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Henrik Enderlein, III Which Structural Reforms for Europe? in:

Oliver Holtemöller (Ed.)

How Can We Boost Competition in the Services Sector?, page 43 - 86

1. Edition 2017, ISBN print: 978-3-8487-4676-7, ISBN online: 978-3-8452-8902-1, https://doi.org/10.5771/9783845289021-42

Bibliographic information
Which Structural Reforms for Europe?1 (Henrik Enderlein) Prof Dr Henrik Enderlein, Vice President and Professor of Political Econ‐ omy at the Hertie School of Governance and Director of the Jacques De‐ lors Institut – Berlin Dr Anna auf dem Brinke, Research Fellow at the Jacques Delors Institut - Berlin Executive Summary The euro area still suffers from low growth rates, macroeconomic imbal‐ ances and divergence. Therefore, the European Commission, the ECB, the IMF, and the OECD have all called for more structural reforms in the euro area. Adding up all recent key reform recommendations by the European Commission and the OECD alone amounts to more than 200 recommen‐ dations for the 19 euro-area countries. In this jungle of recommendations setting the right priorities is impor‐ tant. This policy paper presents an approach on how to use the long list of reform recommendations. It provides a structured summary of the key re‐ form recommendations for the euro area, puts forward three reform priori‐ ties for each euro area country and presents an overview of the reforms on a single page. Such a procedure is necessarily controversial. But we want to bring some clarity and structure into a debate that is all over the place. We arrive at three key conclusions: First, product-market reforms with a focus on enhancing the Single Market should be the top priority now. They have the highest short-term gains, can be implemented in good and bad economic times, have the largest effects on potential growth and can contribute significantly to the functioning of the euro area. III 1 A previous version of this article has been published here: auf dem Brinke, A.; En‐ derlein, H. (2017): How to make sense of the structural reform lists for the euro area, Policy Paper 184, Jacques Delors Institut - Berlin. 43 The second reform priority should be to boost investment as the euro area suffers from a significant investment gap. Countries with fiscal space should directly invest in education, research and investment. Investments here count as reform in the sense that they change the structure of the economy. Third, the high rates of unemployment in many euro-area countries are a source of concern. However, labour market reform should be implement‐ ed with great care: They can have transitional costs in the short term and benefits may take longer to materialize. Moreover, some of the reforms do not work well in times of weak economic growth and there are potentially powerful veto players to counter reform efforts. In addition, product-mar‐ ket reforms can go a long way in increasing employment and restoring competitiveness. If labourmarket reforms are implemented, reforms should have a demand-side component to stabilize the economy, such as investment in education, vocational training, ALMPs and life-long learn‐ ing. The timing and method to implement reforms need to take into account the broader economic circumstances as well as distributional effects and social cohesion. Our key take-home point is that not the most frequently mentioned reforms should be implemented, but the ones that fulfil the ob‐ jectives of increasing growth and improving the functioning of the euro area also in difficult economic times. What are structural reforms and why are they important? What are structural reforms? There is a lot of disagreement about the term “structural reforms”. Many prefer not to use it as it is considered to reflect a certain ideological orien‐ tation. We argue that the term can be meaningfully applied as long as it is well-defined. For us, structural reforms are all government-driven reforms that improve the functioning of the economy with the aim of leading to higher long-term GDP. Whether higher GDP should be an objective in it‐ self is of lesser relevance here. We consider a higher GDP to be generally positive as long as negative externalities are properly taken into account. But the debate about structural reforms should not be a debate on whether higher GDP is good, but how to get there, should higher GDP be desired. In the euro area context, an improved functioning of the single currency 1 1.1 III Which Structural Reforms for Europe? (Henrik Enderlein) 44 area thanks to structural reforms would also fall under our definition as we would expect euro area GDP to increase as a consequence in the longer term. Typical structural reforms fall into the area of labour markets, product markets and the financial sector, as well as taxation and public sector re‐ forms. At their best, structural reforms may be budget-neutral or even save money. These features have led some to argue that structural reform rec‐ ommendations are conceptually empty or “[s]afe advice. No one knows what it means. If economy grows: I told you. If it stalls: You didn’t do structural reform.”2 The quote by Kaushik Basu, Professor of Economics at Cornell University and former Chief Economist of the World Bank, highlights both the power and confusion surrounding the concept of struc‐ tural reform: When it comes to economic policy, structural reforms are of‐ ten synonymous with sound economic policy. But how do we recognize a good structural reform when we see it? Clearly, when looking at the long lists of reform recommendations (that put forward hundreds of reforms for euro area countries alone) it seems that governments should know what to do. At the same time, the imple‐ mentation gaps are significant: Only a handful of reforms have been im‐ plemented in the last years.3 On almost half of the key recommendations there has been no progress at all. This could be due to the context of eco‐ nomic crisis. Indeed, even strong proponents of structural reforms such as the IMF now recommend paying more attention to the macroeconomic context, see Duval et al. (2016), OECD (2016a) and Sanchez et al. (2016). There has been a notable shift from focusing on what one might call the traditional reform agenda to more emphasis on the difference between bad and good economic times, the role of the demand-side, and social cohe‐ sion. In this context, making reform recommendations and prioritising them has become even more challenging. This paper explains why structural reforms are important for the euro area from a theoretical standpoint. Second, it analyses more than 200 key reform recommendations and collapses them into two summary reform lists with five areas of reform in each list. Third, with the help of insights from empirical research it identifies three reform priorities for each euroarea country. 2 See tweet of Kaushik Basu, Professor of Economics at Cornell University and for‐ mer World Bank Chief Economist, on 7 April 2016 at 10:33 pm. 3 For recent evaluations see OECD (2015a) and Hradisky (2016). 1 What are structural reforms and why are they important? 45 Why structural reforms are important for growth The recovery after the crisis has been slow and the euro area is stuck in a difficult situation: low growth, low inflation and high unemployment. In terms of potential output most advanced economies have not recovered from the crisis: potential growth is still below pre-crisis levels (Duval et al. 2016). Figure 3.1 reproduces estimates from the IMF. Lost years for growth in advanced economies4 Source: Duval et al. 2016, Figure 3.1. Growth rates in the euro area are still too low. As figure 3.2 shows, some countries have not recovered from the crisis. Of the 19 euro-area members four have still lower GDP per capita in 2016 than in 2008. The Baltic States and also Germany have grown faster; France and Spain have wit‐ nessed a slower recovery; Greece and Italy are on a downward trend. 1.2 Figure 3.1: 4 Figure 3.1 shows potential output growth and its components for advanced economies. III Which Structural Reforms for Europe? (Henrik Enderlein) 46 Not surprisingly, unemployment rates in November 2016 stood at 9.8 percent on average.5 Again this conceals the vast differences within the euro area: Spain’s unemployment is just below 20 percent, while Ger‐ many’s unemployment rate amounted to a little more than 4 percent. On top of that, inflation is still low: The annual HICP inflation rate for De‐ cember 2016 stood at 1.1%.6 In some euro-area economies recovery has come to a halt7 Source: Eurostat (variable namq_10_pc), authors’ calculation. While structural reforms, shifting aggregate supply, can in theory lead to a tendency for prices to fall, the general growth dynamic triggered by re‐ forms is of paramount importance, especially in the context of a highly ac‐ commodative monetary policy. As the ECB often argues, the currently Figure 3.2: 5 Eurostat, unemployment rate by sex and age, monthly average, seasonally adjusted estimate. 6 ECB, Selected Indicators for the Euro Area. 7 Figure 3.2 shows quarterly unadjusted chained GDP per capita for selected coun‐ tries (2008Q1=100). 1 What are structural reforms and why are they important? 