Jürgen Stark: Structural reforms in Europe
Bullet points by Mr Jürgen Stark, Member of the Executive Board of the European Central
Bank, for a speech delivered at the OECD-IMF Conference on Structural Reforms in Europe,
Paris, 17 March 2008.
* * *
•
It is well established that the lack of structural reforms is the main factor behind the
relatively disappointing economic performance of some euro area countries over the last
few decades. Despite the acceleration in economic growth of the last three years, the gap
in GDP per capita between the euro area and the United States remains substantial,
reflecting lower levels of both productivity and labour utilisation. Overcoming these
constraints to growth is essential in the current environment, where the European
economy is facing a number of important challenges, including rapid technological
change, accelerating globalisation and ageing populations.
•
The EMU is a catalyst for structural reforms in Europe. Within the monetary union,
regional monetary and exchange rate policies are no longer viable options. Flexible and
integrated labour and product markets are therefore a prerequisite for the smooth
functioning of the euro area, including countries' ability to absorb shocks and fully benefit
from EMU. This is why a price-stability orientated monetary environment in principle
provides more, not fewer, incentives for national governments to implement structural
reforms.
•
The performance of the euro area policy framework, however, has been mixed. On the
one hand, the first nine years of EMU have been characterised by low and stable inflation
and firmly anchored inflation expectations, vindicating the monetary policy framework laid
down in the Maastricht Treaty. On the other hand, the overall achievements of economic
policies over the last nine years have been rather disappointing. Progress with structural
reforms still falls short of expectations, fiscal policies in some countries conflicted with the
rules of the fiscal framework, eventually leading to an adjustment of the rules rather than
of policies, and also wage policies have often not taken sufficient account of the
requirements of the new situation of a single currency.
•
The institutional framework of the EMU provides European policy-makers with the tools to
successfully address the challenges ahead. The Maastricht Treaty established a clear
allocation of responsibilities to different policy areas, reflecting the fact that assigning
policy instruments primarily to one single policy objective and making individual
policymakers responsible for one single policy instrument ensures a high level of effectiveness
and accountability.
•
The single monetary policy was given the task of maintaining price stability in the euro
area and was assigned to the ECB as an independent, supranational institution.
Economic policy deals with the other economic objectives. Responsibility for the various
areas of economic policy has largely remained with the Member States, since these
policies are best carried out at the national level in order to ensure that they are
appropriately tailored to the specific characteristics and needs of the individual countries.
•
More specifically:
structural policies in the Member States are supposed to seek to create flexible and
o
efficient structures in product and labour markets with a view to fostering the growth
potential of euro area economies and improving the adjustment mechanisms in EMU;
fiscal policies are supposed to ensure the sustainability of public finances, effectively
o
limiting government deficit and debt ratios, thereby also ensuring that automatic fiscal
stabilisers work effectively as an adjustment mechanism in the currency union; and
wage policies should be compatible with trend developments in productivity in order
o
to foster full employment and should take into account the overriding importance of
wage flexibility as an equilibrating adjustment mechanism in the EMU.
•
Within the Lisbon strategy, as refocused and reaffirmed by the European Council in 2005,
Member States aim to gear national policies towards micro-economic flexibility and
macro-economic stability. This would strengthen the capability of the euro area economy
to swiftly re-allocate economic resources in view of exogenous economic shocks and
improve its long-term growth prospects. The Lisbon Strategy and the peer surveillance of
its implementation at the national level have raised the awareness among governments
in European countries that structural reforms are decisive for remaining competitive in an
increasingly global economic environment and to fully realising the economic potential of
the EMU.
•
Significant progress in reforming labour market policies - especially in the areas of
pension schemes, early retirement and part-time work - has been achieved over the last
ten years in some European countries, contributing to the significant rise in the euro area
employment rate, accompanied by a decline in the aggregate unemployment rate from
10.6% in 1996 to 7.2% most recently. The latest number is the lowest on record since the
early 1980s, but should not give rise to complacency.
•
These encouraging developments show that past labour market reforms, immigration and
wage moderation have helped to overcome some of the constraints on growth stemming
from rigid and over-regulated labour markets. Despite this progress, we are still a long
way from having exhausted the potential for further increases in participation rates and
employment. The unemployment rate is still unacceptably high and the employment
rates, especially among young, female and older workers, remain low by international
standards. These features appear to be consistent with an "insider-outsider"
characterisation of the European labour market, where structural impediments, triggered
by the legal and regulatory environment, high taxes on labour and rigidities associated
with wage regulations may prevent those groups "at the margins" from actively
participating in the labour market.
