## _spn1019

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---

### Diagnosis — Growth Facts
- Euro area per capita GDP stopped converging toward its best performing peers in the early 1980s, leaving a persistent gap.
- Over 2000–08, GDP growth in the euro area averaged 2 percent, keeping pace with the United States and Japan in per capita terms, but falling behind some northern European peers.
- Lagging GDP per capita levels result from:
  - Lower labor utilization (higher unemployment rates, lower participation rates, fewer hours worked) — particularly acute for females, older workers, and the young.
  - Lower labor productivity, especially in southern Europe.
- From a cyclical perspective, the euro area’s recovery from the global financial turmoil is lagging: in the two years since early 2008, the euro area lost about 2½ percentage points in per capita GDP relative to the United States and barely kept par with Japan.
- For some countries (Germany, France, and some smaller euro area countries) the shortfall versus the United States is mostly due to lower labor utilization while labor productivity is close to U.S. levels; for southern European countries productivity matters more.
- As unused or underutilized labor is likely to exhibit below average productivity, productivity will become increasingly important as labor utilization rises.

### Diagnosis — Structural Landscape
- Labor markets exhibit reform gaps across the euro area; all but a few euro area countries show severe weaknesses in labor markets compared to advanced economy peers.
- Binding business and service sector regulations are widespread in the currency union.
- Southern euro area faces pronounced impediments to long-term growth in human capital, institutions and contracts, infrastructure, and innovation; core countries may face similar obstacles once labor utilization rises.
- The Structural Reforms Gaps heatmap highlights widespread medium-term labor market inefficiency and business/regulatory barriers across euro area countries (detailed country indicators and methodology referenced in the source).

### Large Potential Gains from Reforms
- Simulations suggest that filling half of the gap in the labor market and service sectors with the 3 best EU performers, carried out over 2011–15, could yield as much as ½ percentage point of additional annual growth over the next 5 years (IMF, 2010a; Hobza and Mourre, 2010; OECD, 2008).
- This illustrative reform package would combine:
  - A shift from labor to VAT taxes;
  - A reduction in the level/duration in unemployment benefits and in early and old-age retirement schemes;
  - A reduction in entry barriers in network industries (gas, electricity, and telecoms), retail distribution, and professional services.
- A more ambitious long-term objective: closing half of the gap with the United States would be a reasonable target to resume convergence and support inclusiveness and fiscal sustainability.

### Required Actions — Top Priority: More and Better Jobs
- Addressing weaknesses in the financial system is a prerequisite for a strong and sustained recovery:
  - Euro area firms finance primarily through banks; bank capital needs to be increased sufficiently.
  - Successful restructuring of weak banking segments and prompt implementation of Basel III capital requirements are essential.
- Reform sequencing should be mindful of short-run demand effects given the tentative post-crisis recovery.
  - Short-run measures could include introducing or better targeting income tax credit schemes, lifting impediments to service sector growth, and, where fiscal room exists, measures to stimulate youth and female employment through tax incentives and better child care provision.
- Labor market access and inclusiveness are the main priorities everywhere:
  - Promote incentives for those outside the workforce to re-enter and for firms to hire.
  - Adjust labor market models to reduce dualism and improve hiring incentives.
  - Consider postponing politically sensitive measures (e.g., reductions in unemployment benefit duration, removal of job protection) to a second stage to manage confidence effects, but implement them thoroughly.
- Complementary reforms to generate job growth:
  - Liberalize retail trade, network industries, and professional services to decrease insiders’ rents and foster new entries.
  - Promote decentralized wage bargaining and remove indexation mechanisms where wages have grown out of line to better align wages with productivity without undermining job security.
  - Where fiscal space and capacity slack diminish, support private investment (for example via an investment tax credit).

### Required Actions — Country Differentiation and Common Themes
- Reforms should be tailored to country circumstances:
  - Southern euro area countries need to focus on regaining competitiveness.
  - Some core countries (e.g., France) should prioritize increasing labor participation.
  - Other core countries (e.g., Germany) should tackle obstacles to service sector expansion to support domestic demand.
- A common theme across the euro area is the need to ease regulation and reform taxes and social benefits to improve labor market incentives and reduce intra-euro area imbalances.

### Delivering Coordinated, Comprehensive Reforms (summary points)
- Strong impetus for reforms benefits from strengthened coordination at the euro area level.
- Recent steps to strengthen governance over fiscal and structural policies are in the right direction.
- Recommendations include:
  - Vesting more reform authority at the euro area level.
  - Embedding key structural reforms in a stronger surveillance mechanism over fiscal and structural policies.
  - Revising EU transfer rules to better reward reformers and punish laggards.
  - Enforcing compliance more decisively than in the past.
  - Launching a new common project for labor market reform to harness collective momentum.