47 supportive demand-side conditions should be used by governments for structural reforms. The positive economic effects of reforms work through three main channels: (i) employment, (ii) productivity, and (iii) potential output in the long-run.8 Most reforms have spill-over effects across more than one of these areas, but one can categorize them broadly into these three cat‐ egories. First, there are a number of reforms that have direct effects on employ‐ ment. We simply describe these reform areas here without making a nor‐ mative assessment whether such reforms are desirable. – Reforms that lower the reservation wage, such as the harmonization of employment protection legislation (EPL) for temporary and permanent workers, tax reforms of second-earner penalties, a reduction of the labour tax wedge, a reduction of high and unconditional unemploy‐ ment benefits, a revision of early retirement schemes and pension re‐ forms that increase the pension age and offer more flexible transition periods into retirement. – Reforms that allow labour market outsiders to enter the market and thus increase the overall labour supply, such as the provision of child care for parents, language classes for migrants, vocational training for young individuals, life-long learning programs for the elderly and ac‐ tive labour market policies (ALMP) for the unemployed. These re‐ forms can increase the labour market participation especially of wom‐ en, elderly people, migrants or workers, whose skills are no longer in demand due to structural change. Second, there are structural reforms that are directly targeted at increasing productivity: – Reforms to reduce barriers to entry to increase competition and lower prices such as the opening of closed professional services, harmoniza‐ tion of regulations and reduction of regulatory barriers and red tape. – Reforms to increase market efficiency through digitalization, facilitat‐ ed by increasing competition in the telecoms sector leading to more ICT investment, harmonizing spectrum allocation and allow for EU- 8 For some recent empirical evidence see for instance: Andersen et al. (2014); Duval et al. (2016); ECB (2015a); ECB (2015b); Varga and in ‘t Veld (2014). III Which Structural Reforms for Europe? (Henrik Enderlein) 48 wide auctions for licenses, and encourage EU-wide standards for con‐ nected factories. – Reforms that increase the skill-level, such as investment into earlychildhood education, school and university funding, vocational training and R&D funding. Third, some reforms have direct effects on the growth potential: – Reforms that increase competitiveness in trade such as making the wage-bargaining system responsive to changes in productivity, in‐ crease of competition in product and service markets that lower prices. – Reforms that improve the efficiency of the taxation process, such as enforcing tax compliance to increase the tax base, shifting taxation from labour to more growth friendly taxes such as environmental tax, and reducing government administration and expenditure where possi‐ ble. – Reforms that reduce uncertainty in the market and thereby increase in‐ vestment such as an overhaul of the judicial system and bankruptcy regulations, as well as reduction of regulatory uncertainty. Taken together, these theoretical arguments for more structural reforms in the euro area to increase growth, both directly and indirectly, are com‐ pelling. Given the weak recovery after the crisis, there is room for re‐ forms. Why structural reforms matter for the euro area In addition, structural reforms are important for the functioning of the euro area. There are two main reasons for this (cp. Rubio 2014): First, there are still large macroeconomic imbalances in the euro area and the economies are set on a trajectory of divergence: Business cycles are not synchronized as different empirical studies have shown (de Haan et al. 2007; Giannone et al. 2009; Ferroni and Klaus 2015). Inflation differentials and the com‐ petitiveness divide have fallen since the crisis but remain significant (auf dem Brinke et al. 2015). Figure 3.3 depicts differences in unit labour costs across selected sec‐ tors in the euro area. It shows that the largest wage growth differentials did not occur in manufacturing or construction, but in the service sectors, in‐ cluding financial and insurance services, sales services and business sector services. The finding that wage growth in the sheltered sectors was much 1.3 1 What are structural reforms and why are they important? 49 larger than in the exposed sector and that the sheltered sector is mainly composed of the service sector is confirmed by other research (Johnston 2012; Hanzl-Weiss and Landesmann 2016). Sectoral divergence in wage growth in the euro area9 Source: OECD Dataset: Productivity and ULC by main economic activity (ISIC Rev. 4, International Standard Industrial Classification of All Economic Activities), au‐ thors’ calculation. These imbalances pose a problem for the common monetary policy of the European Central Bank. It sets only one interest rate for the whole euro area. If business cycles in the euro area are not synchronised, this interest rate will be too high for countries that are currently in an upswing, exacer‐ bating the boom, and too low for a country in recession, deepening the slump (Enderlein 2005). The second reason for why structural reforms are important for the euro area rests on optimal currency area theory. The architects of the Economic and Monetary Union knew that market integration was not only a desired by-product of monetary integration, but a necessary component. The real Figure 3.3: 9 Figure shows differences in unit labour cost growth in the euro area 19 (no data for Malta and Cyprus) for selected economic activities, based on standard deviation in wage growth, 1995=0. III Which Structural Reforms for Europe? (Henrik Enderlein) 50 exchange rate channel is thereby of crucial importance (Enderlein et al. 2012, Dullien et al. 2009): If one euro area country grows faster than the others, expectations adjust and workers will ask for higher wages. Higher wages will translate into higher prices. Inflation rises. This reduces the competitiveness vis-à-vis the trading partners. The real exchange rate ap‐ preciates. Exports fall, while imports increase. In the next wage-setting round, wages will be cut. This will reduce aggregate domestic demand. In‐ flation falls. The economy is back in equilibrium. In other words: the real exchange rate channel corrects imbalances after an asymmetric shock. For the real exchange rate channel to work, markets have to be fully in‐ tegrated. Wages and prices should not be sheltered from competition. In‐ complete markets, sheltered sectors and a high share of non-tradable prod‐ ucts hamper the functioning of the real exchange rate channel. Structural reforms that increase the responsiveness of prices and wages to the market stabilize the euro area.10 They reduce inflation differentials and the com‐ petitiveness divide. In theory, structural reforms can help to improve the functioning of the euro area (auf dem Brinke et al. 2016). Among them are: – Reforms that facilitate the cross-border integration of product markets such as harmonization of regulation, opening up sheltered sectors, deregulating closed professions and reduction of red tape. – Reforms that increase the flexibility of wages and employment such as wage bargaining on plant-level and employment protection legislation reform that allow employers to react to upswings and downturns of the economy, reforms that increase labour mobility such as benefit porta‐ bility and degree recognition. – Reforms that help economies to recover after a recession by increasing investment such as public private partnerships, reduction of regulatory uncertainties and public spending on infrastructure and education. Economic theory provides a strong case for euro-area countries to imple‐ ment structural reforms both to get the growth engine back on track and to improve the functioning of the common currency area: Growth rates are still low and potential growth has not yet recovered. The euro area is an imperfect currency area with an inefficient allocation of existing re‐ 10 For more on how structural reforms could feature in a reform agenda for the euro area see Enderlein et al. (2016). 1 What are structural reforms and why are they important? 51 sources. Falling productivity growth, already before the crisis, and weak investment both public and private are widespread. At the same time, the working age population in Europe is shrinking. The current generation ready to enter the labour market may be the best educated so far (at least in terms of years spent in education) but high youth unemployment rates pay testimony to how badly Europe is failing to integrate them into the labour market. The next section looks at the recommendations on the ta‐ ble. What are the recommendations? How to make sense of laundry lists The four most important actors in the field of structural reforms in the eu‐ ro area – the European Commission, ECB, IMF, and OECD – call for more reforms. There is almost an abundance of reform recommendations. As a result, these laundry lists may seem too complex to produce mean‐ ingful policy results. While the number of structural reform recommenda‐ tions may be high and confusing, this section attempts to identify clear policy priorities. It proceeds in three steps: First, this section starts with a frequency count: How many reform rec‐ ommendations are there for each country? This shows which countries have the largest reform backlog and are in need of reform. Second, it ex‐ amines whether there is consensus when it comes to the key reform rec‐ ommendations.11 This allows us to identify a smaller number of reform priorities for each country and the euro area as a whole. Third, the reforms are grouped into five areas (product market, financial sector, labour mar‐ ket, taxation and public sector) distinguishing again between consensus and non-consensus reform recommendations. Based on this we can identi‐ fy areas where reforms are most needed and compare reform patterns across countries. In short, this section tries to condense the more than 200 2 2.1 11 For each country we compare the recommendations of the latest OECD Economic Surveys (published between 2014 and 2016) with the Country Reports 2016 of the European Commission (published in February 2016 and based on the 2015 CSR cycle). These two series have been selected because they provide a European and international perspective, produce regularly systematic reform recommendations, and have directly comparable key recommendations. III Which Structural Reforms for Europe? (Henrik Enderlein) 52 reform recommendations into two short lists of five reform areas each. The first list summarizes reforms that should have already been imple‐ mented: unfinished business. The second list comprises next-generation reforms that are more forward-looking. Deriving consensus reform lists There are many different publications that demand more reforms. To com‐ pare two consistent sets, this paper focuses on two reoccurring publication series: the OECD Economic Surveys and the country-specific recommen‐ dations of the European Commission.12 Taken together the most recent key recommendations add up to 236 reforms for the euro-area countries. Figure 3.4 shows the breakdown of numbers by countries. Not surprising‐ ly, the most reform recommendations were issued for the euro area (20) as a whole. The countries with the longest lists of key reforms were Greece (16), Slovakia (16), Portugal (15) and Latvia (14). The fewest recommen‐ dations were received by Germany, Estonia and Luxembourg (9 each), as well as Belgium (8).13 The frequency count shows that all countries have scope for structural reforms, and that the countries, which still have not fully recovered after the crisis, have received a longer list. How much do key reform priorities overlap? While in terms of general diagnostics, the difference between the main actors is more in emphasis than in substance, the actual reform recommendations overlap by less than 40 percent. Because the European Commission and the OECD are in regu‐ lar contact about their reform recommendations one could have expected a greater overlap. Yet at the same time, they have tended to set different pri‐ orities in their recommendations. 