Strengthening the Euro Area: The Role of National Structural Reforms in Building Resilience
Staff Discussion Notes, June 17, 2019
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- Strengthening the Euro Area: The Role of National Structural Reforms in Building Resilience
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Bibliographic details
- Authors: John C Bluedorn, Shekhar Aiyar, Romain A Duval, Davide Furceri, Daniel Garcia-Macia, Yi Ji, Davide Malacrino, Haonan Qu, Jesse Siminitz, Aleksandra Zdzienicka
- Published: June 17, 2019
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9781498319706.006
Core question and scope
- Examines how national structural policies can help euro area countries better deal with economic shocks when a national nominal exchange rate is not available.
- Uses a mix of empirical and modeling approaches.
- Publication details: Pages: 31; Volume: 2019; Issue: 005; Series: Staff Discussion Notes No. 2019/005; Stock No: SDNEA2019005; DOI: https://doi.org/10.5089/9781498319706.006; ISBN: 9781498319706; ISSN: 2617-6750.
- Publication date: June 17, 2019.
- Authors: John C Bluedorn, Shekhar Aiyar, Romain A Duval, Davide Furceri, Daniel Garcia-Macia, Yi Ji, Davide Malacrino, Haonan Qu, Jesse Siminitz, Aleksandra Zdzienicka.
Key findings
- Cross-country differences in economic resilience within the euro area remain significant.
- Part of these differences reflect the absence of a national nominal exchange rate as an adjustment mechanism to shocks.
- Union-wide architectural changes (banking union, capital markets union, central fiscal capacity) can foster greater international risk sharing, but cannot insure against all shocks.
- National structural policies therefore play a vital role in resilience.
- 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.
- Structural and cyclical policies interact: greater rigidities make economies more fragile and place a higher burden on fiscal policy.
- The fiscal burden from rigidities is especially pronounced for members of a monetary union.
- Recommendation focus: build fiscal space in good times and tackle rigidities so as to reduce the need for countercyclical policies in bad times and to make countercyclical policies more effective when deployed.
Policy recommendations and implications
- Prioritize growth-enhancing labor market reforms tailored to country-specific circumstances.
- Implement product market reforms that raise productivity and flexibility.
- Improve insolvency regimes to facilitate efficient factor reallocation after shocks.
- Build fiscal space during good economic times to increase policy effectiveness during downturns.
- Tackle structural rigidities to reduce reliance on countercyclical fiscal policy and improve the effectiveness of such policies when needed.
- Recognize that union-wide institutional reforms (banking union, capital markets union, central fiscal capacity) complement but do not substitute for national structural reforms.
Thematic subjects covered
- Commodity markets; Employment; Financial crises; Financial markets; Global financial crisis of 2008-2009; Labor; Macrostructural analysis; Structural reforms.
- Keywords highlighted include: capital reallocation, corporate insolvency regime, credit constraint, exchange rate, firm level, fiscal policy, high-leverage firm, insolvency regime, investment dynamics, labor market, monetary union, open economy, product market regulation, reforms, risk premium, structural policies, total factor productivity, unemployment insurance.
Staff Discussion Notes No. 2019/005 (June 17, 2019).
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- Staff Discussion Note