### Box 1 — Country-Specific Reform Priorities: Germany and Spain

- Germany — labor market and service-sector reform priorities
  - Key objective: strongly boost domestic investment, in particular in the service sectors.
  - Labor market reforms deemed essential:
    - Softening employment protection, both de jure and de facto, in particular by streamlining labor court proceedings and labor court discretion over severance pay.
    - Enforcing stronger conditionality of unemployment benefits receipt and improving social transfer recipients’ ability to earn additional income, to support growth of the low-wage sector by improving search and work incentives.
    - Lowering the tax wedge, which remains substantially above the OECD’s average.
    - Reducing restrictions on rehiring of workers previously employed on temporary contracts.
  - Measures to support growth in the service sectors:
    - Enhancing the powers of the competition authority, with a view in particular to increasing competition in transportation industries.
    - Lowering formal entry requirements in professional services, including by removing formal requirement of trade association membership and liberalizing degree requirements.
    - Facilitating cross-border transfer of degrees and training certificates.

- Spain — labor market and service-sector reform priorities
  - Key objective: regaining competitiveness and boosting production in the tradable sector.
  - Labor market reforms to reduce dualism and encourage permanent hires:
    - Lowering severance pay on permanent contracts to at least EU average levels and making the increase of such severance payments more gradual in the early years of tenure.
    - Preventing excessive use of unfair dismissals.
    - Decentralizing wage setting, for example by moving to an “opt-in” rather than “opt-out” system for collective bargaining, and eliminating automatic indexation.
  - Service-sector reforms:
    - Ensure an ambitious implementation of the EU Services Directive, especially to lower entry barriers in the area of retail trade imposed at the local and regional levels.
    - Eliminate restrictions on professional services, in particular by narrowing qualification requirements and reducing existing regulatory differences across regions.
    - Relax restrictions in the rental market, such as landlords’ obligation to automatically renew leases for the first five years and the cap on rent increases to CPI inflation.

- Complementary priorities: robust finance, innovation, and education
  - Financial-sector priorities to support growth:
    - Revitalizing securitization, developing capital markets, and generating attractive conditions for venture capital to put the financial sector back at the service of the economy.
    - Developing capital markets and revitalizing well-regulated securitization markets to allow banks to focus more on supporting smaller firms.
    - Encouraging savings in some countries (notably in the southern euro area) through private pension schemes to relieve constraints on growth from external imbalances and provide a stable source of funding for productive investment.
  - Innovation and education priorities:
    - Closing productivity gaps where private R&D spending and tertiary-education graduation rates lag United States and Japanese levels.
    - Specific measures:
      - Extending the use of R&D tax credits across the euro area to replace existing direct grant schemes.
      - Promoting links between universities and business-related research, including allowing universities to patent output even when research has been financed through public programs.
      - Increasing the share of adults reaching tertiary education, including by encouraging return to studies throughout the professional career.
      - Offering more and better vocational education and retraining, especially as working life lengthens.

- Delivering coordinated, comprehensive reforms — political economy and governance
  - Political economy observations:
    - Large-scale growth-enhancing national reforms seldom happen without the specter of a crisis, involve compromises, and take time.
    - EU-driven reforms have been more successful where national authority was delegated but failed when relying on peer pressure.
    - Market pressure can succeed where other approaches have failed; reformist governments have similar re-election likelihoods as non-reformist governments.
  - Principles for designing euro-area incentives to reform:
    - Building in central incentives is necessary.
    - Larger EU transfers conditioned on reform implementation could help.
    - These transfers should be accompanied by a transfer of fiscal competence to the euro area level but without raising overall public debt.
    - Suggested design features:
      - EU disbursements closely linked to reform implementation, reflected in National Reform Agendas and assessed by an independent expert group.
      - Use of more transparent EU-wide instruments (for example, green levies) to enlarge revenues accruing to the center.
      - Strong conditionality to avoid moral hazard; recipient countries must be pursuing prudent policies and abide by EU deficit limits to obtain funds.
  - New governance and coordination proposals:
    - In a monetary union, coordinating reforms is important to reduce asymmetric shocks and enhance labor mobility.
    - A simultaneous comprehensive approach creates synergies across reform areas and increases buy-in by ensuring all countries “do their share.”
    - Making labor market reform a euro-area project (a “Single Labor Market” initiative) could harmonize critical priorities such as labor taxation, unemployment benefit systems, and employment protection legislation, or at minimum promote “best practices.”
    - Establishing a network of national productivity commissions, with a hub at EU level, to assess regulations’ economic costs and benefits and to require government responses in national and European parliaments.

