Maximising the impact of labour and product market reforms in the euro area - sequencing and packaging

Katia Berti and Eric Meyermans

Quarterly Report on the Euro Area (QREA), 2017, vol. 16, issue 2, 7-19

Abstract: Well-functioning labour and product markets ensure the efficient allocation of resources, contribute to making economies more resilient and strengthen growth potential in the long run. Structural reforms are beneficial because they improve the functioning of markets in the longer term but some reforms can have negative short-term effects, notably on aggregate demand, that need to be carefully considered in policy design. This section focusses on these shorter-term effects. It first provides a review of the transmission channels through which structural reforms may affect aggregate demand in the short term and then highlights how the negative effects could be at least partly offset through an appropriate 'sequencing' and 'packaging' of reforms that takes advantage of synergies and complementarities. Packaging also increases the political acceptability and ownership of reforms, thereby facilitating their implementation. Econometric analysis suggests that the simultaneous implementation of labour and product market reforms can indeed improve growth dynamics in the short run. Well-functioning labour and product markets are also found to increase the estimated speed of adjustment of GDP growth towards potential, thus providing support to the idea that structural reforms increase resilience. The latter is a particularly important feature for euro area members as they cannot use the nominal exchange rate as a tool for adjustment against shocks. Finally, supportive macroeconomic policies also play an important role in the successful delivery of structural reforms.

Keywords: structural reforms; shorter-term effects; economic resilience; supportive macroeconomic policies (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0162-01

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