Strengthening the Euro Area: The Role of National Structural Reforms in Building Resilience

By John C Bluedorn, Shekhar Aiyar, Romain A Duval, Davide Furceri, Daniel Garcia-Macia, Yi Ji, Davide Malacrino, Haonan Qu, Jesse Siminitz, Aleksandra Zdzienicka

June 17, 2019

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John C Bluedorn, Shekhar Aiyar, Romain A Duval, Davide Furceri, Daniel Garcia-Macia, Yi Ji, Davide Malacrino, Haonan Qu, Jesse Siminitz, and Aleksandra Zdzienicka. Strengthening the Euro Area: The Role of National Structural Reforms in Building Resilience, (USA: International Monetary Fund, 2019) accessed November 8, 2024

Disclaimer: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

Summary

Cross-country differences in economic resilience—in an economy’s ability to withstand and adjust to shocks—remain significant in the euro area. In part, the differences reflect the lack of a national nominal exchange rate as a mechanism to adjust to shocks. The IMF staff has argued that union-wide architectural changes such as the banking union, the capital markets union, and a central fiscal capacity can help foster greater international risk sharing. Yet even these changes cannot insure against all shocks. National policies thus have a vital role to play. This IMF staff discussion note analyzes how national structural policies can help euro area countries better deal with economic shocks. Using a mix of empirical and modeling approaches, the note finds that growth-enhancing reforms to labor and product market regulations, tailored to country-specific circumstances, would help individual euro area economies weather adverse shocks. Higher-quality insolvency regimes are associated with more efficient factor reallocation following a shock. The note also finds that structural and cyclical policies interact. Greater rigidities make economies more fragile, putting a higher burden on fiscal policy. This is especially true for members of a monetary union. Countries should build fiscal space in good times and tackle rigidities, reducing their need for countercyclical policies in bad times while making countercyclical policies more effective when deployed.

Subject: Commodity markets, Employment, Financial crises, Financial markets, Global financial crisis of 2008-2009, Labor, Macrostructural analysis, Structural reforms

Keywords: Area economy, Business cycles, Capital reallocation, Commodity markets, Corporate insolvency regime, Credit constraint, Employment, Exchange rate, Firm level, Fiscal policy, Global, Global financial crisis of 2008-2009, High-leverage firm, Insolvency regime, Investment dynamics, Labor market, Monetary union, Open economy, Product market, Product market reform, Product market regulation, Reforms, Regime reform, Resilience, Response to shock, Risk premium, SDN, Structural policies, Structural reforms, Total factor productivity, Unemployment insurance

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Staff Discussion Notes No. 2019/005
Stock No:

SDNEA2019005
ISBN:

9781498319706
ISSN:

2617-6750

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