### Annex highlights — key labor-market and service-sector reforms across the euro area
- Labor-market reform priorities (selected):
  - Reward return to work for the unemployed through initially generous but limited-in-time support; shorten unemployment benefits duration where net replacement rates still top 75 percent after one year in some countries.
  - Attract second-earners to join the labor force; the implicit tax on the gross income of a second earner tops 70 percent in Austria, France, Ireland, and the Slovak Republic. IMF staff estimates: cutting labor income taxes paid by women by 5 percentage points would increase the GDP level by 1¾ percentage points, for a fiscal cost of ½ percentage point of GDP.
  - Foster longer lifetime contribution to the labor market by raising the pensionable age rather than primarily reducing pension benefits.
  - Lower labor costs to boost hiring by shifting taxes away from the labor factor and toward consumption.
  - Ease regulations on labor contracts to boost labor flows, especially in Spain, France, Luxembourg, and Portugal.
  - Remove labor market dualism by harmonizing labor contracts and employment legislation between permanent and short-term employment where temporary work is prevalent.
- Service-sector reform priorities (selected):
  - Foster competition in the retail industry by relaxing opening hours and zoning restrictions.
  - Ease formal restrictions in professional services, such as numerus clausus and compulsory membership in professional associations.
  - Lift entry barriers in network industries (transportation and energy) and end de facto monopolies of state-owned companies.
  - Improve the business environment via reduction in red tape, fewer restrictions to operate, and reform of overly onerous personal bankruptcy rules.
- Detailed reform agendas should be tailored to country-specific situations; Annex II (not reproduced here) lists high priority measures identified by IMF country teams.

### Annex II — Euro Area: Country Specific Recommendations (selected priorities and measures)

- Cross-cutting reform priorities (selected measures repeated across countries)
  - Soften employment protection, both de jure and de facto, in particular by:
    - streamlining labor court proceedings and labor court discretion over severance pay.
  - Support growth of low-wage sector by improving search and work incentives, in particular by:
    - enforcing stronger conditionality of unemployment benefit receipts;
    - improving social transfer recipients' ability to earn additional income.
  - Lower the tax wedge, which remains substantially above OECD's average.
  - Reduce restrictions on rehiring of workers previously employed on temporary contracts.
  - Enhance the powers of the competition authority, with a view to increasing competition in network and transportation industries.
  - Liberalize price setting in professional services; lower formal entry requirements in professional services.
  - Facilitate cross-border transfer of degrees and training certificates.
  - Achieve minimum wage moderation and better training, by:
    - eliminating the coup de pouce (minimum wage increases beyond those linked to inflation);
    - further developing apprenticeship programs and sector-specific training and re-training opportunities.
  - Increase senior employment by:
    - raising the minimum age for pension eligibility;
    - enforcing job-search requirements and applying penalties for refusals of reasonable job offers more consistently.
  - Reduce regulatory barriers in the retail sector by:
    - abolishing administrative entry limitations for discounters;
    - eliminating restrictions on opening hours and sales periods;
    - combining market liberalization with the end of price regulations on key products, for example in the pharmacy sector.
  - Liberalize services sectors by:
    - introducing greater competition in health-related services and professional services (notaries, accountants);
    - implementing the EU Services Directive.
  - Boost product market competition and reduce mandatory information requirement for setting up business, in particular by making "one-stop shop" single electronic contact points (Sportello Unico per le Attività Produttive) operational and developing use of IT at the local level (as identified in Law Decree 112/2008).
  - Enhance the role of competition bodies in formulating policy by:
    - raising the statutory cap on authorized personnel level of the Antitrust Authority;
    - developing a check list of pro-competition practices with the contribution of the Antitrust Authority, and establishing "watchdogs" at regional level to enforce this check list;
    - introducing an annual law covering competition and market issues.

