This Selected Issues paper on Euro Area Policies underlies global rebalancing of accounts. From a growth-accounting perspective, slower growth in the capital-labor ratio seems to be the main driver behind the deceleration in labor productivity. The increase in bilateral trade was accompanied by a large bilateral EU trade deficit. China’s market share seems to have increased mainly at the expense of other East Asian countries. EU trade with China increased at more than twice the rate of total EU external trade, and China became the EU’s second largest trading partner.

Abstract

This Selected Issues paper on Euro Area Policies underlies global rebalancing of accounts. From a growth-accounting perspective, slower growth in the capital-labor ratio seems to be the main driver behind the deceleration in labor productivity. The increase in bilateral trade was accompanied by a large bilateral EU trade deficit. China’s market share seems to have increased mainly at the expense of other East Asian countries. EU trade with China increased at more than twice the rate of total EU external trade, and China became the EU’s second largest trading partner.

II. Implementing Lisbon: Incentives and Constraints15

Core Questions, Issues, and Findings

  • Do EU countries differ from other industrial countries and among themselves as regards the pace of structural reforms? EU countries exhibit significant status-quo bias, with progress on structural reforms lagging other industrial countries, and the degree of labor and product market flexibility remaining relatively low. There is some evidence that, within the EU, smaller countries are more reformist. (¶29-35)

  • What are the main factors driving structural reforms in industrial countries? European integration, particularly the Single Market Act, has triggered a bout of reforms, especially in product markets. Product market liberalization seems to spur labor market liberalization, consistent with the hypothesis that as product market rents diminish, resistance to labor market reforms weakens. (¶21-28; ¶40-47)

  • Should structural reforms be coordinated among countries? Spillovers provide the main rationale for coordination. Cross-border spillovers affect structural reforms, especially through external competitiveness, whereby reformers gain a competitive advantage over non-reforming countries. There can also be spillovers arising from the benefits of market flexibility when all countries face the same monetary policy, and spillovers as countries learn from each other. (¶48-51)

  • Has the Lisbon strategy’s “open method of coordination” promoted structural reforms? To date, the open method of coordination has not lived up to expectations. But the open method—relying on coordination based on mutual appreciation of common goals and agreement on the appropriate policy response—remains appropriate given the EU’s overall governance architecture, especially in the area of labor market reforms that are largely in the realm of national decision-making. (¶52-59)

  • Could the open method of coordination be enhanced? The open method could be improved by streamlining the agenda to focus more on labor participation; bolstering multilateral surveillance, including through greater use of “naming and shaming”; further progress on product market reforms that would act as a catalyst for labor market liberalization; and more leadership on structural reforms by large countries. (¶60-63)

A. Introduction

67. After three decades of uneven economic performance and persistently high unemployment, there is widespread consensus that Europe’s economic and social model needs to be reformed. Since the early 1970s, the area’s per capita GDP has remained at 70 percent of the U.S. level, as high labor productivity growth has been neutralized by a secular decline in labor utilization (see chapter I). Making the institutional and regulatory environment more market-friendly—more mindful of individual incentives to work, spend, save, invest, and innovate—is widely perceived as an essential ingredient of any policy package aiming to boost growth, reduce unemployment, and increase the economy’s resilience in the face of shocks. Although the picture is not uniformly gloomy across countries, such reforms are needed in many member states, but particularly in the area’s three largest economies.

68. Structural reforms are intrinsically difficult to implement. Distributive effects, and in some instances, significant adjustment costs lead to resistance from groups expecting to lose out. For policymakers, structural reforms are subject to two trade-offs, an intratemporal trade-off between well-organized special interests and the more diffuse “common good,” and an intertemporal trade-off between certain short-term adjustment costs and uncertain long-term benefits. These two trade-offs seem at the root of the status-quo bias against reforms (Fernandez and Rodrik, 1991).

