Structural reforms in Southern Europe - Instituto 25 Mayo€¦ · Structuralreforms I Microeconomic reforms, mainly supply-side, aimed at improving the working of markets I Labour

Structural reforms in SouthernEuropeMassimo D’AntoniDept of Economics and Statistics, University of Siena

Instituto 25 MayoSummer School 23-26 July 2015

Ultimo aggiornamento: 23 luglio 2015 – 11:02

Plan of my lecture

I What do we mean by structural reforms and what is theirtheoretical/ideological background

I An overview of the reforms implemented and proposed in SouthernEurope

I An appraisal of the reforms as a response to the euro crisisI What is the nature of the euro crisis?I Final comments

Massimo D’Antoni Instituto 25 Mayo, Summer School 23-26 July 2015 Dept of Economics and Statistics, University of Siena

Structural reforms

I Microeconomic reforms, mainly supply-side, aimed at improvingthe working of marketsI Labour market reforms, aimed at making labour more flexibleI Product market reforms, aimed at enhancing market competitionI Financial markets deregulation, aimed at increase capital mobilityI Institutional reforms, aimed at reducing the power of interest groups in

the Parliament to stop economic reformsI Improving the efficiency of public administration (tax collection,

reducing red tape)I Structural reforms will bring productivity growth, hence economic

growth, and help overcome the crisis by eliminating structuralweaknesses

I (different from demand side policy, aimed at stabilizing theeconomy)


The ideological/theoretical background of reforms

I Emphasis on structural reforms dates well before the crisisI In fact, the recipe corresponds to the standard recommendations

made by the main international institutionsI embodied in the set of recipes known as the Washington consensus

(World Bank and IMF, but also OECD): stabilize, privatize,liberalizeI Budget discipline as a precondition for macroeconomic stabilityI Privatization of state-owned enterprisesI Abolition of regulation that restricts competitionI Liberalization of finance

I This view went under severe criticism by many scholarsI Stiglitz: recipes have a bias against government intervention, they are

aimed at reducing the economic role of the stateI Rodrik: they are abstract recipe, which do not consider specific

characteristics of countries


The crisis as an opportunity to reform and correct weaknesses

I Government asking for assistance were forced to implement suchreforms

I In other cases (e.g. Spain and Italy) reforms as a condition forgovernment bond purchases by the ECB. In this, the ECB played apolitical role.

I Everything is in the letter of the ECB to Spain and Italy of Summer2011

The recommendation were in continuity with pre-crisis view (not areaction to the crisis in a proper sense). The idea is that the crisis wasthe result of structural weaknesses.


The changing meaning of reforms

I Traditionally, the word reform was strictly related to the change ofthe (capitalist) economic model (reformists vs revolutionary)

I Reforms aimed at extending positive liberties and citizenship rights.The objective was to enhance distribution, improve equality

I Now a completely different meaning:I reforms aimed at quantitative economic growthI growth secured by unleashing the power of markets by removing all

obstacles to their workingI Reforms identified mainly with deregulation of markets, elimination

of influence of government, unions, organized groups


The changing meaning of reforms /2

I It follows that reforms have a universal meaning, the same for allcountries and situations, regardless of specificities

I Reforms are de-politicized: they can (or must) be imposedexogenously, they are technical, not political.

I Emphasis on efficiency rather than distribution: political conflict iskept out of the picture (de-policization)

I Best practices of reform: a competitive view of reformism, wherecompetition among countries in an integrated area provides theincentives to reform (see below)


Fixing structural problems of Southern economies

Structural reforms aimed at correcting some characteristics ofSouthern European economies (GIPS) and welfare statesI Social expenditure is age-biased: high level of pension expenditure.

However:I not so much higher when we consider net expenditureI substitution for other form of social protectionI longevity, family structure with male breadwinner

I Labour legislation protecting career continuity (job protection)I Industrial relations based on centralized bargaining at a sectoral levelThese characteristics are considered sources of inefficiency and lack offlexibility


Labour markets reform: dismissal

I Support for reform from the high level of unemployment (expeciallyof young people)I employment is explained with rigidities and outdated rulesI reduced power of unionsI emphasis on duality of the labour market (pointing to privileges of

workers with long-term contracts)I Reforms aimed at reducing the cost of firing for the firmI Portugal: for all new contracts it is now 20 days per year of service, with

a cap of 12 months and elimination of the 3-months minimumI Italy: since 2015 in case of lack of giusta causa the worker now receives

only a monetary compensation (increasing with seniority)I Spain (february 2012): reduction of dismissal costs of permanent

workers for unfair dismissal, make fair dismissal easierI similar reforms in Greece


Was the labour market really rigid?