- Country-specific priorities and measures (selected excerpts)
  - Austria
    - Increase labor market participation of older and low-skilled/foreign-origin workers.
  - Belgium
    - Overhaul the labor market to reduce dualism and encourage permanent hires.
  - Finland
    - Increase labor participation of older workers; make the education system more efficient.
  - France
    - Improve the functioning of labor markets to lift the employment rate; increase competition in retail and service sectors.
  - Germany
    - Make labor market work better; promote competition in retail and services; decentralize wage bargaining to account for regional productivity and cost-of-living differences.
  - Greece
    - Improve service markets functioning; implement the EU Services Directive; eliminate automatic wage indexation to inflation; introduce stricter criteria for unemployment benefits access; make pension benefits actuarially neutral for early retirement; reduce generous replacement rates and gradually increase statutory retirement age and eligibility criteria.
  - Ireland
    - Raise employment to avoid persistence of high unemployment rate; improve competitiveness to promote exports as a sustainable source of growth.
  - Italy
    - Lower severance pay on permanent contracts to at least EU average levels and make increases more gradual in early years of tenure;
    - Prevent excessive use of unfair dismissals;
    - Decentralize wage setting (for example by moving to an “opt-in” rather than “opt-out” system for collective bargaining) and eliminate automatic indexation;
    - Ensure ambitious implementation of the EU Services Directive to lower entry barriers at local and regional levels;
    - Eliminate restrictions on professional services and narrow qualification requirements;
    - Relax restrictions in the rental market (examples: landlords' obligation to automatically renew lease for the first five years and the cap on rent increases to CPI inflation);
    - Selectively reduce labor taxes for hiring unemployed workers over 50;
    - Phase in the income-based tax credit to make it attractive for low-earning partners with children;
    - Increase statutory retirement age from 65 to 67 while providing financial incentives for workers to continue working after minimum retirement age (62).
  - Luxembourg
    - Reform the pension system.
  - Malta
    - Reform the pension system to encourage labor market participation.
  - Netherlands
    - Increase labor market participation and raise the employment rate; promote firm-level wage bargaining to allow companies to opt-out from industry-wide arrangements.
  - Portugal
    - Further improve the business environment; foster competition in product and service markets.
  - Slovakia (Slovak Republic)
    - Make labor market work better to reduce high structural unemployment among young and low-skilled workers; improve effectiveness of the education system.
  - Slovenia
    - Reduce state involvement in the economy by continuing privatization; strengthen competition in product and service markets; provide competition authority with adequate capacities and institutional independence.
  - Spain
    - Reduce entry barriers to professional services; improve transportation services by establishing an independent regulatory and supervisory body for the railway sector; restructure the state-owned railway company with a final objective of privatization; privatize transportation infrastructures, including ports and airports; eliminate early retirement schemes ("unemployment pipelines") while enhancing retraining for older long-term unemployed; strengthen activation requirements for sickness and disability benefits; improve opportunities for part-time work, including for retired persons; speed transition from secondary to tertiary education with tuition fees and means-tested loan system; raise incentives for timely tertiary education graduation.
  - Cyprus
    - Ensure wage moderation to regain competitiveness; make labor market work better; improve the functioning of the labor market to provide incentives to work.
  - Other targeted measures across countries include:
    - Reduce severance payments (noted as above EU average in some countries);
    - Relax employment protection for regular workers to reduce protection gap with temporary workers;
    - Relax working time regulations to help reduce cyclical employment losses;
    - Promote vocational training and better-targeted active labor market policies;
    - Streamline licensing processes and accelerate SIMPLEX program implementation;
    - Resume privatization processes and expand performance monitoring of state-owned enterprises;
    - Introduce gradual decrease of unemployment benefits over time and stricter job search requirements;
    - Provide more resources to unemployment agencies (example: FÁS in Ireland) to improve job search assistance;
    - Review minimum wage levels and consider regional differentiation with explicit numeric proposals:
      - Allow regional differentiation of the minimum wage by capping the minimum wage to 40 percent of regional median wage and abolishing any formal link between the minimum wage and the contractual wage;
      - The reduced minimum wage (at 75 percent) should also be extended to the 18-21 age group.
    - Enhance tertiary education funding and governance via tuition fees for full-time tertiary students along with means-tested grants and loans, greater autonomy for institutions, and performance-based management.
    - Encourage female labor market participation through fiscal incentives for part-time and flexible work arrangements, training programs, and affordable childcare services.
    - Increase effective retirement age and limit early retirement pathways; make pension benefits actuarially neutral for early retirement.

*Source: Executive Summary and Box 1 (IMF staff).*

### Executive Summary ......................................................................................................

### _spn1019 - Executive Summary

### Diagnosis — Growth Facts
- Euro area per capita GDP stopped converging toward its best performing peers in the early 1980s, leaving a persistent gap.
- Over 2000–08, GDP growth in the euro area averaged 2 percent, keeping pace with the United States and Japan in per capita terms, but falling behind some northern European peers.
- Lagging GDP per capita levels result from:
  - Lower labor utilization (higher unemployment rates, lower participation rates, fewer hours worked) — particularly acute for females, older workers, and the young.
  - Lower labor productivity, especially in southern Europe.
- From a cyclical perspective, the euro area’s recovery from the global financial turmoil is lagging: in the two years since early 2008, the euro area lost about 2½ percentage points in per capita GDP relative to the United States and barely kept par with Japan.
- For some countries (Germany, France, and some smaller euro area countries) the shortfall versus the United States is mostly due to lower labor utilization while labor productivity is close to U.S. levels; for southern European countries productivity matters more.
- As unused or underutilized labor is likely to exhibit below average productivity, productivity will become increasingly important as labor utilization rises.

### Diagnosis — Structural Landscape
- Labor markets exhibit reform gaps across the euro area; all but a few euro area countries show severe weaknesses in labor markets compared to advanced economy peers.
- Binding business and service sector regulations are widespread in the currency union.
- Southern euro area faces pronounced impediments to long-term growth in human capital, institutions and contracts, infrastructure, and innovation; core countries may face similar obstacles once labor utilization rises.
- The Structural Reforms Gaps heatmap highlights widespread medium-term labor market inefficiency and business/regulatory barriers across euro area countries (detailed country indicators and methodology referenced in the source).