69. Although countries are not in denial about the need for reforms, action lags intentions, especially when it comes to contentious labor market reforms. Inaction in the 1970s and early 1980s sometimes led to attempts to alleviate the slow growth and high unemployment with monetary or fiscal painkillers. The outcomes were often high inflation, rising public debts, and ultimately painful episodes of disinflation and fiscal adjustment. A change in direction came slowly in the 1980s, when an increasing number of governments in industrial countries realized that structural reforms needed to be an integral part of the therapy. It was becoming increasingly obvious that product and labor market regulation in Europe had a stifling effect on growth and productivity (see Koedijk and Kremers, 1996 and Nicoletti and Scarpetta, 2003, for the empirical evidence). Still, many policymakers in continental Europe remain reluctant to make hard choices. Reform efforts in notoriously difficult areas, such as labor market institutions, have generally been marginal and very gradual (see Boeri, 2004, and IMF, 2004 for recent evidence).

70. The slow and uneven progress in structural matters has spurred EU governments to consider joint action in addressing the problem. Beyond the common interest in improving the functioning of product and factor markets, the case for regional coordination in structural policies is further reinforced by political economy considerations as cooperation may help governments to overcome the resistance of special interests at home. Cooperation has served EU governments well over the past thirty years. The deepest changes affecting EU economies over that period were linked to the gradual process of economic integration.

71. Against this backdrop, the European Council adopted a strategy aimed at transforming the EU into the “world’s most dynamic, and competitive economy” by 2010. The so-called Lisbon strategy, adopted in 2000, endeavors to foster economic reforms through the collective pressure created by annual peer reviews of achievements (see Box 1). Each member state is assessed on the basis of a scorecard of fourteen structural indicators covering specific dimensions of the ultimate objective (European Commission, 2004a). Although three of those indicators are formally considered as targets—the total employment rate, the employment rate of older workers, and expenditure on research and development—the strategy implies no specific policy commitment to meet these targets. By virtue of the subsidiarity principle, many aspects of structural policies remain in the realm of national policymaking processes.

What is the Lisbon Strategy?

At the Lisbon summit in March 2000, the EU member states adopted a program designed to make Europe the most competitive knowledge based economy in the world by 2010. The agenda focused on promoting sustainable job-rich economic growth combined with social cohesion. The broad objectives include increasing the employment rate from 61 percent to 70 percent by 2010 (20 million extra jobs), and achieving an average real growth rate of 3 percent, higher than in the recent past.

The Lisbon strategy is based on the open method of coordination (OMC), a strategy which eschews the traditional centralization of policy formulation, and relies instead on benchmarking based on quantitative and qualitative indicators and specific timetables. The Council meets every spring to monitor progress and determine new targets.

The following are the basic structural indicators: GDP per capita; labor productivity; employment rate; employment rate of older workers; educational attainment; expenditure on research and development; business investment; comparative price levels; at-risk-of-poverty rates; long term unemployment; dispersion of regional employment rates; greenhouse gas emissions; energy intensity of economy; volume of transport.

72. Only four years after the adoption of the Lisbon strategy, its impact on national reform processes remains difficult to gauge. First, counterfactuals do not exist, pushing judgments uncomfortably close to priors. Second, recent evidence indicates that the effect of reforms on objectives often takes time to materialize (IMF, 2004). Still, evidence on labor reforms analyzed in this chapter indicates that the Lisbon strategy has coincided with increased reform activism (with respect to 1998 and 1999) in only four EU member states.

73. The need to accelerate implementation of the Lisbon strategy is acknowledged by policymakers. The perception that achievements currently fall short of expectations has resulted in mounting pressure from various quarters for member states to do more, which is how the strategy is expected to operate. The Irish and upcoming Presidencies of the EU have placed the acceleration of structural reforms at the top of their agenda. Some member states have also suggested the appointment of a “super Commissioner” (in fact a vice-president of the European Commission) in charge of structural reforms and competitiveness. Finally, the Spring report from the European Commission to the European Council concluded that “Member States must now commit more firmly to pursuing the reforms defined since the Lisbon European Council.” Toward this end, a High-Level Group chaired by Mr. Wim Kok was set up invigorate the Lisbon process. The Group is expected to come up with proposals to improve delivery of the Lisbon objectives and submit them to the Commission by November 2004.