I The main indicator is the index of EPL, where less regulation istaken to imply more efficient. Is the Italian labour market rigid?


Labour market reform: collective bargaining

I Traditional in GIPS is collective bargaining at the sectoral level,with erga omnes regulation.

I Reforms aimed at moving towards a decentralized model(bargaining at firm level)

I This is either explicitly included in the memorandum (Greece andPortugal) or recommended as an implicit condition for bondpurchasing by the ECB (Spain and Italy)

I In the economies of Southern Europe, which are dominated by smalland medium-sized enterprises, the increasing undermining ofcentralised collective agreements will radically transform wagepolicy. Not just decentralisation, but far-reaching individualisationof wage negotiations.


Public sector wages and minimum wage

I Freezing or cutting wages in the public sector. This is directly aimedat reducing public expenditure, but it also affects wage dynamics inthe private sectorI Greece: nominal cut around 30% between 2009 and 2013I Spain and Portugal: cut by 5% and frozen (in Spain uncompensated

reduction of hours per week)I Italy: wages frozen since 2009, no renewal of contracts

I In Greece reduction of the minimum wage: 32% for the young, 22%for older workers


Privatization of public firms/assets

I Many countries, including GIPS, already implemented extensiveprivatization programmes in the 1990s

I privatization recommended for residual public firms:I in Italy postal services and railways, and reduction of the public shares

in large firms such as ENI (oil and gas) or ENEL (electricity)I in Portugal energy suppliers and networkI in Spain airports, Loterias, REE (energy) and Ebro Food considered for

privatizationI In Greece a very ambitious (unrealistic?) privatization plan: 50 bil,

more than 20% of GDP (note that total proceeds 1977-2007amounted to 14%)I Assetes include: banks, state owned enterprises, public services (gas,

electricity, post, railways, ports, airports and motorways, buildings andlands)

I A dedicated privatisation authority was brought into being, the HellenicPublic Asset Development Fund (HRADF), modelled after Germany’sTreuhand created for privatization of East Germany assets

I high risk of fire saleMassimo D’Antoni Instituto 25 Mayo, Summer School 23-26 July 2015 Dept of Economics and Statistics, University of Siena

Pensions

I In GIPS relatively generous public pension systems, income-related.In some cases (e.g. Greece) differentiated along occupational lines

I Problem of long term sustainability and short term impact on publicbudget

I In the 1990s recommended shift to a funded system based ondefined contribution.

I In many cases reforms already implemented before the crisis (inItaly continuously since 1995, in Portugal main reform in 2007)

I In Italy (1995) introduction of a Notional Defined Contributionsystem which switched the demographic risk to pensioners.

I In Spain (Toledo pact, 1995) change in the formula, less favourablefor pensioners. Surpluses between 1998 and 2010

I In Portugal, reform in 2007: benefits related to like expectancy,incentive to retire laterI Sharp reduction in expenditure projections

I In Greece fragmented systemMassimo D’Antoni Instituto 25 Mayo, Summer School 23-26 July 2015 Dept of Economics and Statistics, University of Siena

Pensions /2

I Main reforms in Greece, as a consequence of the bailoutI There is a lot of mythology around the Greek pension system: it is

true there are areas of privilege and a lot of exception and specialtreatment. However, the general picture is differentI average effective retirement age is 61 years (like Germany)

I In Italy in 2012 sharp increase in retirement age, expecially forwomen. This broght to the problem of esodati: people who hadalready agreed to retire (or encouraged to do so) counting on apension, and remained without income for years. A major politicalproblem

I In general:I general increase in retirement ageI reduction in indexation of pensionsI more stringent requirement for early retirement or invalidity


Reforms as a response to the crisis

I The reforms are aimed at overcoming (alleged) structuralweaknesses of GIPS, they have been proposed well before the crisis

I Are they an adequate response to the debt crisis?I The view of the crisis prevalent in 2010-12 (and still widespread,

expecially in Northern Europe) was that it was not a systemic crisisof the euro, but the effect of local problems of the interestedeconomiesI not enough fiscal disciplineI not enough flexibilityI slow growth caused by structural weaknesses

I Things are different if we accept that there is a problem at the levelof the euro area (recognized e.g. by Draghi)


What is the nature of the crisis?

