Economic reforms in the euro area: Is there a common agenda? by Xavier Debrun and Jean Pisani-Ferry, Bruegel

 

  Bruegel Policy contribution by Xavier Debrun and Jean Pisani-Ferry   

Despite the recent growth revival, the state of the euro area economy remains vexingly disappointing. What is taking place is too little, too late and the very fact that output growth only started to pick up in the fourth year of the global recovery suggests that something must be wrong. Against this background, the overriding priority remains to design and implement policy packages aiming at:

(i)  Increasing potential output through higher employment, higher labour participation, and higher productivity;

(ii) Ensuring that actual output does not lag behind gains in potential output.

 

While several items on the reform agenda remain a matter for discussion, the overall direction and a large part of the concrete prescriptions increasingly command consensus among euro-area

policymakers.  It is also widely recognised that this agenda leaves room for social choices that may differ from one country to another or from one political camp to another — say, as regards the respective roles of public and private initiatives or the balance between individual and collective responsibility.

Yet the devil is in the detail, and there is much less consensus on the strategy for reform, that is, on whether reforms should be bundled into comprehensive packages or introduced step by step, on how to deal with their distributional effects, and on the methods governments should rely on to overcome political economy constraints. This would be less of a problem if the political momentum for reforms was strong enough to overcome those constraints. But opponents are loud and proponents are almost apologising for trying to get things right.

 

The result is damning: reforms in the euro area tend to be piecemeal and lack coherence. In other words, many governments tend to waste scarce political capital in low-return reforms and they find themselves unable to build on first gains to sustain the effort and achieve significant results. In the worst case — but not the least frequent one — the choice of a reform agenda is primarily determined by the amount of political capital a government finds itself able to venture on a particular project — absent any consideration of expected return. This is reform by stealth, and it does not work.

 

This note intends to be a somewhat subjective contribution to the emerging discussion on reform strategies in the euro area. It is not based on original research and does not constitute a survey but draws selectively on our reading of the evidence and the literature to ask questions we regard as relevant in the present European context. We concentrate on four issues:

1. What is special about reforms in Europe and the euro area?
2. What do we know about reforming in good times?
3. Should governments try to find the right reform sequencing or to exploit robust complementarities (across policies or over time)?
4. To what degree should reforms be coordinated?

 

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