74. An orderly rebalancing of current accounts would require the euro area to increase its potential growth. In particular, a key element of the cooperative strategy to address global current account imbalances would be to accelerate the pace of structural reforms in the euro area. As suggested by the analysis of global imbalances in Chapter IV, this would help reallocate global patterns of domestic demand growth, not least by making the euro area a more favorable location for real and financial investments.

75. Well-functioning product and factor markets are particularly important in the euro area, a currency area subject to asymmetric disturbances. Focusing on the two critical areas of product and labor markets, this chapter provides a systematic analysis of the reform process over the last two decades in industrial countries in general and the EU in particular. More specifically, the analysis studies the relationship between aggregate structural indicators commonly used in macroeconomic analyses of structural reforms16 and economic and political variables likely to shape policymakers’ incentives and constraints. It sheds light on a number of key factors likely to drive the reform dynamics in Europe. Among those factors, particular attention is paid to the role of cross-border spillovers, as well as to the potential strategic complementarities across reform areas, and the effect of EU-wide coordination efforts.

76. The remainder of the chapter is organized as follows. Section B presents an analytical framework, including the main theoretical arguments relating to policymakers’ incentives and constraints. Broad stylized facts about reforms in labor and product markets are described in Section C. Section D analyzes the determinants of structural reforms in these two critical domains, focusing on the rationale for a cooperative approach and on the desirable scope of such coordination. Section E builds on that analysis to discuss possible cooperation frameworks, and assesses the existing one.

B. Implementing Structural Reforms: Incentives and Constraints

Knowing what’s right

77. Aggregate analyses of structural reforms generally overlook a formal treatment of normative issues and this chapter is no exception. There is however a broad consensus on the need for, and the direction of, economic reforms in the EU, making the need for such an analysis less compelling (Elmeskov, Martin and Scarpetta, 1998; Nickell et al., 2003; Nicoletti and Scarpetta, 2001). Moreover, the normative literature still provides little practical guidance in areas where the case for reforms seems the most persuasive, like labor market institutions.17

78. According to a popular view, the growing malaise about EU social and economic model, and the corresponding need for reforms, is related to the global trend toward liberalization. Greater competition in product and factor markets around the world seems to have put a premium on market-friendly social models, like those in the United States and other common law countries, and heavily penalized models based on direct interference with market mechanisms (as in continental Europe). This argument can be rationalized as a change in the hypothetical “efficiency frontier” between social protection and growth (Figure 1, top panels). The bottom-left panel of Figure 1 illustrates the view of many that the EU will be forced to trade-off higher potential growth against a reduction in social protection through politically difficult reforms. Yet, the official EU objective to carry out reforms that simultaneously improve growth and social cohesion suggests the need for “smart reforms”18 that could expand the frontier at the high end of social protection (bottom-right panel of Figure 1).

Figure 1.
Figure 1.

Reforms and the Equity-Growth Trade-Off, 1960-2004

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

79. This chapter defines as “reforms” any change in conventional aggregate indicators of structural conditions19 that reflects a reduction in government’s interference with market signals. Although there is no alternative and internationally comparable measure of structural policies, the use of these indicators calls for caution in interpreting the results. First, they ignore many subtle and hardly quantifiable ingredients of reforms, including political and economic trade-offs between different measures. As a result, they may underestimate both the quality and the extent of reform efforts (Boeri, 2004). For example, trading-off a reduction in employment protection against a more generous unemployment benefits system may bring about significant efficiency gains in a country that has too much of the former and none of the latter. Yet, aggregate measures of labor-market flexibility will downplay the importance of that reform package. Second, those indices make no distinction between misguided government intervention and specific regulatory changes addressing market failures (e.g., Drèze and Gollier, 1993 or Agell, 1999).

80. The analytical framework of this chapter follows the political economy literature, which investigates the reasons why governments fail to adopt desirable reforms (Fernandez and Rodrik, 1991; and Rodrik, 1996). First, an econometric relationship linking reforms to their potential determinants is estimated. These determinants capture key ingredients of the policymakers’ decision problem, including the financial and political constraints and the intermediate objectives pursued. Second, the chapter builds on these results to discuss governance structures conducive to reforms in the specific context of the EU. This section now turns to a brief discussion of the main obstacles to reforms.