### Large Potential Gains from Reforms
- Simulations suggest that filling half of the gap in the labor market and service sectors with the 3 best EU performers, carried out over 2011–15, could yield as much as ½ percentage point of additional annual growth over the next 5 years (IMF, 2010a; Hobza and Mourre, 2010; OECD, 2008).
- This illustrative reform package would combine:
  - A shift from labor to VAT taxes;
  - A reduction in the level/duration in unemployment benefits and in early and old-age retirement schemes;
  - A reduction in entry barriers in network industries (gas, electricity, and telecoms), retail distribution, and professional services.
- A more ambitious long-term objective: closing half of the gap with the United States would be a reasonable target to resume convergence and support inclusiveness and fiscal sustainability.

### Required Actions — Top Priority: More and Better Jobs
- Addressing weaknesses in the financial system is a prerequisite for a strong and sustained recovery:
  - Euro area firms finance primarily through banks; bank capital needs to be increased sufficiently.
  - Successful restructuring of weak banking segments and prompt implementation of Basel III capital requirements are essential.
- Reform sequencing should be mindful of short-run demand effects given the tentative post-crisis recovery.
  - Short-run measures could include introducing or better targeting income tax credit schemes, lifting impediments to service sector growth, and, where fiscal room exists, measures to stimulate youth and female employment through tax incentives and better child care provision.
- Labor market access and inclusiveness are the main priorities everywhere:
  - Promote incentives for those outside the workforce to re-enter and for firms to hire.
  - Adjust labor market models to reduce dualism and improve hiring incentives.
  - Consider postponing politically sensitive measures (e.g., reductions in unemployment benefit duration, removal of job protection) to a second stage to manage confidence effects, but implement them thoroughly.
- Complementary reforms to generate job growth:
  - Liberalize retail trade, network industries, and professional services to decrease insiders’ rents and foster new entries.
  - Promote decentralized wage bargaining and remove indexation mechanisms where wages have grown out of line to better align wages with productivity without undermining job security.
  - Where fiscal space and capacity slack diminish, support private investment (for example via an investment tax credit).

### Required Actions — Country Differentiation and Common Themes
- Reforms should be tailored to country circumstances:
  - Southern euro area countries need to focus on regaining competitiveness.
  - Some core countries (e.g., France) should prioritize increasing labor participation.
  - Other core countries (e.g., Germany) should tackle obstacles to service sector expansion to support domestic demand.
- A common theme across the euro area is the need to ease regulation and reform taxes and social benefits to improve labor market incentives and reduce intra-euro area imbalances.

### Delivering Coordinated, Comprehensive Reforms (summary points from Executive Summary)
- Strong impetus for reforms benefits from strengthened coordination at the euro area level.
- Recent steps to strengthen governance over fiscal and structural policies are in the right direction.
- Recommendations include:
  - Vesting more reform authority at the euro area level.
  - Embedding key structural reforms in a stronger surveillance mechanism over fiscal and structural policies.
  - Revising EU transfer rules to better reward reformers and punish laggards.
  - Enforcing compliance more decisively than in the past.
  - Launching a new common project for labor market reform to harness collective momentum.

*Source: Executive Summary (IMF staff).*

### Box 1. Country-Specific Reform Priorities—Germany and Spain

### _spn1019 - Box 1. Country-Specific Reform Priorities—Germany and Spain

### Germany — labor market and service-sector reform priorities
- Key objective: strongly boost domestic investment, in particular in the service sectors.
- Labor market reforms deemed essential:
  - Softening employment protection, both de jure and de facto, in particular by streamlining labor court proceedings and labor court discretion over severance pay.
  - Enforcing stronger conditionality of unemployment benefits receipt and improving social transfer recipients’ ability to earn additional income, to support growth of the low-wage sector by improving search and work incentives.
  - Lowering the tax wedge, which remains substantially above the OECD’s average.
  - Reducing restrictions on rehiring of workers previously employed on temporary contracts.
- Measures to support growth in the service sectors:
  - Enhancing the powers of the competition authority, with a view in particular to increasing competition in transportation industries.
  - Lowering formal entry requirements in professional services, including by removing formal requirement of trade association membership and liberalizing degree requirements.
  - Facilitating cross-border transfer of degrees and training certificates.

### Spain — labor market and service-sector reform priorities
- Key objective: regaining competitiveness and boosting production in the tradable sector.
- Labor market reforms to reduce dualism and encourage permanent hires:
  - Lowering severance pay on permanent contracts to at least EU average levels and making the increase of such severance payments more gradual in the early years of tenure.
  - Preventing excessive use of unfair dismissals.
  - Decentralizing wage setting, for example by moving to an “opt-in” rather than “opt-out” system for collective bargaining, and eliminating automatic indexation.
- Service-sector reforms:
  - Ensure an ambitious implementation of the EU Services Directive, especially to lower entry barriers in the area of retail trade imposed at the local and regional levels.
  - Eliminate restrictions on professional services, in particular by narrowing qualification requirements and reducing existing regulatory differences across regions.
  - Relax restrictions in the rental market, such as landlords’ obligation to automatically renew leases for the first five years and the cap on rent increases to CPI inflation.

