Structural reforms in Europe: policy lessons from the crisis

AUDIO & VIDEO RECORDINGS

SUMMARY

Possibly the most common buzzword within the jargon of European policy, “structural reforms” have represented the benchmark of EU national economic policies in the aftermath of the financial and debt crises. The popularity of the expression has made the concept very broad, encompassing any sort of supply-side friendly interventions (usually changes in institutions and regulations): labour market reforms towards higher flexibility, reduction in the size of public administration, removal of barriers to competition and access to markets are just a few examples. The emphasis put on structural reforms by European institutions is clearly shown by the statistics presented by the chair Alessio Terzi (Affiliate fellow at Bruegel): 30% of the ECB Board executive members’ communications include a reference to structural reforms, compared to only 2% in those by members of the US Fed Board of Governors.  This attention, according to Klaus Masuch, Principal Adviser at the European Central Bank, can be explained by the importance that structural reforms have in creating a more suitable environment to the transmission of monetary policy, through its different channels.

After being restricted to South American and Asian experiences for decades, economic research has shown increasing interest in assessing the record of European countries with structural reforms. Such assessment, however, cannot be done in a purely technical way, at least according to Ana Fontoura Gouveia (Economist at the Research Department of the Banco de Portugal), who stressed some eminently political issues related to the promotion and implementation of structural reforms. To begin with, the goal itself of structural reforms is to enhance the long-term potential growth of an economy. This may or may not coincide with shared prosperity.  If and when these two objectives are in contrast, it requires a political decision to favour the attainment of one over the other.

The same goes for the potential trade-off between equity and efficiency. The former has been sacrificed too often to the latter, thereby fuelling resentments among the losers from such policies. Politics also has the crucial goal of defining priorities. As political capital of democratic representatives is limited, and potential areas of reform countless, some country-specific urgencies have to be selected and addressed effectively – a point all panellists agreed on, mentioning education, youth unemployment and the poorness of some countries’ institutions among candidates as utmost priorities. The discussion on reforms in the European Union and the Eurozone has also focused too much on national policies and too little on communitarian ones. The scope for improving on the latter (e.g., better tax coordination to prevent competition across EU member states) is sizeable, and would arguably improve the effectiveness of structural reforms at national level too.

Some of the points raised by Ms Fontoura Gouveia were not uncontroversial though. Mr Masuch disagreed on the practical relevance of the supposed trade-off between equity and efficiency, insofar as equity is intended as equal opportunities, and not as interference with market outcomes. On the contrary, most structural reforms would serve both goals: a simpler and more efficient public administration could offer better services (and disadvantaged people are those who need them the most); fighting tax evasion and addressing the excessive market powers of certain firms are other examples of non-zero-sum games. One possible exception is represented by labour market reforms, where the effects at the margin between unemployed and employed make the assessment harder equity-wise.

Paolo Manasse (Professor of Macroeconomics and International Economic Policy at the University of Bologna) disagreed on the potential divergence between higher long-term potential growth and shared prosperity, as a larger pie can benefit everybody as it increases the scope for redistribution. Alongside the existence of country-specific considerations, the Italian economist listed some criteria that have proved to be of the essence in determining the effectiveness of structural reforms in Europe (see presentation).  Timely implementation and a responsible political class able, or willing, to be held accountable for the reforms, clearly increase the chances of success. Other factors, such as the presence of external constraints (usually financial institutions), or the interaction between reforms and fiscal consolidation, have a more nuanced and often mixed impact.

Event notes by Jan Mazza

EVENT MATERIALS

Paolo Manasse Presentation