I The EMU: bringing together, under a common currency andmonetary policy, very different countriesI structural differences (international specialization, institutions)I differences in their ability to control wage growth and inflation

I Elimination of the possibility to correct unbalances through the pricemechanism provided by exchange rate—rigidity introduced

I When you have a country which is more able at controlling wagedynamics, this is equivalent to competitive devaluation

I Additionally, the role of financial flows:I the euro eliminated the exchange rate risk for investorsI it created the expectation that there was not a risk of sovereign debt

default—no country specific risk


It was not a problem of fiscal irresponsibility

I Some of the countries (e.g. Spain) were a model of fiscal virtue, theother had been able to keep their debt/deficit under control


Meanwhile, it was private debt that was growing


What were the forces at work?

I Flows of private capitals from the core to the peripheryI This was encouraged by low demand in core countries: saving

surplus which financed peripheral countriesI This happened mainly through the banking system, inflating private

debt of countries like GIPS (and Ireland)I this brought to current account imbalances and loss of

competitivenessI What happened in 2008 was a sudden stop of financial flows, a

phenomenon typical of less developed countries which borrow in aforeign currency

I deadly loop: government had to save banks, incrasing their debt;banks held foreign bonds. A sudden nationalization of financialsystem.

I In the background, the ECB did not play as a lender of last resort


Current account imbalances


What is the nature of the crisis? To summarize

I It was not lack of fiscal discipline that caused the crisisI the fact that there are structural rigidities or backwardness may

explain slow growth (although GIPS used to grow very fast in thepast) but it is not per se an explanation for the current crisis

I Mobility of capitals within a financial system which is still nationalare a destabilizing force, that creates asymmetries. Capital mobilityis very often destabilizing, but this is more the case with a commoncurrency (super-fixed exchange rates)

I The fact that the main economy in the area (Germany) relied on thedemand of peripheral countries and cumulated surplus and creditfeeds such destabilizing forces

I The EU failed to recognize that the problem was systemic, andimposed to debtors the whole burden of adjusting imbalances,through austerity

I This was encouraged by treatiesMassimo D’Antoni Instituto 25 Mayo, Summer School 23-26 July 2015 Dept of Economics and Statistics, University of Siena

Draghi’s view

I “The minimum requirements for monetary union” on 27 November2014 at Helsinki

I “When shocks do occur – as they inevitably will – adjustment has totake place through other channels. In all national economies,permanent transfers take place from richer to poorer regions; frommore densely populated to more sparsely populated areas; and fromthose better endowed with natural resources to those less endowed.This is true in the United States, within Germany, within Italy,within Finland. Fiscal transfers, so long as they remain fair, oftenhelp cement social cohesion and protect against the temptation ofsecession. But as such transfers are not foreseen within the euroarea, this model does not apply for us.

I He fails to recognize that the capital mobility (and the euro itself) isa destabilizing force

I He rules out the political feasibility of a fiscal union.Massimo D’Antoni Instituto 25 Mayo, Summer School 23-26 July 2015 Dept of Economics and Statistics, University of Siena

Draghi’s view /2

I Greater cross-country mobility would be welcome, and we shouldencourage measures that facilitate it. But research suggests that it isunlikely that cross-country migration flows will ever become a keydriver of labour market adjustment

I Countries need to be flexible enough to respond quickly toshort-term shocks, including through adjustment of wages orreallocating resources across sectors.

I For national fiscal stabilisers to be able to play out in full, sovereigndebt has to act as a safe haven in times of economic stress. Thismeans having sufficient buffers over the cycle to absorb exceptionalshocks.

I The other ingredient of a working monetary union is a deeperfinancial integration.


What kind of Europe?

I Austerity a structural characteristic of the eurozone.I Within the euro, there will be always the incentive to play Germany:

keep wages low to increase competitiveness. This is not goodcompetition. The result is to cumulate surplus and exportunemployment.

I A similar incentive to reduce the welfare state, inasmuch as its costincrease labour cost

I The euro was introduced deliberately as a way to force countries toreform: reduce the bargaining power of labour, force rolling back ofcostly welfare states

I This is the meaning of competitive reformism

What about the European social model?What is the purpose to have an integrated Europe which gives up itssocial model?


The alternative (is there an alternative?)

I Political and fiscal union. Draghi says it is not on the table.I Fiscal union is ruled out by richer countries, not accepting the idea

of funding poorer countries welfare states’. Fiscal transfers wouldbe one-way.

I Political union requires solidarity and a true common political space,where being German or Greek of Spanish or Italian does not matterthat much. If national interests and identity are too strong, a politicalunion would exacerbate the asymmetries among countries. It wouldreduce the ability of countries to defend their people’s interest.

I Is there an alternative within the euro?


Structural reforms in Southern Europe - Instituto 25 Mayo€¦ · Structuralreforms I Microeconomic reforms, mainly supply-side, aimed at improving the working of markets I Labour

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