### Complementary priorities: robust finance, innovation, and education
- Financial-sector priorities to support growth:
  - Revitalizing securitization, developing capital markets, and generating attractive conditions for venture capital to put the financial sector back at the service of the economy.
  - Developing capital markets and revitalizing well-regulated securitization markets to allow banks to focus more on supporting smaller firms.
  - Encouraging savings in some countries (notably in the southern euro area) through private pension schemes to relieve constraints on growth from external imbalances and provide a stable source of funding for productive investment.
- Innovation and education priorities:
  - Closing productivity gaps where private R&D spending and tertiary-education graduation rates lag United States and Japanese levels.
  - Specific measures:
    - Extending the use of R&D tax credits across the euro area to replace existing direct grant schemes.
    - Promoting links between universities and business-related research, including allowing universities to patent output even when research has been financed through public programs.
    - Increasing the share of adults reaching tertiary education, including by encouraging return to studies throughout the professional career.
    - Offering more and better vocational education and retraining, especially as working life lengthens.

### Delivering coordinated, comprehensive reforms — political economy and governance
- Political economy observations:
  - Large-scale growth-enhancing national reforms seldom happen without the specter of a crisis, involve compromises, and take time.
  - EU-driven reforms have been more successful where national authority was delegated but failed when relying on peer pressure.
  - Market pressure can succeed where other approaches have failed; reformist governments have similar re-election likelihoods as non-reformist governments.
- Principles for designing euro-area incentives to reform:
  - Building in central incentives is necessary.
  - Larger EU transfers conditioned on reform implementation could help.
  - These transfers should be accompanied by a transfer of fiscal competence to the euro area level but without raising overall public debt.
  - Suggested design features:
    - EU disbursements closely linked to reform implementation, reflected in National Reform Agendas and assessed by an independent expert group.
    - Use of more transparent EU-wide instruments (for example, green levies) to enlarge revenues accruing to the center.
    - Strong conditionality to avoid moral hazard; recipient countries must be pursuing prudent policies and abide by EU deficit limits to obtain funds.
- New governance and coordination proposals:
  - In a monetary union, coordinating reforms is important to reduce asymmetric shocks and enhance labor mobility.
  - A simultaneous comprehensive approach creates synergies across reform areas and increases buy-in by ensuring all countries “do their share.”
  - Making labor market reform a euro-area project (a “Single Labor Market” initiative) could harmonize critical priorities such as labor taxation, unemployment benefit systems, and employment protection legislation, or at minimum promote “best practices.”
  - Establishing a network of national productivity commissions, with a hub at EU level, to assess regulations’ economic costs and benefits and to require government responses in national and European parliaments.

### Annex highlights — key labor-market and service-sector reforms across the euro area
- Labor-market reform priorities (selected):
  - Reward return to work for the unemployed through initially generous but limited-in-time support; shorten unemployment benefits duration where net replacement rates still top 75 percent after one year in some countries.
  - Attract second-earners to join the labor force; the implicit tax on the gross income of a second earner tops 70 percent in Austria, France, Ireland, and the Slovak Republic. IMF staff estimates: cutting labor income taxes paid by women by 5 percentage points would increase the GDP level by 1¾ percentage points, for a fiscal cost of ½ percentage point of GDP.
  - Foster longer lifetime contribution to the labor market by raising the pensionable age rather than primarily reducing pension benefits.
  - Lower labor costs to boost hiring by shifting taxes away from the labor factor and toward consumption.
  - Ease regulations on labor contracts to boost labor flows, especially in Spain, France, Luxembourg, and Portugal.
  - Remove labor market dualism by harmonizing labor contracts and employment legislation between permanent and short-term employment where temporary work is prevalent.
- Service-sector reform priorities (selected):
  - Foster competition in the retail industry by relaxing opening hours and zoning restrictions.
  - Ease formal restrictions in professional services, such as numerus clausus and compulsory membership in professional associations.
  - Lift entry barriers in network industries (transportation and energy) and end de facto monopolies of state-owned companies.
  - Improve the business environment via reduction in red tape, fewer restrictions to operate, and reform of overly onerous personal bankruptcy rules.
- Detailed reform agendas should be tailored to country-specific situations; Annex II (not reproduced here) lists high priority measures identified by IMF country teams.