2.2 12 See appendix for a complete list of all references by country. 13 Malta has very few recommendations (3), partly because it is not covered by the OECD. 2 What are the recommendations? 53 Counting key reform recommendations: in total more than 230 Sources: Based on the latest reform recommendations from the country studies in the latest OECD Economic Surveys and the CSRs in the country reports from February 2016 by the European Commission (please see appendix for details), compiled by au‐ thors. The two countries still under a macroeconomic adjustment program, Cyprus and Greece, have the highest number of consensus reform recom‐ mendations, as figure 3.5 depicts. This is due to the fact that both coun‐ tries have been under a macroeconomic adjustment programme with a de‐ tailed Memorandum of Understanding and have received more recommen‐ dations than in the CSRs. But also for Italy (7) and Lithuania (7) there is a consensus on what has to be done next. For Spain there is more disagree‐ ment with only 2 key reforms that are advocated by both the OECD and the European Commission. Countries with fewer reform recommendations in total have larger overlap, as can be seen in the cases of Germany (6) and Belgium (6). Figure 3.4: III Which Structural Reforms for Europe? (Henrik Enderlein) 54 Consensus on reform priorities for euro-area countries is less than 40% Sources: Based on the latest reform recommendations from the country studies in the latest OECD Economic Surveys and the CSRs in the country reports from February 2016 by the European Commission (please see appendix for details), compiled by au‐ thors. Reform recommendations can be sorted into five areas. Figure 3.6 shows the number of key reform recommendations by areas. Most reform recom‐ mendations concern the labour market (73), followed by public sector re‐ forms (65), which include all reforms that alter how the public sector works including investment, social benefit reforms, public employment re‐ forms and reforms of the judicial service. Fewer recommendations fall in‐ to the areas of taxation (29), the financial sector (25) and the product mar‐ ket (24). There are almost three times as many labour market reform rec‐ ommendations than product market reform recommendations. Figure 3.5: 2 What are the recommendations? 55 There were three times as many country recommendations for labour markets than product markets Source: Based on the latest country reform recommendations from the country studies in the latest OECD Economic Surveys and the CSRs in the country reports from Febru‐ ary 2016 by the European Commission (please see appendix for details), compiled by authors. In a last step, let us look at reform contents.14 One can see that although all countries receive tailored advice, the recommendations themselves are not that different. It is possible to identify two distinct reform lists: unfin‐ ished-business and next-generation reforms. The list of unfinished busi‐ ness should be completed, and if possible, coupled with reforms from the next-generation list. Most countries can follow one of the reform blueprints: seven countries from the euro area should focus on their unfin‐ ished business first, seven other countries should fully embark on the nextgeneration reform measures. For five countries, there could be a mix with elements from both lists. Figures 3.7A and 3.7B provides a short and sim‐ ple overview of all reform recommendations by area and country.15 Figure 3.6: 14 See appendix tables 3.A1 and 3.A2 for the complete list of all reform recommen‐ dations, and table 3.A3 for a summary of the consensus reform recommendations. 15 See appendix tables 3.A1 and 3.A2 for the complete list of all reform recommen‐ dations, and table 3.A3 for a summary of the consensus reform recommendations. III Which Structural Reforms for Europe? (Henrik Enderlein) 56 Consensus reform lists: unfinished business and next gener‐ ation Consensus reform lists: where the countries are Source: Authors. Figure 3.7A: Figure 3.7B: 2 What are the recommendations? 57 The unfinished-business list consists of policies that can be implemented even if there is no or little fiscal space because public deficit and debt are too high. The five recommendations are to increase competition in the product market, to improve the resolution of non-performing loans and bankruptcy procedures, to help bring wage growth in line with productivi‐ ty by installing an effective framework for wage bargaining, and reducing EPL, broadening the tax base and enforcing tax compliance and reduce public debt. These reforms are still relevant for Belgium, Cyprus, Finland, Greece, Ireland, Italy and Luxembourg. While these reforms may make sense from a theoretical perspective, how to implement them remains a puzzle. In addition, we have a list of new reform recommendations. The con‐ crete reform measures are to increase competition in the service market, especially by deregulating closed professional services, improving access to finance (particularly for SMEs), integrating outsiders (including young and old workers, women and immigrants) into the labour market by offer‐ ing more targeted training through vocational schemes and ALMPs, re‐ ducing the labour tax wedge and shifting taxation to a consumption or en‐ vironmental tax, and finally (if there is fiscal space) increasing investment into education, research and infrastructure. Austria, Estonia, Germany, Latvia, Malta, the Netherlands and Slovakia could primarily turn to the next-generation list. According to the analysis, France, Lithuania, Portugal, Slovenia and Spain are clearly in-between the two lists and need reforms from both. France should follow the unfinished business list when it comes to labour market policies and public debt, and follow the next-generation list with regards to the product market and taxation. Lithuania should integrate out‐ siders into the labour market but at the same time also broaden the tax base and fight tax evasion. Portugal needs to alleviate poverty and scaleup the ALMPs. Slovenia has to tackle its non-performing loan problems in the banking sector and facilitate restructuring, while at the same time ad‐ dress the problem of integrating long-term unemployed and low-skilled in‐ dividuals into the labour market. Spain still has to restructure and privatize banks, but should also work on increasing competition in the service sec‐ tor. To sum up, although there is still some unfinished business which needs to be taken care of, countries may concentrate, where possible, on the next generation list because these reforms are forward-looking, and focus on how to regulate the new economy including the digital sector, be innova‐ III Which Structural Reforms for Europe? (Henrik Enderlein) 58 tive and integrate the younger generations into the labour market. Reforms on that list have a demand-side component and help to stimulate growth in the euro area. The focus of these reforms it to push out the production pos‐ sibility frontier and to move from consolidation to stimulation of the econ‐ omy. Still, unfinished-business reforms remain important and their imple‐ mentation a challenge. Where possible, we might think about how to cou‐ ple them with reforms from the next-generation list. This is what the next section is about. How to prioritize structural reforms? Growth effects There is a great degree of uncertainty regarding the short-term and medi‐ um-term effects of structural reforms. Empirical results are not easy to compare as they use different data and methodology. Still, we can identify three important criteria for evaluating the growth effect of structural re‐ forms: The time horizon (short-term, medium-term and long-term effects), the economic conditions (normal, good or bad times), and sequencing and package deals. First, it almost goes without saying that reform effects on growth get larger over time. Most reforms have transitional costs in the beginning. For example, simulations show that in the first five years growth rates will be less than two percent higher but after five years they can be higher than two percent (Andersen et al. 2014). Estimates suggests that after 50 years euro-area GDP will by somewhere between 12 and 17 percent higher, if structural reforms have been implemented, than compared to a baseline scenario (Andersen et al. 2014; Varga and in ‘t Veld 2014). Labour-market reforms, in particular reforms of the unemployment in‐ surance and employment protection legislation, tend to have small (or even negative effects) in the early years of implementation (Andersen et al. 2014). By contrast, a reduction of the labour tax wedge and an increase of ALMPs have already a sizeable effect in the short run because they also have a demand-side component (Duval et al. 2016). When comparing growth effects in the long run of different reforms when implemented si‐ multaneously (Andersen et al. 2014), calculations suggest that the largest growth gains can be made with reforms in the non-tradable sector, such as the service sector, with about 4.2 percent deviation in GDP from the base‐ 3 3.1 3 How to prioritize structural reforms? 