Why is it so difficult to make it happen?

81. Assuming governments fully understand the need for reforms and genuinely intend to carry them out, why don’t they just do it? A number of theoretical analyses lay out various obstacles facing well-intended reformers.20

82. The difficulty in carrying out reforms is sometimes blamed on politics. Looking at fiscal adjustment, Alesina and Drazen (1991) depict a “war of attrition” among two social groups battling over who should bear the cost of the adjustment. The adjustment is delayed until the cost of status quo becomes so unbearable that one group yields and assumes these costs. The argument can easily be extended to explain the status quo bias in reforms with large distributive effects. Olson (1965) discusses how radical opposition by politically well-connected and well-organized groups may prevail over the widespread benefits expected by a diffuse majority.

83. Turning to economic arguments, it is sometimes claimed that the reluctance to implement reforms reflects the policymaker’s uncertainty about the desirable reform path. Uncertainty about the effects of a particular policy naturally leads to caution, and justifies waiting for the costs of doing nothing (and the corresponding support for reforms) to be sufficiently strong and visible before acting. However, in many instances, the “aggregate uncertainty” about the net benefits of reforms is simply too low to justify inaction, although opponents of reforms may deliberately attempt to blur the distinction between aggregate uncertainty and their narrow interests.

84. Even in the absence of aggregate uncertainty, so that everybody is aware of the economy-wide benefits of reforms, a sufficiently large number of people may not know exactly whether they will gain or lose. Uncertainty about the distributive effects of reforms (Fernandez and Rodrik, 1991) could undermine the necessary support and result in a status quo bias. This is particularly relevant to areas where distributive effects are potentially large and/or uncertain, such as tax reforms, adjustments in pension benefits and other age-related entitlements, and labor market reforms. This may explain the striking contrast between the sustained and significant pro-competitive reforms achieved in product markets and the often marginal reforms of labor market institutions21 (see Section C below).

85. Of course, governments could in principle deal with the distributive effects of reforms through offsetting taxes and transfers. However, transfer schemes targeted to compensate losers may simply not be feasible due to insufficient information about the distributive effects (Grüner, 2002). Moreover, the promise to compensate potential losers to get their support lacks credibility because after reforms are implemented, the majority of winners may simply deny such compensations (Fernandez and Rodrik, 1991). Finally, gains and losses may not materialize at the same time, with gains arising slowly over time while costs are felt immediately. In that case, any compensation of the losers through fiscal policy would have to be financed from future taxes on the expected winners, implying an immediate but temporary increase in the structural deficit (Beetsma and Debrun, 2004). This hypothetical scenario could fit a situation in which, for instance, workers laid off immediately after a relaxation in employment protection obtain better unemployment benefits and enhanced training while they have to wait before taking full advantage of the new employment opportunities expected from the reforms.22

86. Finally, reforms may lack supporters because the proposed package is poorly designed. Indeed, “technical” complementarities between reforms may increase the net expected gains from a reform package with respect to a series of piecemeal measures (Coe and Snower, 1997), thereby fostering support. Similarly, “distributive” complementarities may allow for a package with offsetting effects on income distribution. To the extent that those complementarities are clear enough to the broad public, they should help alleviate the opposition to desirable reforms.

Can product market reforms force labor market reforms?

87. The complementarity between product and labor market reforms has attracted a great deal of attention in the literature recently,23 not least because it appears particularly relevant to the current labor market reform backlog in the EU. As documented in the next section, deep structural changes have affected product markets over the last 15 years in the EU, especially after the Single European Act of 1986. The induced reduction in firms’ pricing power is expected to have deep implications for the labor market. Indeed, through wage bargaining and other institutions granting workers some monopoly power, the latter end up sharing the firm’s monopoly rents. As product market reforms erode those rents and the firms’ profit margins, incentives for workers to exert monopoly power are weakened. This may have played a role in the broad acceptance of “wage moderation” in a number of countries and may ultimately lower the resistance to competition-enhancing labor reforms.