*Source: _spn1019 - Box 1. Country-Specific Reform Priorities—Germany and Spain (extracted content).*

### Annex Figure 1. Euro Area: Structural Indicators f or Labor and Services Markets 1/

### Annex Figure 1. Euro Area: Structural Indicators for Labor and Services Markets 1/

### Structural indicators (figure captions and axes)
- Employment Protection (Stricter toward the Center)
  - Country comparisons against: EA Countries (black line) and US (green line).
  - Figure axis markers appearing in source: 0, 3, 6.
  - Country labels shown: Austria; Belgium; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Netherlands; Portugal; Slovak Republic; Spain.
- Implicit Tax Rate on Returning to Work for a Second Earner
  - Label: (Per cent of Gross Earning, 67 per cent of Average Wage)
  - Directional note: (Higher towards the Center)
  - Figure axis markers appearing in source: 20, 60, 100.
  - Country labels shown: Austria; Belgium; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Netherlands; Portugal; Spain; Euro Area; US.
- Net Income Replacement Rate for Unemployment Benefits After One Year
  - Directional note: (Higher towards the Center)
  - Figure axis markers appearing in source: 50, 75, 100.
  - Country labels shown: Austria; Belgium; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Netherlands; Portugal; Spain; Euro Area; US.
- Marginal Tax Wedge (Principal Earner of Family of 4)
  - Directional note: (Higher towards the Center)
  - Figure axis markers appearing in source: 20.0, 60.0, 100.0.
  - Country labels shown: Austria; Belgium; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Netherlands; Portugal; Spain; Euro Area; US.
- Regulatory Conditions in the Retail Sector
  - Directional note: (More regulated towards the Center)
  - Figure axis markers appearing in source: 0.0, 3.0, 6.0.
  - Country labels shown: Austria; Belgium; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Netherlands; Portugal; Slovak Republic; Spain; Euro Area; US.
- Regulatory Conditions in Professional Services
  - Directional note: (More Regulated towards the Center)
  - Figure axis markers appearing in source: 0.0, 3.0, 6.0.
  - Country labels shown: Austria; Belgium; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Netherlands; Portugal; Slovak Republic; Spain; Euro Area; US.
- Regulatory Conditions in Non-Manufacturing Industries 1/
  - Note 1/: airlines, telecoms, electricity, gas, post, rail, and road freight
  - Directional note: (More regulated towards the center)
  - Figure axis markers appearing in source: 0.0, 2.0, 4.0.
  - Country labels shown: Austria; Belgium; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Netherlands; Portugal; Slovak Republic; Spain; Euro Area; US.

### Key interpretive notes from figure captions
- Each country is compared to its euro area peers (black line) and to the U.S. (green line).
- Best policies are situated at the center (figure caption statement).
- Several axis numeric markers and country labels are presented in the figure to enable country-to-peer and country-to-US comparisons.
- Regulatory categories include retail, professional services, and non-manufacturing industries (airlines, telecoms, electricity, gas, post, rail, and road freight).

*Source: OECD. 1/ Each country is compared to its euro area peers (black line) and to the U.S. (green line). Best policies are situated at the center.*

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### Annex II. Euro Area: Country Specific Recommendations (selection of priorities and specific measures)

### Cross-cutting reform priorities (selected measures repeated across countries)
- Soften employment protection, both de jure and de facto, in particular by:
  - streamlining labor court proceedings and labor court discretion over severance pay.
- Support growth of low-wage sector by improving search and work incentives, in particular by:
  - enforcing stronger conditionality of unemployment benefit receipts;
  - improving social transfer recipients' ability to earn additional income.
- Lower the tax wedge, which remains substantially above OECD's average.
- Reduce restrictions on rehiring of workers previously employed on temporary contracts.
- Enhance the powers of the competition authority, with a view to increasing competition in network and transportation industries.
- Liberalize price setting in professional services; lower formal entry requirements in professional services.
- Facilitate cross-border transfer of degrees and training certificates.
- Achieve minimum wage moderation and better training, by:
  - eliminating the coup de pouce (minimum wage increases beyond those linked to inflation);
  - further developing apprenticeship programs and sector-specific training and re-training opportunities.
- Increase senior employment by:
  - raising the minimum age for pension eligibility;
  - enforcing job-search requirements and applying penalties for refusals of reasonable job offers more consistently.
- Reduce regulatory barriers in the retail sector by:
  - abolishing administrative entry limitations for discounters;
  - eliminating restrictions on opening hours and sales periods;
  - combining market liberalization with the end of price regulations on key products, for example in the pharmacy sector.
- Liberalize services sectors by:
  - introducing greater competition in health-related services and professional services (notaries, accountants);
  - implementing the EU Services Directive.
- Boost product market competition and reduce mandatory information requirement for setting up business, in particular by making "one-stop shop" single electronic contact points (Sportello Unico per le Attività Produttive) operational and developing use of IT at the local level (as identified in Law Decree 112/2008).
- Enhance the role of competition bodies in formulating policy by:
  - raising the statutory cap on authorized personnel level of the Antitrust Authority;
  - developing a check list of pro-competition practices with the contribution of the Antitrust Authority, and establishing "watchdogs" at regional level to enforce this check list;
  - introducing an annual law covering competition and market issues.