59 line, followed by reforms in the tradable sectors (3.0 percent) and tax re‐ forms (1.2 percent). All labour-market reforms have an effect smaller than 1 percent. These effects are, of course, depended on a variety of factors. There is, nonetheless, agreement that labour markets and product markets are the two most important reform areas when it comes to growth effects. Second, reforms have different effects on growth depending on the overall condition of the economy, as the IMF shows (Duval et al. 2016): In times of low growth, some structural reforms can have significant negative results. For instance, a revision of unemployment benefits and employ‐ ment protection legislation can further decrease demand and prolong the recession. It will also affect low-income households disproportionality and may raise inequality (Causa et al. 2015). By contrast, structural reforms that have a Keynesian component, such as investing in vocational training and ALMP or reducing the tax wedge can increase wages and thereby help to sustain or increase demand. It has been shown, for instance, that boost‐ ing ALMP in particular can increase both equality and efficiency (Cournède et al. 2016). This means that some structural reforms are better left for good economic times. Product-market reforms work well in good and bad economic climate. Structural reforms have also a budgetary effect: Policies that have a Keynesian component may cost money in the short run, even if the effect on the public budget is neutral or even positive in the long run. Policies such as cutting unemployment benefits or reforming pensions may reduce budgetary pressures (Bouis et al. 2012) but also reinforce the slump. There is a thin line between choosing reforms that do not deepen the recession but also do not strain the public budget. Some reforms can have a neutral effect on the budget and work in good and bad times (combining the find‐ ings from IMF 2016 and OECD 2012): tax reforms such as reducing the labour tax wedge and shifting from direct to indirect taxation and productmarket reforms. Third, sequencing and package deals are important. Simulations suggest that the growth effect of product-market reforms and labour-market re‐ forms is larger over time if they are implemented simultaneously because many reforms are complementary (Andersen et al. 2014; ECB 2015a). Front-loading may also be politically easier as package deals can be com‐ promises between different political parties and stakeholders. Research suggests further that product-market reforms should be implemented prior to labour-market reforms because product-market reforms increase em‐ ployment and help to absorb potential losers of labour-market reforms III Which Structural Reforms for Europe? (Henrik Enderlein) 60 (Blanchard and Giavazzi 2003). The estimations also show that the effects on growth will be larger for the euro-area periphery countries than for the core (Andersen et al. 2014). The empirical evidence in a nutshell: All structural reforms have a posi‐ tive effect on growth in the medium or long run. This effect gets larger over time. Some reforms have a negative effect in the short run and in par‐ ticular during a recession. Reforms should be front-loaded but still se‐ quenced: Product-market reforms should always be implemented prior to labour-market reforms, and labour-market reforms with an embedded stimulus should be prioritized. There is no consensus on whether productmarket reforms or labour-market reforms will have larger growth effects in the long run, but there is general agreement that these two areas are the most important ones for structural reforms in the euro area. Countries in the euro-area periphery will reap larger growth benefits from reforms than countries in the geographic core. Contribution to euro area stability In addition to contributing to growth, structural reforms may also help to increase the adjustment capacity of the euro area, as also the ECB has ar‐ gued (Praet 2015). In this view, euro-area countries should focus on prod‐ uct market reforms because they improve the real exchange rate channel and thereby promote cyclical convergence (auf dem Brinke et al. 2016). Here, the most promising reforms are opening up sheltered sectors for competition by facilitating market entry, opening up professional services and integrating the service sector, as well as harmonizing regulations espe‐ cially in the digital sector (Enderlein et al. 2017) and reducing regulatory uncertainty. Thus, completing the European Single Market should be on top of the euro-area reform agenda. This also shows that the reform recommendations judged by the num‐ bers do not set the right emphasis. Instead of treating labour-market and product-market reforms as equals, there should be a clear focus on prod‐ uct-market reforms. Labour-market reforms, financial sector reforms, tax‐ ation reforms and public-sector reforms are also important but from an economic perspective – both theoretically and empirically – product-mar‐ ket reforms are more important. Recent analyses agree that product market reforms should have priority. This assessment is also shared by the ECB and the IMF. The ECB con‐ 3.2 3 How to prioritize structural reforms? 61 cluded: “More product-market reforms should be considered the highest priority at the current juncture.” (ECB 2016a) And the IMF summed up its findings with the key point: “Product-market reforms should be imple‐ mented forcefully (…).”(Duval and Furceri 2016) The fact that there are by far more labour-market reform recommendation than product-market ones blurs these clear policy messages. Political feasibility There are very few good economic reasons for delaying structural reforms, as Mario Draghi, the president of the ECB put it in June 2016 (Draghi 2016), but many understandable political ones. The political feasibility of structural reforms is indeed disputed. Jean-Claude Juncker, then the Prime Minister of Luxembourg and the President of the Eurogroup, famously said “We all know what to do, but we don’t know how to get re-elected once we have done it.” (The Economist 2007) The political economy of reforms is at the heart of the problem: there are national and euro-area lev‐ el considerations as well as the question of whether there is fiscal space for reforms. First, structural reforms can be politically painful and governments, which implement structural reforms, are less likely to win re-election. It follows that structural reforms should be implemented early into the elec‐ toral cycle so that the benefits of reforms already occur during the legisla‐ tion. In addition, governments should aim for low-hanging fruits, i.e. re‐ forms that offer “quick-wins” in the short run (Enderlein and Pisani-Ferry, 2014). These reforms may also help to increase the acceptance of more de‐ manding reform packages later. The empirical evidence, however, also shows that reformist govern‐ ments are not always punished. The electorate may also reward politicians for necessary reforms and for overcoming a reform backlog (Buti et al. 2008). Announcing structural reforms now and implementing them later may work, if the commitment is seen as credible. If financial markets work well and the changes are priced immediately into the market, transi‐ tional costs will be smaller and short-lived. The recent period has shown again that countries are more likely to re‐ form in times of crisis. However, a crisis may become so severe that some structural reforms are not the optimal policy response given their possible short-term costs and only medium to long-term gains. The reform back‐ 3.3 III Which Structural Reforms for Europe? (Henrik Enderlein) 62 lash in Greece and Spain is a case in point and shows that during a severe economic crisis, further reform measures must be implemented with great care. One difficulty in the current situation despite low interest rates and low oil prices is that global demand remains weak and cannot readily off‐ set a fall in domestic demand. The social consequences of reforms have often been an afterthought in the debate. However, they should feature in the equation from the begin‐ ning. Fighting poverty and inequality in the short-run may take precedence over other reform agendas. Labour-market reforms that impose high costs on the losers (if only in the short run) should be avoided during recession. Reforms that lead to wage cuts in the short run, will further reduce de‐ mand, may lead to poverty, and could worsen the slump (Eggertson et al. 2014). Trust in institutions can be an important predictor for reform success. Even reforms that have negative effects in the short run can erode social trust and hinder future reforms. This may lead to a vicious cycle: As citi‐ zens lose trust in Europe in the face of rising unemployment rates in some member states, reforms become impossible to implement and the deadlock remains. It follows from this that only structural reforms with a positive short to medium-term effect should be implemented when trust is low to prepare the grounds for more far-reaching reforms. Second, and in addition to national political considerations, euro-area countries must follow the rules of the Stability and Growth Pact (SGP): the deficit-to-GDP ratio may not exceed 3 percent and the debt-to-GDP ra‐ tio may not be larger than 60 percent. The SGP does provide for flexibility to allow countries to reform even if that entails deviating from the medi‐ um-term objectives.16 These reforms must be major, have a direct effect on the public budget over the long run, be announced ex-ante and then have to be fully implemented (European Commission 2015a). Does the SGP constrain or incentivize reform? The empirical evidence is mixed. A comparison of the implementation record17 for the CSRs of 2014 and 2015 shows that the euro-area member states are not systemati‐ 16 For the legal framework, see Article 5 of Council Regulation No 1466/97 for members states under the preventive arm of the SGP, and Article 2 of Council Regulation No.1467/97 for countries under the corrective arm of the SGP. 17 Comparing implementation records is methodologically not easy. Consider for in‐ stance that endogenous change in the form institutions adapting to a new economic environment without passing legislation, may lead to similar results than newly 3 How to prioritize structural reforms? 