88. Does this mean that there is an obvious reform sequence from “easy” product market reforms to more “difficult” labor reforms, as resistance fades away? Not necessarily. First of all, product market reforms are not obviously “easy.” Indeed, as workers, voters expect to lose rents through lower wage growth even though, as consumers, they expect to benefit from lower prices, especially if reforms are widespread. Still, the losses from product market reforms are immediate and certain (partial equilibrium effect), whereas the benefits are more elusive (general equilibrium effect)—see Blanchard (2004) and Gersbach (2003). Second, “rent seeking” 24 is not the unique motivation behind the resistance to changes in labor market institutions. It is widely recognized that those institutions address important market failures (Blanchard, 2002) and provide significant insurance against macroeconomic risks (Agell, 1999). Hence, the strength of the product-labor nexus remains unclear and is ultimately an empirical issue.

89. Product market reforms initiated in the second half of the 1980s have had a deep impact on the affected industries and the effect of reform appears contingent on labor market institutions. Figures 2 and 3 compare the effects of liberalization in the transportation industry in the United States and France.25 The OECD STAN database provides internationally comparable, industry-level data on value added (in volume and value), employment levels, and spending on wages and salaries. The comparison focuses on a sector for which a reasonable proxy for reforms could be calculated and revealed significant structural changes in both countries.26 In common with other industries, the United States, starting from a lower level of restrictions, initiated the deregulation process in the late 1970s whereas a similar movement was only observed a decade later in France.

Figure 2.
Figure 2.

Liberalization and Labor Productivity in the Transportation Industry: France Versus the United States, 1975-1998

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

Sources: see Appendix.
Figure 3.
Figure 3.

Liberalization and Real Unit Labor Costs in the Transportation Industry: France Versus the United States, 1975-1998

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

Sources: see Appendix.

90. In line with the related literature, Figure 2 illustrates the positive association between productivity growth and deregulation, as firms attempt to compensate for the loss of pricing power by improving efficiency in the use of inputs (such as a reduction in overmanning) or adopting new technologies.27 In both countries, productivity growth in the transportation industry was indeed much higher than in the rest of the economy. Interestingly, the industry’s productivity gains in France were noticeably higher than in the United States, possibly indicating “decreasing returns” of reforms.

91. Pro-competitive reforms in product markets can lead to tensions if not accompanied by greater labor market flexibility. Stronger productivity gains in France did not translate into a larger reduction in real unit labor costs than in the United States, suggesting that labor market institutions in France allowed workers to absorb a significant share of the productivity gains through higher wages (Figure 3). Strikingly and in stark contrast with the United States, real unit labor costs in the French transportation industry remained broadly in line with those in the rest of the economy despite the large difference in productivity growth. On the one hand, the upward trend in real unit labor costs observed in France in the 1990s reveals lower price mark-ups over wages, in line with the expected erosion of firms’ monopoly rents. On the other hand, workers continued to exert significant monopoly power, and take advantage of the ample productivity gains engineered by firms in an attempt to compensate for the loss of pricing power.

92. In sum, the potential complementarity between product and labor market reforms finds some support in the data and suggests a strategic nexus that might be exploited further to overcome resistance against labor reforms. Indeed, the complete integration of services and financial markets is still a work in progress and greater competition in these areas may further increase pressure to improve labor market flexibility (Blanchard, 2004).

Does monetary unification hinder or promote reforms?

93. Many argue that the pressure for reforms should be stronger in euro area countries, as monetary unification puts a premium on reforms that increase their economy’s resilience to shocks. That argument rests on the presumption that member governments fully internalize Mundell’s (1961) concerns about the costs associated with country-specific shocks in a region notorious for its low labor mobility. Indeed, the advantages of factor mobility inside a monetary union are less compelling if wages and prices adjust to asymmetric developments swiftly.

94. But participation in a currency union may either be irrelevant or even reduce incentives to implement structural reforms. Three arguments come into play:

  • First, the euro notwithstanding, political-economy constraints may be so strong in the euro area that it would take a perfect “Mundellian storm” (a wave of massive asymmetric shocks) to trigger decisive reforms.