•
In addition, in those European countries and regions where competitiveness has been
lost in the past or the unemployment rate remains too high, it is essential that wage
increases do not fully exhaust productivity gains in order to provide incentives for firms to
create additional jobs. In this respect, flexible wage setting, resulting in particular in
sufficient wage differentiation, is crucial in order to strengthen or at least maintain
competitiveness and improve employment opportunities, in particular for less-skilled
workers.
• Furthermore, many studies point to the potential that competition has to increase
employment and to boost productivity trends by improving production efficiency and by
enhancing the incentive to invest and innovate1. In the European Union, significant
progress has been made in strengthening competition and increasing economic
integration over the last two decades. The single market has already brought sizable
benefits for the European economy.2 However, much remains to be done, in particular in
some market services sectors. The extension and deepening of the internal market
remains a priority as regards further financial market integration, the pursuit of effective
competition in the energy market, and the implementation of the Services Directive. The
growing role of services3 in modern economies suggests that improvements in European
living standards are likely to depend on a high degree of competition and on productivity
improvements in the services sector.
•
Let me now focus more specifically on financial integration, which is of key importance for
the ECB. The process of European financial integration is gradually taking place and
considerable progress has already been made. The degree of integration, however,
varies across market segments, and integration is generally more advanced in those
market segments which are closer to the single monetary policy. While the euro area
banking markets for wholesale and capital market-related activities show clear signs of
increasing integration since the introduction of the euro, the retail banking segment has
remained more fragmented, leaving European consumers unable to take full advantage
of the benefits of the EMU and the Single Market.4
•
While there has been progress in the implementation of structural reforms in Europe, the
catalyst role of EMU in improving Europe's growth potential has not yet been fully
exhausted. The lacklustre performance in many euro area countries is rooted not in
deficiencies in the current institutional framework, but rather in some national
governments' lack of willingness to implement structural reforms. The reasons why
politically motivated governments tend not to implement sufficient structural reforms are
by now well known. Structural reforms typically have positive, long-term effects, which
can be difficult to ascertain in advance, but often negative short-term effects that are
relatively more visible to voters.
•
It has sometimes been argued that some macroeconomic stimulus from aggregate
demand policies might help foster the implementation of structural reform packages by
offsetting potential short-term costs of reforms. This idea that there could be a trade-off
between structural reforms and macroeconomic accommodation is disputable, notably in
the EMU. Such accommodation could be provided either by monetary policy or fiscal
policy, which I will now discuss in turn.
•
In the EMU monetary policy is not the appropriate tool for mitigating the potential
shortterm costs of structural reforms or for providing incentives for reforms at the national
levels. First, reform needs differ across euro area countries and the single monetary
policy is by its very nature unable to mitigate the potentially different short-term
countryspecific costs of reforms. Second, there are well-known and overwhelming
implementation problems of ex ante coordination between policy makers with different
objectives. This typically gives rise to incentive distortions for the policy actors involved.
An immediate consequence of any attempt to seek closer coordination with the ECB
would be a blurring of responsibilities, which would lead to every institution being made
responsible for everything, which in the end would mean that, amid confusion, no
institution was responsible for anything, and no successful reform implemented.
• Price stability is the best contribution monetary policy can make to structural reforms in
Europe. By improving the quality of relative price signals, our price stability-orientated
monetary policy makes it easier for policy makers and European citizens to identify the
areas in which structural reforms are most needed. Beyond safeguarding price stability,
there is nothing monetary policy can do to foster the growth and employment potential of
our economies. The only modest contribution a central bank can make to structural
reforms is to assess their impact, and communicate in a balanced manner and through
different channels and fora its views on the expected effects of reforms to the public,
thereby helping to build a constituency supporting reform packages.
• As to fiscal policy, let me first stress that I have doubts on the possibility to make a deficit
limit contingent on the implementation of structural reforms by national governments. The
inherent difficulty of assessing the short-term costs of structural reforms in real time
creates significant moral hazard problems, with governments having an incentive to
overestimate the costs of reforms they are implementing to mask additional spending or
shortfalls in consolidation efforts unrelated to reforms. Having said that, it is clear that the
recent reform of the Stability and Growth Pact allows fiscal policy to mitigate the possible
short-term cost of structural reforms, if these are clearly specified and can be quantified.
It is, however, crucial that fiscal authorities create the necessary room for manoeuvre
regarding their possible support for the implementation of reforms beforehand.
Otherwise, there is a risk of significant policy mistakes, with reforms eventually leading to
persistent increases in deficit and debt ratios.
Employment rates in the euro area and the US
Source: Eurostat.