63 cally worse in implementing structural reforms (Hradisky 2016). Earlier work, however, finds that non-euro-area countries have been more active when it comes to single-market rules implementation (Monti 2010). Con‐ trary, other empirical evidence suggest that the euro area has facilitated product-market reforms but not labour-market reforms in the 2000s (Alesina et al. 2008).The ECB concluded that labour-market reforms have been implemented while product-market reforms lag behind (ECB 2016a). Thus, there seems to be no consistent pattern of whether euro-area mem‐ bership has contributed or hindered the feasibility of reforms. What is clear is that if rules worked, the structural reform implementa‐ tion record would look different. How to incentivize reforms remains a key question. Positive conditionality seems like a promising avenue. In‐ vestment may also be coupled to the successful implementation of struc‐ tural reforms (see for instance Enderlein et al. 2014). Third, there is the question of whether reforms are feasible given the availability of fiscal space. Countries on a sustainable public debt path with no excessive deficit should in principle be able to finance reforms. The most commonly measures are the debt-to-GDP ratio and the cost of servicing the debt. But judging the availability of fiscal space is not easy. The European Commission so far has been more cautious than the OECD when it comes to the availability of fiscal space. In November 2016, how‐ ever, it announced that the euro area would benefit from a positive fiscal stance (European Commission 2016a). The relation between fiscal space and structural reforms could become a chicken and egg problem: To create fiscal space, one needs to reduce the debt, increase the growth rate and maintain low interest rates. Reducing the debt level entails consolidating fiscal policies, while increasing the growth rates in weak economic climate, which requires investments. Get‐ ting the sequencing right will therefore be important: Without fiscal space, reforms should be budget neutral or save money in the medium term. As soon as there is some fiscal space, reforms should have a demand-side component and aim at increasing future growth rates. The current monetary situation has had a positive and negative effect on fiscal space. On the one hand, the low (and sometimes negative) inflation rates have not helped to reduce the debt burden. On the other hand, quanti‐ implemented reforms. More reforms are not necessarily a sign of a well-function‐ ing economy. III Which Structural Reforms for Europe? (Henrik Enderlein) 64 tative easing by the ECB has led to lower interest rates which have re‐ duced the cost of borrowing, and thereby opened the field for more invest‐ ment. The verdict is still out on whether quantitative easing will incen‐ tivize or disincentives more structural reforms. The ECB has repeatedly argued that it is already doing all it can to fa‐ cilitate reforms. In this view, the euro area economies are missing a crucial window of opportunity to implement reforms. Yet at the same time, its monetary stance may also contribute to sustain the current situation and may have prompted member states to postpone difficult reforms. To sum up the evidence: In terms of political feasibility, reforms should be implemented early in the electoral cycle and there should be package deals. When bundling reforms, policy-maker should pay attention to com‐ bining quick-win reforms with reforms that may have transitional costs or take longer to show economic benefits. While it may be easier to imple‐ ment reforms during an economic boom, there may be more public sup‐ port for a reform agenda during an economic downturn. However, during a severe recession, governments should avoid reforms that have large transitional costs and reduce disposable income. Judging whether there is fiscal space for reforms is difficult as it depends not only on the nominal amount of debt, but also growth rate forecasts and interest rate developments. In general, debt levels in the euro area remain high, even in the presence of quantitative easing. Reforms that are budget neu‐ tral should be prioritized. Conclusion: The euro area reform priorities on a single page This paper has tried to bring some clarity into the often confusing discus‐ sion about structural reforms. To conclude, we make the attempt to sum‐ marise the reform priorities in a single graph. Such a representation might be controversial, but could contribute to making the discussions more straightforward and transparent. We proceed in two steps: First, we recall the five important insights on how to identify the right structural reforms: (A) Reforms with significant transitional costs should be avoided during bad economic times. (B) Most reforms are complemen‐ tary and joined implementation yields larger effects. (C) Product-market reforms should be implemented prior to labour-market reforms. (D) If there is fiscal space or in other words, not an unsustainable public debt 4 4 Conclusion: The euro area reform priorities on a single page 65 and deficit, reforms should include a demand-side component. (E) Front‐ loading and package deals can be politically easier. Second, on the basis of these rules we identify three content-based reform priorities: – 1. Product-market reforms should be the top priority now. They have the highest short-term gains, can be implemented in good and bad eco‐ nomic times, have the largest effects on potential growth and can con‐ tribute significantly to the functioning of the euro area. For the euro area single-market reforms are the most rewarding ones. Here, servicesector reforms are of key importance because the service sector re‐ mains fragmented despite the enormous growth potential: it employs more than 70 percent of the total labour force (OECD 2016b) and pro‐ duces 74 percent of value added in the euro area (ECB 2016b). The Service Directive of 2006 was projected to increase GDP in the whole European Union by more than 1 percent of which only a fraction has been realized so far (see for instance Monteagudo et al. 2012; Fernández Corugedo and Pérez Ruiz 2014). Deregulating closed pro‐ fessions and opening up sheltered sectors, as well as supporting the Digital Single Market by reconsidering the country of origin rule and harmonizing regulation of the 28 countries might be good steps in the right directions. – 2. Boosting investment to increase the growth potential while provid‐ ing also an accommodating demand context is a second priority. In‐ vestments can but do not necessarily have to be public investments. Countries with fiscal space should directly invest in education, re‐ search and infrastructure. Investments here count as reform in the sense that they change the structure of the economy. There are, how‐ ever, also ways and means to foster investment when public finances are tight: These are measures to reduce regulatory uncertainty and thereby foster long-term investments such as tackling the resolution of non-performing loans and revising bankruptcy procedures. Reducing regulatory uncertainty builds trust in the markets. Completing the sin‐ gle market will also have direct positive effects for private investment as it will increase returns to investments in countries with small and weak demand, if access to the entire single market is guaranteed. – 3. Labour-market reforms need to continue but with some change in focus because they tend to have transitional costs in the short term, III Which Structural Reforms for Europe? (Henrik Enderlein) 66 benefits take longer to materialize, some of the reforms do not work well in times of weak economic growth and there are potentially powerful veto players to counter reform efforts. Reforms to harmonize employment protection legislation and integrate outsiders in the labour market should be implemented. If possible, reforms should have a de‐ mand-side component to stabilize the economy, such as investment in education, vocational training, ALMPs and life-long learning. Productmarket reforms can also go a long way in increasing employment and restoring competitiveness. Table 3.1 shows how the reform priorities for each euro-area country could be summed up on a single page. As a final take-home message we advocate that not the most frequently mentioned reforms should be imple‐ mented, but the ones that fulfil the objectives of increasing growth and im‐ proving the functioning of the euro area also in difficult economic times. The top three reform priorities for euro-area countries investments. Countries with fiscal space should directly invest in education, research and investment. Investments here count as reform in the sense that they change the structure of the economy. There are, however, lso w ys and means to fos er inv stment when public finances are tight: These are measures to reduce regulatory uncertainty and thereby foster long-term investments such as tackling the resolution of non-performing loans and revising bankruptcy procedures. Reducing regulatory uncertainty builds trust in the markets. Completing the single market will also have direct positive effects for private investment as it will increase returns to investments in countries with small and weak demand, if access to the entire single market is guaranteed. - Labour market reforms need to continue but with some change in focus because they tend to have transitional costs in the short term, benefits take longer to materialize, some of the reforms do not work well in times of weak economic growth and there are potentially powerful veto players to counter reform efforts. Reforms to harmonize employment protection legislation and integrate outsiders in the labour market should be implemented. If possible, reforms should have a demand-side component to stabilize the economy, such as investment in education, vocational training, ALMPs and life-long learning. Product market reforms can also go a long way in increasing employment and restoring competitiveness. Table 1 shows how the reform priorities for each euro-area country could be summed up on a single page. As a final take-home message we advocate that not the most frequently mentioned reforms should be implemented, but the ones that fulfil the objectives of increasing growth and improving the functioning of the euro area also in difficult economic times. Table 1: The top three reform prio ities for eu o-a ea countries #1 Complete the Single Market #2 Boost investment #3 Increase employment Belgium Cyprus Finland Greece Ireland Italy Luxembourg Increase competition in product market • Open up sheltered sectors • Remove barriers to entry • Move to service sector reforms Reduce regulatory uncertainty • Improve resolution of non-performing loans • Improve bankruptcy procedures Bring wage growth in line with productivity growth • Take national situation into account • Harmonize EPL • But stabilize demand France Lithuania Portugal Slovenia Spain Increase competition in service sector • Open up sheltered sectors • Deregulate closed professions • Integrate the Digital Single Market Reduce regulatory uncertainty • Improve resolution of non-performing loans • Improve bankruptcy procedures Reduce dualism by integrating outsiders into the labour market • Harmonize EPL • Increase spending on