – to crack their home markets and pile on the competition for native companies.

Rehn also called for workers' representatives to get behind labor market reforms – such as making it easier to hire and fire staff – that they fear would damage their rights. He said states need "the political skill and stamina to build a societal consensus on the necessary reforms."

Trade unions in Spain and Greece have protested loudly against government moves to hike retirement ages, which reduces state pensions spending. French President Nicolas Sarkozy is also likely to face fierce union opposition to his plans to reform pensions.

Italy is expected to become the latest European government to announce big budget cuts later Tuesday, shaving an estimated euro24 billion from state spending in an effort to reduce its debt – currently the largest in the EU.

Other eurozone countries – Spain, Portugal and Ireland – are sharply curbing budget spending to try and get mounting debt under control amid loss of market confidence in the euro currency and the ability of eurozone states to pay their bills.

Britain, which does not use the euro, also announced some 6 billion pounds ($8.7 billion) in budget cuts on Monday. Denmark is likewise making cuts.