In fact, unemployment in the 12 nations that share the single currency will fall only moderately in the next five years, to around 7.5 percent in 2008, unless governments do more to deregulate their job markets, according to the OECD.

It was 8.9 percent in June, Eurostat data showed.

"If nothing is changed the OECD predicts the unemployment rate will average 8.25 percent over the period 2003 to 2008," said Laurence Boone, euro area economist at the Paris-based Organisation for Economic Co-operation and Development.


It remains too costly, complicated and risky to create new jobs in Europe.

That compares with a projected 5.5 percent in the United States.

As a result, jobless benefit payments will keep putting heavy pressure on Europe's public budgets, and the continent will stay lumbered with a built-in brake on growth.

Barriers to job creation 

That is because it remains too costly, complicated and risky to create new jobs in Europe.

For one, companies are so sceptical about the strength of the upturn that they are not taking on new labour.

Even as leading indicators such as Germany's Ifo business climate index have started to suggest a recovery towards the end of the year, top firms are announcing major layoffs.

Industrial firm Siemens AG said last week it was shedding 2,300 jobs at its struggling mobile phones unit, of which 500 will be in Germany. Electronics group Epcos AG said it would move more jobs abroad to cut costs.

As if scepticism and high costs weren't enough, Europe's companies face stringent job protection rules, putting them off hiring workers they would have trouble firing again.

And jobless benefit is so high in a number of countries that people shun low-paid jobs.

Changes are under way in Germany, which is loosening job protection, cutting benefits and leaning harder on the unemployed to take on work.

No mobility


"China's the manufacturer and India's the back office, that seems to be the way it's shaping up."

Lakshman Achuthan, Economic Cycle Research Institute (ECRI)

Labour mobility is another problem, reflected partly in the wide divergence in jobless rates from 3.7 percent in Luxembourg to 11.4 percent in Spain. Germany and France share second place at 9.4 percent, according to Eurostat data for June.

Language and culture are obvious barriers that may deter a French dentist from setting up shop in Helsinki. For that reason alone, mobility is unlikely ever to be as great as in the United States.

But Europe's governments have done little to remove other obstacles, such as a lack of transferable pension funds and problems getting job qualifications recognised across borders.

Meanwhile even the United States, lauded for its low labour costs and flexible labour market, is showing evidence of economic recovery without robust job creation.

A problem both Europe and the United States face is a long-term drift of manufacturing jobs to lower cost countries such as China, with software and support jobs going to India.

"Industrial jobs are being lost to low cost producers in Asia. And those jobs are unlikely to return when the recovery begins," said Lakshman Achuthan at the New York-based Economic Cycle Research Institute (ECRI).

"China's the manufacturer and India's the back office, that seems to be the way it's shaping up."

That poses a particular risk for Germany, Italy and Spain with more than 30 percent of their workforce in industrial jobs.

Europe's powerhouse falters 

The OECD estimates the euro zone will be able to create jobs next year provided growth matches its two percent forecast.


"The major problem that trumps everything at the moment is Germany."

Lakshman Achuthan

But there are doubts about how strong the recovery will be. Achuthan said the ECRI's long leading index, which looks ahead for nine to 12 months, remains weak for Germany, which accounts for a third of euro zone output.

"The major problem that trumps everything at the moment is Germany," said Achuthan.

Germany especially is being hemmed in by what has become another European structural problem - the EU's Stability and Growth Pact that requires countries to limit their budget deficits to below three percent of GDP.

Both Germany and France are at risk of breaching the Pact for three years running, but nevertheless remain constrained by it, curbing their ability to copy the United States in spending their way out of stagnation.