vocational training, ALMPs, child care, lifelong learning Austria Estonia Germany Latvia Malta Netherlands Slovakia Increase competition in service sector • Open up sheltered sectors • Deregulate closed professions • Integrate the Digital Single Market Increase public and private investment • Increase public investment in education, research and infrastructure • Encourage public-private partnerships • Improve access to finance also for SMEs Reduce dualism by integrating outsiders into the labour market • Enable young, woman, unemployed, underemployed and migrants to increase labour supply • Increase spending on vocational training, ALMPs, child care, lifelong learning le 3.1: 4 Conclusion: The euro area reform priorities on a single page 67 Appendix Overview of country reform recommendations Table shows reform consensus of the key recommendations by the OECD and the European Commission (COM). Country Reform priority OECD COM Consensus Ger‐ many Increase investments in education and research Yes18 Yes19 Yes Increase investments in infrastructure Yes Yes Yes Implement incentives for later retirement Yes Yes Yes Increase competition in the service sector Yes Yes Yes Integrate refugees and migrants (training and labour market easing) Yes No No Deregulate professional services Yes Yes Yes Address regulatory biases or privatize in areas such as Landes‐ banken, car manufacturing, network industries Yes No No Integrate women better into the labour market also by lowering secondary earner penalties Yes Yes Yes Comprehensive application of environmental/ energy taxes Yes No No France Limit spending in government and administration, especially local government Yes20 Yes21 Yes Ensure wage development in line with productivity gains No Yes No Reduce labour tax wedge Yes No No Coordinate minimum wage development in accordance with employment objectives No Yes No Increase competition in the service sector esp. professional ser‐ vices Yes Yes Yes Implement more investment-friendly business regulation Yes Yes Yes Simplify and improve tax system, shift to consumption based taxation Yes Yes Yes Introduce more efficient environmental tax Yes No No Lower taxes on corporate income No Yes No Reduce EPL of open-ended contracts, allow for more flexible work hours Yes Yes Yes Tie unemployment benefits to activation and adjust benefit du‐ ration Yes No No Improve vocational training system Yes No No Table 3.A1: 18 OECD (2016c). 19 European Commission (2016b). 20 OECD (2015b). 21 European Commission (2016c). III Which Structural Reforms for Europe? (Henrik Enderlein) 68 Country Reform priority OECD COM Consensus Italy Limit spending in government and administration Yes22 Yes23 Yes Improve tax compliance, simplify tax system Yes Yes Yes Improve infrastructure No Yes No Reform public administration and civil justice system No Yes No Reform corporate governance rules of banks No Yes No Address non-performing loans problem / improve insolvency procedures Yes Yes Yes ALMP Yes Yes Yes Simplify labour contracts Yes Yes Yes Increase female participation in the labour market (better care infrastructure) Yes No No Tie unemployment benefits to activation Yes No No Effective framework for collective bargaining No Yes Yes Allow for plant level wage bargaining Yes No No Enhance competition in public and private sector (local public services, banking, network, regulated professions, retail) Yes Yes Yes Spain Restructure and privatize savings banks Yes24 Yes25 Yes Improve cost-effectiveness in healthcare sector No Yes No Ensure wage development in line with productivity gains No Yes No Increase competition in the service sector, professional ser‐ vices Yes Yes Yes Remove business regulation barriers for large firms No Yes No Shift from labour to consumption, environment and real estate taxes Yes No No Broaden corporate tax base, eliminate special regimes for SMEs Yes No No Improve insolvency procedures Yes No No Improve ALMP, employment agency Yes No No Improve vocational training system Yes No No Strengthen innovation and research, e.g. in universities Yes No No 22 OECD (2015c). 23 European Commission (2016d). 24 OECD (2014a). 25 European Commission (2016e). Appendix 69 Country Reform priority OECD COM Consensus Belgium Limit spending in government and administration Yes26 Yes27 Yes Ensure wage development in line with productivity gains Yes Yes Yes Broaden tax base and lower tax rates Yes Yes Yes Shift from labour tax to consumption, environment and real es‐ tate taxes Yes Yes Yes Raise retirement age Yes Yes Yes Improve education and labour market integration for disadvan‐ taged groups including migrants Yes Yes Yes Reduce financial disincentives to work No Yes No Promote more efficient and equitable housing, make better use of housing in urban areas, improve social housing Yes No No Austria Curb expectations of government guarantees in the banking sector, implement resolution directive Yes28 No29 No Address vulnerabilities of financial sector in foreign exposure and insufficient asset quality No Yes No Make regional governments more cost-efficient Yes No No Shift from labour tax to consumption, environment and real es‐ tate taxes Yes Yes Yes Increase effective retirement age Yes No No Increase labour market participation of elderly No Yes No Foster more competition in services, lower entry barriers Yes Yes Yes Improve education and labour market integration for disadvan‐ taged groups including migrants Yes No No Increase female participation in the labour market by improv‐ ing child care and abolishing tax disincentives Yes Yes Yes More family friendly work places in the public sector Yes No No Ireland Broaden tax base by shifting taxes to immovable assets, reduc‐ ing allowances for capital income, and aligning corporate tax system Yes30 Yes31 Yes Improve cost-effectiveness of healthcare system Yes Yes Yes Accelerate resolution of non-performing loans via court system Yes Yes Yes Improve responsiveness of housing supply, avoid home buyer subsidies Yes No No 26 OECD (2015d). 27 European Commission (2016d). 28 OECD (2015e). 29 European Commission (2016e). 30 OECD (2015f). 31 European Commission (2016f). III Which Structural Reforms for Europe? (Henrik Enderlein) 70 Country Reform priority OECD COM Consensus Strengthen monitoring by the Central Bank of Ireland, make central credit registry operational No Yes No Set up more agile, relevant and gender-inclusive vocational training scheme Yes No No Provide support to disadvantaged schools Yes No No Improve ALMP by reforming employment services, better training for long-term unemployed Yes No No Increase incentives to work including withdrawal of benefits, enforce obligations for unemployed Yes Yes Yes Improve access to quality child care, esp. for low-income groups Yes Yes Yes Nether‐ lands Strengthen tax base, reduce mortgage interest relief and phaseout lower VAT rate Yes32 Yes33 Yes Revise tax incentive and ensure social security coverage for self-employed Yes No No Reduce contributions to pension scheme in the early years of working life No Yes No Ease regulation on private supply of rental housing Yes Yes Yes Improve access to social housing Yes No Foster investment in renewable energy Yes No No Increase public support for R&D Yes Yes Yes Enhance credit access for SMEs, foster competition of credit provision, consider credit register for companies Yes No No Improve education and labour market integration for disadvan‐ taged groups Yes No No Raise quality of early childhood education Yes No No Foster general skills in vocational training Yes No No Enhance entrepreneurial skills of small companies Yes No No Ease EPL to facilitate prevalence of permanent contracts Yes No No 32 OECD (2016d). 33 European Commission (2016g). Appendix 71 Country Reform priority OECD COM Consensus Portugal Improve public service efficiency, reduce number of civil ser‐ vants Yes34 No35 No Increase transparency of PPPs at local and regional level No Yes No Improve resilience of financial sector, esp. timely and consist‐ ent recognition of losses, develop stress test framework, and provisional capital requirements Yes No No Address corporate debt overhang and efficiency of debt re‐ structuring No Yes No Enhance competition in the non-tradable sector, e.g electricity Yes No No Promote wage-bargaining at firm level Yes No No Align wages and productivity taking into account wide dispari‐ ty of productivity No Yes No Strengthen R&D by improving links between researchers and private sector, tax credits for R&D Yes No No Better targeting of social safety net, raise benefit levels of min‐ imum income support Yes Yes Yes Make unemployment benefits independent of age and widen coverage Yes Yes Yes Scale-up ALMP Yes Yes Yes Scale-up adult education and training Yes No No Improve medium-term sustainability of pension scheme No Yes No Safeguard financial sustainability of state-owned enterprises No Yes No Improve tax compliance and efficiency of tax administration No Yes No Finland Curb public expenditure growth Yes36 Yes37 Yes Open retail sector, transport and construction for effective competition Yes Yes Yes Improve work incentives, reduce and shorten duration of un‐ employment benefits, enforce mandatory job search Yes No No Limit use of early exit pathways to retirement Yes Yes Yes Shift from (low-income) labour taxes to consumption, environ‐ ment and real estate taxes Yes No No Improve R&D cooperation between businesses and universi‐ ties Yes No No Encourage female labour market participation by reducing du‐ ration of parental leave and home-care allowance Yes No No Strengthen mediating role of the state in wage-setting process on local level Yes No No 34 OECD (2014b). 35 European Commission (2016h). 36 OECD (2016e). 37 European Commission (2016i). III Which Structural Reforms for Europe? (Henrik Enderlein) 72 Country Reform priority OECD COM Consensus Strengthen vocational training and development of job relevant skills of young people, old workers and long-term unemployed Yes Yes Yes Increase productivity and cost-effectiveness in the provision of public services, including municipal structure, healthcare and social services No Yes No Greece Enhance administrative capacity Yes38 Yes39 Yes Strengthen public financial management and public procure‐ ment No Yes No Broaden tax base and strengthen tax administration through more autonomy and more resources Yes Yes Yes Strengthen tax compliance and fight tax evasion No Yes No Improve bankruptcy framework, improve resolution of nonperforming loans Yes Yes Yes Strengthen governance and independence of state intervention of banks No Yes No Create fiscal space for more comprehensive social safety net and ALMP Yes No No Fight poverty by guaranteeing minimum income, school meal program, and housing assistance Yes Yes Yes Fight undeclared work No Yes No Modernize public employment service Yes Yes Yes Strengthen vocational training No Yes No Conclude pension reform, also review special regimes and in‐ troduce basic pension Yes Yes Yes Ease regulation in network industries Yes Yes Yes Reduce rigidities in product markets No Yes No Reduce backload of cases in the judiciary system Yes No No Improve cost-effectiveness of healthcare system No Yes No 38 OECD (2016f). 