### Country-specific priorities and measures (selected excerpts)
- Austria
  - Increase labor market participation of older and low-skilled/foreign-origin workers.
- Belgium
  - Overhaul the labor market to reduce dualism and encourage permanent hires.
- Finland
  - Increase labor participation of older workers; make the education system more efficient.
- France
  - Improve the functioning of labor markets to lift the employment rate; increase competition in retail and service sectors.
- Germany
  - Make labor market work better; promote competition in retail and services; decentralize wage bargaining to account for regional productivity and cost-of-living differences.
- Greece
  - Improve service markets functioning; implement the EU Services Directive; eliminate automatic wage indexation to inflation; introduce stricter criteria for unemployment benefits access; make pension benefits actuarially neutral for early retirement; reduce generous replacement rates and gradually increase statutory retirement age and eligibility criteria.
- Ireland
  - Raise employment to avoid persistence of high unemployment rate; improve competitiveness to promote exports as a sustainable source of growth.
- Italy
  - Lower severance pay on permanent contracts to at least EU average levels and make increases more gradual in early years of tenure;
  - Prevent excessive use of unfair dismissals;
  - Decentralize wage setting (for example by moving to an “opt-in” rather than “opt-out” system for collective bargaining) and eliminate automatic indexation;
  - Ensure ambitious implementation of the EU Services Directive to lower entry barriers at local and regional levels;
  - Eliminate restrictions on professional services and narrow qualification requirements;
  - Relax restrictions in the rental market (examples: landlords' obligation to automatically renew lease for the first five years and the cap on rent increases to CPI inflation);
  - Selectively reduce labor taxes for hiring unemployed workers over 50;
  - Phase in the income-based tax credit to make it attractive for low-earning partners with children;
  - Increase statutory retirement age from 65 to 67 while providing financial incentives for workers to continue working after minimum retirement age (62).
- Luxembourg
  - Reform the pension system.
- Malta
  - Reform the pension system to encourage labor market participation.
- Netherlands
  - Increase labor market participation and raise the employment rate; promote firm-level wage bargaining to allow companies to opt-out from industry-wide arrangements.
- Portugal
  - Further improve the business environment; foster competition in product and service markets.
- Slovakia (Slovak Republic)
  - Make labor market work better to reduce high structural unemployment among young and low-skilled workers; improve effectiveness of the education system.
- Slovenia
  - Reduce state involvement in the economy by continuing privatization; strengthen competition in product and service markets; provide competition authority with adequate capacities and institutional independence.
- Spain
  - Reduce entry barriers to professional services; improve transportation services by establishing an independent regulatory and supervisory body for the railway sector; restructure the state-owned railway company with a final objective of privatization; privatize transportation infrastructures, including ports and airports; eliminate early retirement schemes ("unemployment pipelines") while enhancing retraining for older long-term unemployed; strengthen activation requirements for sickness and disability benefits; improve opportunities for part-time work, including for retired persons; speed transition from secondary to tertiary education with tuition fees and means-tested loan system; raise incentives for timely tertiary education graduation.
- Cyprus
  - Ensure wage moderation to regain competitiveness; make labor market work better; improve the functioning of the labor market to provide incentives to work.
- Other targeted measures across countries include:
  - Reduce severance payments (noted as above EU average in some countries);
  - Relax employment protection for regular workers to reduce protection gap with temporary workers;
  - Relax working time regulations to help reduce cyclical employment losses;
  - Promote vocational training and better-targeted active labor market policies;
  - Streamline licensing processes and accelerate SIMPLEX program implementation;
  - Resume privatization processes and expand performance monitoring of state-owned enterprises;
  - Introduce gradual decrease of unemployment benefits over time and stricter job search requirements;
  - Provide more resources to unemployment agencies (example: FÁS in Ireland) to improve job search assistance;
  - Review minimum wage levels and consider regional differentiation with explicit numeric proposals:
    - Allow regional differentiation of the minimum wage by capping the minimum wage to 40 percent of regional median wage and abolishing any formal link between the minimum wage and the contractual wage;
    - The reduced minimum wage (at 75 percent) should also be extended to the 18-21 age group.
  - Enhance tertiary education funding and governance via tuition fees for full-time tertiary students along with means-tested grants and loans, greater autonomy for institutions, and performance-based management.
  - Encourage female labor market participation through fiscal incentives for part-time and flexible work arrangements, training programs, and affordable childcare services.
  - Increase effective retirement age and limit early retirement pathways; make pension benefits actuarially neutral for early retirement.

*Source: IMF desks.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2010/_spn1019.pdf_