  • Second, EMU’s stability-oriented macroeconomic frameworks reduce the probability of high inflation or runaway deficits that would result from futile attempts to escape the temporary adverse effect of structural rigidities on growth and employment. This reduces the potential costs of structural rigidities, thereby weakening policymakers’ incentives to eliminate them (Calmfors, 2001, Sibert and Sutherland, 2000).

  • Finally, the formal restrictions on short-term fiscal flexibility may limit the scope for using fiscal policy to absorb transition costs and alleviate the distributive effects entailed by some reforms, making the adoption of such reforms politically more difficult (see Grüner, 2002, and Beetsma and Debrun, 2004).

C. The Pace of Structural Reforms: Is Europe Different?

95. In contrast with other industrial countries, EU countries remain characterized by greater regulatory restrictions in product markets and lower flexibility in labor markets. Figure 4 shows the evolution of aggregate structural indices between 1975 and 1998 for the United States and two (partly overlapping) groups of countries: the EU-15, and the “common law” countries, namely Australia, Canada, New Zealand, the United Kingdom, and the United States. The graph reveals a broad trend toward product market liberalization, with the US emerging as a clear leader. EU 15 countries started the process later, in the mid 1980s, and proceeded at a slower pace, which is characteristic of a status quo bias against reforms. As for labor market flexibility, the aggregate indices reveal little change in common law countries and a slow deterioration in the EU. Figure 5 looks at cumulative reform efforts in each group of countries—the relative change in structural indicators since 1975. In the EU 15, the adoption of the Single European Act and the launch of the single market (identified by vertical bars) coincide with significant accelerations in reforms. Figure 5 also suggests that the tendency toward increasingly restrictive labor markets in the EU culminated around 1992. Since then, a slow trend toward greater flexibility has been observed, pointing to the possibility that lower monopoly rents in product markets have helped reverse the anticompetitive bias of labor market policies.

Figure 4.
Figure 4.

Regulatory Restrictions in Product Markets and Labor Market Flexibility: Industrial Countries, 1975-1998

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

Sources: see Appendix.
Figure 5.
Figure 5.

Cumulative Reform Efforts in Industrial Countries, 1975-1998

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

Sources: see Appendix.

96. Episodes of more intense reforms coincide with a sharp increase in the crosscountry dispersion of structural indicators, highlighting the country-specific dimension of reform patterns (Figure 6). Despite the greater convergence expected from EU-wide coordination, idiosyncratic elements such as the political constraints facing national decision makers seem to play a critical role in shaping the reform process. Of course, in the EU 15, the dramatic increase in the dispersion of product market restrictions observed after 1986 (and the corresponding acceleration in reforms) partly reflects the fact that Austria, Finland, and Sweden only joined the EU in 1995, and indeed dispersion fell slightly after that date. Moreover, the United Kingdom alone contributes quite a lot to the dispersion of structural conditions among EU countries. It nevertheless remains remarkable that the dispersion of product market regulations is similar to the levels observed among common law countries, which unlike the EU had no institutional incentives to undertake product market liberalization in a coordinated fashion. As far as labor markets are concerned, cross-country dispersion is lower in both groups although the EU appears noticeably more homogeneous.

Figure 6.
Figure 6.

Cross-Country Dispersion of Structural Conditions, 1975-1998

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

97. What happened in recent years? Unfortunately, available time series for aggregate structural indices stop in 1998. What happened since then? Part of the answer can be found in the Social reforms database compiled by the Fondazione Rodolfo DeBenedetti (FRDB). The database collects structural measures adopted by selected industrial countries between 1986 and 2002 along three dimensions: employment protection legislation, non-employment benefits, and pensions. Each measure is assessed on two features: (i) whether it improves the flexibility of the system and (ii) whether the measure is marginal or major. Reform efforts can be measured by the difference between the number of flexibility-enhancing measures and the number of flexibility-reducing measures—referred to as the “net number” of reforms in the remainder of the chapter.28