39 Key deliverables from the 2015 Memorandum of Understanding (MoU). Please note that Greece has not received CSRs because it is under a stability support pro‐ gramme. The MoU recommendations are more detailed. Here they have been con‐ solidated to allow for a comparison to the other reform recommendations. Appendix 73 Country Reform priority OECD COM Consensus Cyprus Stabilize, restructure and recapitalize the banking sector NA40 Yes41 Yes42 Step up supervision of financial services and strengthen antimoney laundering framework NA Yes Yes Broaden tax base for indirect and direct taxes NA Yes Yes Cut wages of public sector employees NA Yes Yes Improve targeting of social transfers by tightening means-test‐ ed criteria NA Yes Yes Raise retirement age and limit use of early retirement NA Yes Yes Raise efficiency of healthcare system NA Yes Yes Improve cost-effectiveness of public administration NA Yes Yes Privatize SOEs NA Yes Yes Lift entry barriers and operation restrictions in service sector NA Yes Yes Improve functioning of housing market, also reduce backlog of title deeds NA Yes Yes Diversify energy mix NA Yes Yes Estonia Improve labour market participation by implementing Work Ability reform No Yes43 No Raise incentives to work through measures targeting low-in‐ come earners and narrow gender pay gap Yes44 Yes Yes Improve vocational training scheme Yes Yes Yes Improve framework for R&D Yes Yes Yes Expand access to European transport and energy networks Yes No No Strengthen insolvency procedures Yes No No Raise revenues from property taxes Yes No No Reduce costs borne by workers of compulsory private pension scheme, reduce exceptions in public pension scheme Yes No No Prioritize spending on ALMP, infrastructure and education Yes No No 40 The OECD does not cover Cyprus in its Economic Surveys Series or any compa‐ rable recommendation format. 41 European Commission (2013). 42 Cyprus is only covered in detail by the MoU but because it is a country under pro‐ gramme, all reforms are here ranked as consensus reforms. 43 European Commission (2016j). 44 OECD (2015g). III Which Structural Reforms for Europe? (Henrik Enderlein) 74 Country Reform priority OECD COM Consensus Latvia Improve vocational training Yes45 Yes46 Yes Increase offers for work-based learning Yes Yes Yes Concentrate public support for research and innovation on li‐ mited number of specialization areas No Yes No Reduce high tax wedge for low-income earners and shift taxes to sources less detrimental for growth Yes Yes Yes Increase employability of unemployed No Yes No Ensure targeting of social assistance benefits Yes Yes Yes Improve cost-effectiveness and accessibility of healthcare sys‐ tem No Yes No Improve efficiency of the judicial system No Yes No Improve public service legislation to strengthen conflict of interest legislation No Yes No Reduce entry-barriers, red tape and simplify licensing in prod‐ uct markets Yes No No Improve governance of SOEs Yes No No Improve connection of energy network with EU Yes No No Improve tax compliance and tackle tax fraud Yes No No Improve resilience of financial sector and strengthen moni‐ toring Yes No No Lithua‐ nia Broaden the tax base Yes47 Yes48 Yes Improve tax compliance and fight tax evasion Yes Yes Yes Improve labour market relevance of education Yes Yes Yes Improve performance of healthcare system Yes Yes Yes Reduce high tax wedge for low-income earners and shift taxes to sources less detrimental for growth including environment and property tax Yes Yes Yes Improve pension adequacy No Yes No Improve coverage and adequacy of unemployment insurance Yes Yes Yes Strengthen ALMP to increase employability of unemployed, and improve capacity of employment agency Yes Yes Yes Promote life-long learning Yes No No Increase the role of workplace training Yes No No 45 OECD (2015h). 46 European Commission (2016k). 47 OECD (2016g). 48 European Commission (2016l). Appendix 75 Country Reform priority OECD COM Consensus Make teaching profession more attractive through higher wages and investment in teacher development Yes No No Promote participation in pre-primary education Yes No No Strengthen innovation of domestic firms Yes No No Luxem‐ bourg Broaden tax base to consumption, property tax and environ‐ ment tax No Yes49 No Limit early retirement and increase retirement age No Yes No Reform wage-setting system to ensure wages evolve with pro‐ ductivity No Yes No Strengthen financial service monitoring Yes50 No No Strengthen resolution procedures, undertake resolvability as‐ sessments of banks Yes No No Improve effectiveness of R&D spending Yes No No Improve quality of school education Yes No No Promote environmentally friendly policies including public transport and petrol taxes Yes No No Introduce spending review mechanism and consider introduc‐ ing a spending ceiling Yes No No Malta Improve education system, also reduce early school leaving, promote attainment of basic skills No 51 Yes52 No Increase statutory retirement age No Yes No Improve credit access for businesses including small and mi‐ cro-enterprises No Yes No Slovakia Improve cost-effectiveness of the healthcare sector No Yes53 No Improve tax compliance Yes54 Yes Yes Improve ALMP, education and training to tackle long-term un‐ employment Yes Yes Yes Develop vocational training system Yes No No Strengthen female employment through care provision Yes Yes Yes Improve education system by making teaching as profession more attractive and provide better training No Yes No Increase participation of Roma children in education and child care Yes Yes Yes 49 European Commission (2016m). 50 OECD (2015i). 51 The OECD does not cover Malta in its Economic Survey Series or any comparable recommendation format. 52 European Commission (2016n). 53 European Commission (2016o). 54 OECD (2014c). III Which Structural Reforms for Europe? (Henrik Enderlein) 76 Country Reform priority OECD COM Consensus Invest in infrastructure, improve administrative procedures for permits, and transport network including rail and road Yes Yes Yes Improve public procurement, also increase competition in pub‐ lic tenders Yes Yes Yes Implement spending ceilings to reinforce budgetary discipline Yes No No Strengthen public administration capacity including co-ordina‐ tion, human resource management, management of EU funds, capacity of local governments Yes No No Reduce regulation in professional services & retail trade Yes No No Improve efficiency of judicial system Yes No No Create incentives for innovation spending Yes No No Develop rental housing market and limit support to house own‐ ers Yes No No Make sure minimum wage implementation does not damage employment Yes No No Slovenia Improve wage-setting system also for minimum wage No Yes55 No Address long-term unemployment by increasing employability of low-skilled Yes56 Yes Yes Limit incentives for early retirement and increase retirement age Yes Yes Yes Tackle non-performing loan problems in the banking sector and facilitate swift restructuring and resolution of companies Yes Yes Yes Improve risk monitoring in banks No Yes No Improve access to credit for SMEs No Yes No Improve efficiency in judicial system No Yes No Increase cost-efficiency in education, public administration and local government Yes No No Privatize SOEs Yes No No Adopt credible fiscal rules (supervised by financial council) Yes No No Increase efficiency in the health sector Yes No No Ease licensing for opening new businesses Yes No No Support innovation, promote collaboration between major stakeholders in innovation policy Yes No No 55 European Commission (2016p). 56 OECD (2015j). Appendix 77 Overview of euro-area reform recommendations Table shows reform consensus of the key recommendations by the OECD and European Commission’s (EC) country-specific recommendations (CSRs). Reform priority OECD COM Consensus Reform employment protection legislation No Yes57 Increase active labour market policies No Yes Promote lifelong learning strategies and increase adult skill level No Yes Offer adequate income support during labour market transi‐ tion No Yes Strengthen single market for services and deregulate profes‐ sional services No Yes Reducing high tax wedge and shift to consumption or envi‐ ronment taxes No Yes Create investment-friendly business regulation No Yes Reduce public administration inefficiencies No Yes Improve access to finance for SMEs, esp. via capital markets No Yes Improve job market relevance of education and training, and cooperation with stakeholders No Yes Speed up and facilitate resolution of NPLs where they create serious economic disturbances, also by raising capital sur‐ charges Yes58 No Establish asset management companies at EU level Yes No Reduce risk in the banking sector Yes No Implement a European Deposit Insurance Scheme Yes No Harmonize banking resolution in Europe Yes No Finance higher-risk projects through EFSI Yes No Increase targeted public support to investment Yes No Enhance framework conditions for private investment Yes No Adopt national expenditure rules Yes No Ensure that the application of the debt reduction rule of the Stability and Growth Pact does neither hinder recovery nor structural reforms Yes No Table 3.A2: 57 European Commission (2015b). 