Blog Post

Distressed Europe should not be bribed to reform

European leaders have started a discussion on German-inspired “contracts for competitiveness and growth”. To implement structural reforms in eurozone member states, the European Commission has proposed to negotiate with selected countries contracts underpinned by financial support.

By: Date: February 6, 2013 Topic: Macroeconomic policy

European leaders have started a discussion on German-inspired “contracts for competitiveness and growth”. To implement structural reforms in eurozone member states, the European Commission has proposed to negotiate with selected countries contracts underpinned by financial support.

The idea, to put it bluntly, is to bribe reluctant governments into economic change. Instead of exhorting governments in vain (the Lisbon agenda was a depressing example of such behaviour) and before a country reaches the point where there is no choice but to dispatch the troika of international lenders – the European Central Bank, European Commission and International Monetary Fund – the EU would support its reforms with temporary conditional transfers. It would agree with the government on a policy agenda and give grants in exchange for its implementation.

There is a case for such an approach. Reforms, even the most beneficial ones for society as a whole, are often opposed because they erode rents. Those enjoying rents, for example because the market for their product is kept closed, have all reasons to fight against change. Those who would benefit from reform are not organised, and they are also uncertain that they will in the end see the positive effects of it, so they do not fight for it. To overcome resistance, buying off the rents may be an advisable option (as advocated some years ago by the economists Jacques Delpla and Charles Wyplosz). However, countries in need of reform generally also suffer from too weak public finances to consider the option. Hence, the idea of relying on other countries’ money.

From the partners’ point of view it may also be better to pay a bit now rather than a lot later. Lack of reform hinders growth and competitiveness and is likely to end up creating troubles. Investing in the partners’ reform may be a valuable investment, if it helps avoid resurgence of financial tensions down the road.

Yet there are objections. Buying off rents may be very costly. Furthermore, and importantly, the politics of the proposal are awful. To negotiate domestic policy with foreign partners or international bodies is a humbling experience no government is likely to be keen on, unless forced to do so by markets. At any rate the partisans of the status quo would no doubt be quick to picture the reforms as foreign-inspired rather than homegrown, and the government as Brussels’ lackey. The whole endeavour could backfire terribly.

There is a better option. Instead of telling governments what they should do, the EU should decide what it wants to do and it should spend for it wherever needed, via new contributions from member countries if necessary. But it should also state clearly that it cannot spend money for certain goals if the national government’s policies make its spending ineffective. So it should make spending for a given goal in a given country conditional on national policies not hindering the achievement of the goal.

Here is an example. Assume the EU wants to foster employment of senior workers by supporting retraining and re-employment schemes. It could for instance introduce special grants to national employment agencies to help them enrol unemployed people in their 50s in dedicated training and placement programmes. These would primarily benefit countries where the employment rate of senior workers is low. But it would be absurd to support employment of older workers if national legislation discourages it (through, for example, early retirement programmes or overly generous disability benefits). So it would be fully justified for the EU to make access to its scheme conditional on the country reforming the provisions that discourage senior employment.

The same approach could be applied to other EU schemes, for example to foster labour mobility across regions and countries, unskilled employment or the improvement of university curricula. In each case the EU scheme should be accessible to all member states, conditional on the policy environment not being adverse to the fulfilment of the scheme’s goals.

The difference with the competitiveness contract would be threefold. First, the EU would not be telling governments what is good for them. It would set its own goals and pursue them. Second, a scheme would not single out a priori particular countries. De facto, the choice of priorities would imply a focus on some of them (as a scheme intended to remedy long-term unemployment would necessarily target countries where long-term unemployment is high), but de facto only. Third, conditionality would not consist in a comprehensive laundry list, rather it would in each case be targeted at significant roadblocks to the achievement of specific EU goals.

Such an approach would have defined goals and its effectiveness could therefore be assessed. And it would be more palatable politically than patronising contracts.

This column was originally published on the Financial Times’ A-List.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Past Event

Past Event

Fiscal policy and rules after the pandemic

What are the possibilities for shaping the new fiscal policy?

Speakers: Zsolt Darvas, Maria Demertzis, Michel Heijdra and Katja Lautar Topic: Macroeconomic policy Date: November 24, 2021
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Opinion

European governance

Growth and inflation after the pandemic in the EU

Countries hit comparatively hard during the financial crisis, helped also by domestic and European policies, are bouncing back from the pandemic faster than their peers.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceFrench Senate

European Union countries’ National Recovery and Resilience Plans: A cross-country comparison

Testimony before the Economic Affairs Committee of the French Senate.

By: Simone Tagliapietra Topic: European governance, French Senate, Macroeconomic policy Date: November 12, 2021
Read article Download PDF
 

Policy Contribution

European governance

Next Generation EU borrowing: a first assessment

The Next Generation EU programme is radically changing the way the EU finances itself and interacts with financial markets. This paper assesses the first design decisions made by the European Commission and the issuances that have taken place so far. It also outlines the potential risks and opportunities linked to this upgrading of the EU borrowing.

By: Rebecca Christie, Grégory Claeys and Pauline Weil Topic: Banking and capital markets, European governance, Macroeconomic policy Date: November 10, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceEuropean Parliament

The New Euro Area Inflation Indicator and Target: The Right Reset?

Testimony to the Monetary Dialogue Preparatory Meeting of the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas Topic: European governance, European Parliament, Macroeconomic policy Date: November 9, 2021
Read about event More on this topic
 

Past Event

Past Event

Phasing out COVID-19 emergency support programmes: effects on productivity and financial stability

How can European countries phase out the COVID-19 support measures without having a negative impact on productivity and financial stability?

Speakers: Eric Bartelsman, Maria Demertzis, Peter Grasmann and Laurie Mayers Topic: Macroeconomic policy Date: November 9, 2021
Read article
 

External Publication

European governanceEuropean Parliament

The new euro area inflation indicator and target: the right reset?

In-depth analysis on the European Central Bank's revised inflation target prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas and Catarina Martins Topic: European governance, European Parliament, Macroeconomic policy Date: November 4, 2021
Read about event More on this topic
 

Past Event

Past Event

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke, Francesco Papadia and Massimo Rostagno Topic: Macroeconomic policy Date: November 4, 2021
Read article Download PDF
 

Policy Contribution

European governance

COVID-19 financial aid and productivity: has support been well spent?

While support schemes during the pandemic were not targeted at protecting ‘good’ firms, financial support mostly went to those with the capacity to survive and succeed. Labour schemes have been effective in protecting employment.

By: Carlo Altomonte, Maria Demertzis, Lionel Fontagné and Steffen Müller Topic: European governance, Macroeconomic policy Date: November 4, 2021
Read article Download PDF More on this topic
 

Working Paper

Does money growth tell us anything about inflation?

Attention should be paid to a possible sequence of negative events: if inflation would start to be volatile and money growth remains high, efforts to control inflation could be undermined.

By: Leonardo Cadamuro and Francesco Papadia Topic: Macroeconomic policy Date: November 4, 2021
Load more posts