98. The post-Lisbon structural reform record is decidedly mixed. Post-1998 data on labor market reforms indicate ample cross-country differences in reform activism (Figure 7). Also, the period following the Lisbon Summit (2000-2002) saw an increase in reform efforts in only 4 countries (Denmark, Germany, Italy, and Spain) whereas all other countries made less effort compared with the preceding two years. With the exception of Italy, large countries generally implemented less labor reforms than small ones. Finally, two countries (France and Portugal) appear to have increased the overall rigidity of their labor markets, although this should be viewed with great caution since it is based on a net number of flexibility-enhancing measures. Overall, these mixed results concerning the impact of the Lisbon strategy are in line with the European Commission’s assessment, which is based on objectives rather than instruments (see Box 2).

Figure 7.
Figure 7.

Net Number of Flexibility-Enhancing Labor Reforms Per Year: Before Lisbon and After

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

Sources: FRDB Social reforms database and IMF staff calculation.

99. Another striking feature of labor reform patterns is the tendency of several countries to trade-off changes in employment protection and non-employment benefits regimes (Figure 8). Labor reform packages are often not flexibility-enhancing across the board. The trade-off between employment protection and unemployment benefits regimes is well-known (Blanchard, 2002; Blanchard and Tirole, 2003; Boeri, 2004; and Boeri and others, 2003) and reflects the attention paid by governments to the risk-reducing role of labor-market institutions. Figure 8 shows that the reduction in the generosity of unemployment insurance led to a tightening of employment protection in 6 member states.

Figure 8.
Figure 8.

Net Number of Flexibility-Enhancing Labor Reforms: Employment Protection (EPL) Versus Non-Employment Benefits (NEB)

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

Sources: FRDB Social reforms database and IMF staff calculation.

Progress Under the Lisbon Agenda, 2000-2003

Limited progress has been made in implementing the Lisbon agenda over the past few years. The recent growth slowdown did not help, with members facing an uphill battle to attain some of the targets. Overall, a north-south divide has emerged between the relatively good achievers—especially Austria, Denmark, Luxembourg, Netherlands, Sweden and the UK—and the Mediterranean laggards (Greece, Italy, Portugal, Spain). In terms of progress made since the institution of the Lisbon strategy, Belgium, France, and Greece have stepped up efforts, while Austria, Germany, Luxembourg, and Portugal have lagged behind. The Commission argues that implementing the Lisbon agenda in full could boost potential growth in Europe ½ to ¾ percentage points within 5-10 years.

Employment has grown, but not substantially. The total employment rate rose to 64.3 percent in 2002, up by 2 percentage points from 1999. Although the interim target of 67 percent in 2005 is unlikely to be achieved, the Commission feels the 70 percent target by 2010 is still feasible, as long as the pace of employment growth maintains its late 1990s rate. Although it improved by 3 points to 40.1 percent in 2002, the employment rate of older workers has a long way to go before it can hit 50 percent, the 2010 target. This target is unlikely to be met. Long term unemployment fell from 4 percent to 3 percent over this period. The overall unemployment rate, however, has increased in the downturn. Some labor market reforms are underway.

Productivity growth remains low. The growth rate of productivity per worker is currently less than in the US. In its assessment, the Commission pins the blame for poor productivity trends on low investment and slow take-up of information and communication technologies. It identifies productivity as being driven by four key areas—regulation, financial markets, product market integration, and investment in knowledge. While there has been some progress in financial market reform, production market integration stagnated, and investment in knowledge actually fell. Heroic efforts will be require to push investment in research and development, hovering around 2 percent of GDP, to its target of 3 percent of GDP by 2010. Moreover, investment in human capital remains inadequate, especially in the private sector. Public investment is also deemed to be to low, especially in areas critical to the Lisbon strategy, such as transnational network infrastructures, and the knowledge sector (research, innovation, education, and training). To rectify this, the European Council approved the Quick Start Program, which is designed to mobilize resources behind priority investment projects.