58 OECD (2016h). III Which Structural Reforms for Europe? (Henrik Enderlein) 78 Re fo rm p ri or iti es b y co un tr ie s O ve rv ie w o f a ll co ns en su s r ef or m s b as ed o n ta bl e 3. A1 . Pr od uc t m ar ke t Fi na nc ia l s ec to r La bo ur m ar ke t Ta xa tio n Pu bl ic se ct or A us tr ia Fo ste r m or e co m pe tit io n in se rv ic es , l ow er e nt ry b ar ri‐ er s N on e In cr ea se fe m al e pa rti ci pa ‐ tio n in th e la bo ur m ar ke t b y im pr ov in g ch ild c ar e an d ab ol ish in g ta x di sin ce nt iv es Sh ift fr om la bo ur ta x to co ns um pt io n, e nv iro nm en t an d re al e sta te ta xe s N on e Be lg iu m N on e N on e En su re w ag e de ve lo pm en t in li ne w ith p ro du ct iv ity Ra ise re tir em en t a ge Im pr ov e ed uc at io n an d la bo ur m ar ke t i nt eg ra tio n fo r d isa dv an ta ge d gr ou ps in cl ud in g m ig ra nt s Br oa de n ta x ba se a nd lo w er ta x ra te s Sh ift fr om la bo ur ta x to co ns um pt io n, e nv iro nm en t an d re al e sta te ta x Li m it sp en di ng in g ov er n‐ m en t a nd a dm in ist ra tio n C yp ru s Pr iv at iz e SO Es Li ft en try b ar rie rs a nd o pe r‐ at io n re str ic tio ns in se rv ic e se ct or St ab ili ze , r es tru ct ur e an d re ca pi ta liz e th e ba nk in g se ct or St ep u p su pe rv isi on o f f i‐ na nc ia l s er vi ce s a nd str en gt he n an tim on ey la un de rin g fra m ew or k Ra ise re tir em en t a ge a nd lim it us e of e ar ly re tir em en t Br oa de n ta x ba se fo r i nd i‐ re ct a nd d ire ct ta xe s Cu t w ag es o f p ub lic se ct or em pl oy ee s Im pr ov e ta rg et in g of so ci al tra ns fe rs b y tig ht en in g m ea ns -te ste d cr ite ria Ra ise e ffi ci en cy o f h ea lth ‐ ca re sy ste m Im pr ov e co stef fe ct iv en es s of p ub lic a dm in ist ra tio n Im pr ov e fu nc tio ni ng o f ho us in g m ar ke t, al so re du ce ba ck lo g of ti tle d ee ds D iv er sif y en er gy m ix Ta bl e 3. A3 : Appendix 79 Pr od uc t m ar ke t Fi na nc ia l s ec to r La bo ur m ar ke t Ta xa tio n Pu bl ic se ct or Es to ni a N on e Ra ise in ce nt iv es to w or k th ro ug h m ea su re s t ar ge tin g lo w -in co m e ea rn er s a nd na rro w g en de r p ay g ap Im pr ov e vo ca tio na l t ra in in g sc he m e N on e N on e Im pr ov e fra m ew or k fo r R& D Fi nl an d O pe n re ta il se ct or , t ra ns po rt an d co ns tru ct io n fo r e ffe ct ‐ iv e co m pe tit io n N on e Li m it us e of e ar ly e xi t p at h‐ w ay s t o re tir em en t St re ng th en v oc at io na l t ra in ‐ in g an d de ve lo pm en t o f j ob re le va nt sk ill s o f y ou ng pe op le , o ld w or ke rs a nd lo ng -te rm u ne m pl oy ed N on e Cu rb p ub lic e xp en di tu re gr ow th Fr an ce In cr ea se c om pe tit io n in th e se rv ic e se ct or Im pl em en t m or e in ve st‐ m en t-f rie nd ly b us in es s re gu la tio n N on e Re du ce E PL o f o pe nen de d co nt ra ct s, al lo w fo r m or e fle xi bl e w or k ho ur s Si m pl ify a nd im pr ov e ta x sy ste m , s hi ft to c on su m p‐ tio n ta x Li m it sp en di ng in g ov er n‐ m en t a nd a dm in ist ra tio n G er m an y In cr ea se c om pe tit io n in th e se rv ic e se ct or D er eg ul at e pr of es sio na l se rv ic es N on e In te gr at e w om en b et te r i nt o th e la bo ur m ar ke t Im pl em en t i nc en tiv es fo r la te r r et ire m en t N on e In cr ea se in ve stm en t i n ed u‐ ca tio n In cr ea se in ve stm en t in in fra str uc tu re a nd re ‐ se ar ch G re ec e Ea se re gu la tio n in n et w or k in du str ie s Im pr ov e ba nk ru pt cy fr am e‐ w or k, im pr ov e re so lu tio n of no npe rfo rm in g lo an s Co nc lu de p en sio n re fo rm , al so re vi ew sp ec ia l r eg im es an d in tro du ce b as ic p en sio n Br oa de n ta x ba se a nd str en gt he n ta x ad m in ist ra ‐ tio n th ro ug h m or e au to no ‐ m y an d m or e re so ur ce s En ha nc e ad m in ist ra tiv e ca ‐ pa ci ty Fi gh t p ov er ty b y gu ar an te e‐ in g m in im um in co m e, sc ho ol m ea l p ro gr am , a nd ho us in g as sis ta nc e M od er ni ze p ub lic e m pl oy ‐ m en t s er vi ce III Which Structural Reforms for Europe? (Henrik Enderlein) 80 Pr od uc t m ar ke t Fi na nc ia l s ec to r La bo ur m ar ke t Ta xa tio n Pu bl ic se ct or Ir el an d N on e A cc el er at e re so lu tio n of no npe rfo rm in g lo an s v ia co ur t s ys te m In cr ea se in ce nt iv es to w or k in cl ud in g w ith dr aw al o f be ne fit s, en fo rc e ob lig a‐ tio ns fo r u ne m pl oy ed Br oa de n ta x ba se b y sh ift ‐ in g ta xe s t o im m ov ab le a s‐ se ts, re du ci ng a llo w an ce s fo r c ap ita l i nc om e, a nd al ig ni ng c or po ra te ta x sy s‐ te m ) Im pr ov e co stef fe ct iv en es s of h ea lth ca re sy ste m Im pr ov e ac ce ss to q ua lit y ch ild c ar e, e sp . f or lo w -in ‐ co m e gr ou ps It al y En ha nc e co m pe tit io n in pu bl ic a nd p riv at e se ct or A dd re ss n on -p er fo rm in g lo an s p ro bl em , i m pr ov e in ‐ so lv en cy p ro ce du re s In cr ea se A LM P Si m pl ify la bo ur c on tra ct s In sta ll ef fe ct iv e fra m ew or k fo r c ol le ct iv e ba rg ai ni ng Im pr ov e ta x co m pl ia nc e an d sim pl ify ta x sy ste m Li m it sp en di ng in g ov er n‐ m en t a nd a dm in ist ra tio n La tv ia N on e N on e Im pr ov e vo ca tio na l t ra in in g In cr ea se o ffe rs fo r w or kba se d le ar ni ng Re du ce h ig h ta x w ed ge fo r lo w -in co m e ea rn er s a nd sh ift ta xe s t o so ur ce s l es s de tri m en ta l f or g ro w th En su re ta rg et in g of so ci al as sis ta nc e be ne fit s Li th ua ni a N on e N on e Im pr ov e la bo ur m ar ke t r el ‐ ev an ce o f e du ca tio n Im pr ov e co ve ra ge a nd a de ‐ qu ac y of u ne m pl oy m en t i n‐ su ra nc e St re ng th en A LM P to in ‐ cr ea se e m pl oy ab ili ty o f u n‐ em pl oy ed , a nd im pr ov e ca ‐ pa ci ty o f e m pl oy m en t a ge n‐ cy Br oa de n th e ta x ba se Im pr ov e ta x co m pl ia nc e an d fig ht ta x ev as io n Re du ce h ig h ta x w ed ge fo r lo w -in co m e ea rn er s a nd sh ift ta xe s t o so ur ce s l es s de tri m en ta l f or g ro w th in ‐ cl ud in g en vi ro nm en t a nd pr op er ty ta x Im pr ov e pe rfo rm an ce o f he al th ca re sy ste m Lu xe m ‐ bo ur g N on e N on e N on e N on e N on e M al ta N on e N on e N on e N on e N on e Appendix 81 Pr od uc t m ar ke t Fi na nc ia l s ec to r La bo ur m ar ke t Ta xa tio n Pu bl ic se ct or N et he rl an ds N on e N on e N on e St re ng th en ta x ba se , r ed uc e m or tg ag e in te re st re lie f a nd ph as eou t l ow er V AT ra te Ea se re gu la tio n on p riv at e su pp ly o f r en ta l h ou sin g In cr ea se p ub lic su pp or t f or R& D Po rt ug al N on e N on e M ak e un em pl oy m en t b en e‐ fit s i nd ep en de nt o f a ge a nd w id en c ov er ag e Sc al eup A LM P N on e Be tte r t ar ge tin g of so ci al sa fe ty n et , r ai se b en ef it le v‐ el s o f m in im um in co m e su pp or t Sl ov ak ia N on e N on e Im pr ov e A LM P, e du ca tio n an d tra in in g to ta ck le lo ng te rm u ne m pl oy m en t St re ng th en fe m al e em pl oy ‐ m en t t hr ou gh c ar e pr ov i‐ sio n Im pr ov e ta x co m pl ia nc e In cr ea se p ar tic ip at io n of Ro m a ch ild re n in e du ca tio n an d ch ild c ar e In ve st in in fra str uc tu re , i m ‐ pr ov e ad m in ist ra tiv e pr oc e‐ du re s f or p er m its , a nd tra ns po rt ne tw or k in cl ud in g ra il an d ro ad Im pr ov e pu bl ic p ro cu re ‐ m en t, al so in cr ea se c om pe ‐ tit io n in p ub lic te nd er s Sl ov en ia N on e Ta ck le n on -p er fo rm in g lo an pr ob le m s i n th e ba nk in g se ct or a nd fa ci lit at e sw ift re str uc tu rin g an d re so lu tio n of c om pa ni es A dd re ss lo ng -te rm u ne m ‐ pl oy m en t b y in cr ea sin g em ‐ pl oy ab ili ty o f l ow -s ki lle d Li m it in ce nt iv es fo r e ar ly re tir em en t a nd in cr ea se re ‐ tir em en t a ge N on e N on e Sp ai n In cr ea se c om pe tit io n in th e se rv ic e se ct or , p ro fe ss io na l se rv ic es Re str uc tu re a nd p riv at iz e pr iv at e ba nk s N on e N on e N on e So ur ce s: Ba se d on th e re fo rm re co m m en da tio ns b y th e O EC D a nd E ur op ea n Co m m iss io n (a s ci te d ab ov e al so in th e ap pe nd ix ), co m pi le d by a ut ho rs . 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Abstract

‘How Can We Boost Competition in the Services Sector?’ is a key question in the process of creating a more effi-cient economic environment in Germany. This book contains a collection of conference contributions on service sector reforms from members of academic institutions, ministries, the EU Commission and other organisations. The conference consisted of a keynote on the importance and implementation of structural reforms in Europe and two panels that dealt with the evaluation of past reforms in the services sector and the potential scope and effects of further reforms.

Since the 1990s, productivity growth in Germany and other Member States of the European Union has been significantly lower than in the US. The development of productivity growth in the services sector is estimated to account for two thirds of this widening gap. The European Commission advocated reforms in the services sector in its country-specific recommendations for Germany. At a conference in Berlin in July 2016, experts from various fields presented and discussed studies on service sector reforms.

With contributions by

Oliver Holtemöller, Brigitte Zypries, Joaquim Nunes de Almeida, Dirk Palige, Henrik Enderlein, Stefan Profit, Davud Rostam-Afschar, Paolo Mengano, Oliver Arentz, Erik Canton, Jochen Andritzky

Zusammenfassung

„Wie können wir den Wettbewerb im Dienstleistungssektor stärken?“ Dies ist eine Schlüsselfrage für eine größere Leistungsfähigkeit des ökonomischen Umfelds in Deutschland. Dieses Buch versammelt Konferenzbeiträge von Mitgliedern wissenschaftlicher Einrichtungen, von Ministerien, der EU-Kommission und anderen Organisationen zu Reformen im Dienstleistungssektor. Die Konferenz umfasste einen Eröffnungsvortrag zur Bedeutung und Durchführung von Strukturreformen in Europa und zwei Gesprächsforen zur Bewertung vergangener Reformen im Dienstleistungssektor und zur möglichen Reichweite sowie zu den möglichen Auswirkungen weiterer Reformen.

Die Zunahme der Produktivität ist seit den 1990er Jahren sowohl in Deutschland als auch in anderen Ländern der Europäischen Union deutlich geringer als in den USA. Es wird geschätzt, dass die Entwicklung des Produktivitätszuwachses im Dienstleistungssektor für zwei Drittel dieses zunehmenden Abstandes verantwortlich ist. Die Europäische Kommission spricht sich in ihren länderspezifischen Empfehlungen zu Deutschland für Reformen in diesem Sektor aus. Auf einer Konferenz im Juli 2016 in Berlin stellten Experten aus unterschiedlichen Bereichen Studien zu solchen Reformen vor und diskutierten deren Ergebnisse.

Mit Beiträgen von

Oliver Holtemöller, Brigitte Zypries, Joaquim Nunes de Almeida, Dirk Palige, Henrik Enderlein, Stefan Profit, Davud Rostam-Afschar, Paolo Mengano, Oliver Arentz, Erik Canton, Jochen Andritzky