The global economy has been growing strongly for several years, capped in 2004 by the strongest growth in a generation. But Europe can do better. The region has lagged, consistently falling short of averages in other regions and its own historical performance. In the first half of 2005, growth in the Europe averaged just 1¼ percent.

Sluggish growth is, by and large, not the fault of macroeconomic policies, which have been quite supportive. The real problem is the sluggishness and partial nature of structural reform, which increasingly undermines the prosperity of the Europe of tomorrow. Without new initiatives and new resolve, economic growth in the euro area will continue to be stymied.

At the top of the list of fundamental, long-term issues is the labor market. Employment rates have remained low for three long decades. Currently, almost one in ten people in the labor force cannot find a job. Among the young, the ratio is twice as high. Unemployment is leading many people to question the benefits of a more integrated world economy. This is tearing at the fabric of European Union.

Central to the issue is the aging of Europe's population, which is poised to accelerate over the next four decades. Benefit payments will increase just as the workforce that pays for them starts to shrink. There is great uncertainty about what governments intend to do about these problems, as they have not, for the most part, yet mapped out in any convincing fashion how they intend to address them. This helps explain why consumers and investors are being careful.

There is no doubt that Europe needs a commitment to sustained structural reform. Where reforms have been implemented, there has been important progress. This includes pension, healthcare, and labor market reforms. While some Europeans may have misgivings about the benefits of these reforms, the results speak for themselves. For example, despite existing high unemployment, wage moderation and labor market policies have still helped to create roughly 12 million jobs in the euro area between 1996 and 2004, putting the region on par with the United States for job creation during this period.

European governments can take a number of concrete steps going forward. They must strengthen and sustain welfare reform, and raise labor utilization. This will require different measures across countries. First, in many of them, pension reform is key. Raising statutory retirement ages by linking them to life expectancy is one crucial step. Second, while governments should continue to support the jobless, they must also strengthen incentives for people to work. In addition, the unemployed need to be supported in their search for new jobs with both better placement services and training.

Governments also need to reduce the costs of job creation. High minimum wages are an obstacle to employment in many countries. Governments could better help people maintain adequate living standards by subsidizing work through earned income tax credits. Administrative burdens on companies need to be lowered, particularly with respect to employment contracts.

Achieving a better integration of Europe's product and services markets is also a promising avenue toward higher growth. Countries outside the euro area with more liberal product markets but similarly prudent wage-setting have posted stronger employment and output gains than the area. More financial integration will enhance competition and efficiency, lower the cost of capital, and improve monetary transmission.

There is broad consensus among European policymakers about the problems they confront. The challenge is for governments to come up with credible and effective solutions. Clearly, the key requirement is for individual countries to focus on national solutions. However, policymakers must not lose sight of the considerable added value that comes from acting together. This is where the Lisbon strategy makes so much sense. Its objective was to boost both labor utilization and productivity through a coordinated effort, and there is much to be said in favor of coordinating reform efforts.

Amid its various ebbs and flows, postwar European integration has been beneficial overall. What is more, the benefits of cooperation are especially marked in a decentralized monetary union such as the euro area. What is needed now are strategies that are better targeted than in the past—strategies that combine labor and product market reforms, with a focus on raising labor utilization. The revised Lisbon strategy provides avenues for doing so.

Europe can help itself to become a more dynamic region by staying the course on structural reforms. By doing so, it can, at the same time, become a leader in helping to redress the imbalances that threaten global prosperity.