There are still substantial weaknesses in competitiveness, and in the development of the internal market. Competition has been enhanced in a number of key markets: telecommunications, rail freight, postal services, electricity, and gas. Some progress has also been made in financial services, elimination of fiscal distortions, establishing a favorable regulatory environment, and reducing state aid. Still, product market integration is slowing down, as cross-border manufacturing trade froze, and prices have stopped converging. The internal market in services—accounting for 70 percent of GDP—has been particularly slow to develop, and remains highly fragmented. Transposition of directives has also dried up recently, and the record is even worse for the Lisbon directives. Of the 70 directives arising directly from the Lisbon strategy, 40 should have been transposed by end-2003. In reality, however, less than 60 percent have been transposed on average; here, the strong performers are Denmark, Italy, and Spain, while France, Germany, and Greece lag behind. Only seven directives have so far been transposed by all members. Beyond transposition, members are showing no inclination to improve their enforcement: over a thousand infringement procedures remain open and this has barely decreased over the past few years.

Lisbon also emphasizes promotes sustainable growth, through social cohesion and environmental policy. On the former, the Commission argue that the rise in unemployment combined with inadequate social protection could raise the incidence of poverty. On the latter, there is also little is any notable improvement on any of the indicators—greenhouse gas emissions, the energy intensity of the economy, and the volume of transport. The share of renewable energy remains at 6 percent, and it is unlikely member states will be able to attain the 12 percent target by 2010, or the target to have 22 percent of generated electricity coming from renewable sources.

100. Looking at the timing of reforms in the EU (Figure 9), the net number of flexibility-enhancing measures has been noticeably lower in “good times”, that is when actual and future growth prospects were high (1999-2000). This may suggest a tendency to implement less reforms when it is in principle the least difficult time to do so. Indeed, robust growth in aggregate income makes the distributive effects as well as the possible transition costs of reforms less visible and painful. This tendency to do less reforms in good times is reminiscent of Rodrik’s (1996) discussion about the role of “crises” as triggers for reforms. That hypothesis is further investigated in the next section.

Figure 9.
Figure 9.

Total Number of Labor Reforms in the EU, 1998-2002

Citation: IMF Staff Country Reports 2004, 235; 10.5089/9781451812954.002.A002

Sources: FRDB Social reforms database and IMF staff calculation.

101. To summarize:

  • EU 15 countries have experienced a particularly strong status quo bias when compared with common law countries.

  • EU-wide initiatives such as the Single European Act are clearly associated with an acceleration in product-market liberalization. A spillover effect on labor market reform appears likely although it has been small so far.

  • Country-specific constraints or objectives seem to play a key role in reform patterns, as witnessed by the increasing dispersion in structural conditions. Recent but partial reform data are broadly consistent with those trends. These data also suggest that the Lisbon process has not encouraged a large number of countries to accelerate labor reforms, although the countries that implemented more reforms after the Lisbon summit are generally large, and therefore more likely to encourage smaller ones to follow.

D. The Determinants of Structural Reforms

102. This section investigates the determinants of structural reforms. In contrast with most existing studies, which look at the realization of objectives (like growth and employment), the design of structural policies is analyzed directly through proxies of instruments, namely the aggregate indices of structural conditions presented in Section C. This section is limited to a brief presentation of the model and a discussion of the main results; a more detailed discussion of the methodology and the potential explanatory variables can be found in IMF (2004).

Specification and estimation

103. The econometric model relates annual variations in the structural indicators to a series of potential explanatory variables that mostly reflect policymakers’ constraints, although some of them are also associated with objectives. The conjecture of a status quo bias in reforms suggests that initial structural conditions matter. Accordingly, the dynamics of reforms is assumed to be driven by the gap between the value of the structural indicator before current reforms are decided (or implemented) and an unobservable “intermediate target” reflecting the degree of liberalization deemed desirable by the policymaker29: REFORMt=α(INDEXt-1- TARGETt). The targeted value of the structural index may change over time, along with variations in the incentive structure of the policymaker. With these elements in mind, the following equation is used to explain structural reforms:

ΔYi,t=κi+β1Yi,t-1+k=2KβkXk,i,t+εi,t,(1)

where i denotes a country, and t is a time subscript; Δ represents the first-difference operator; Yi, t symbolizes the aggregate index of structural conditions; and β1 captures the reform dynamics. The unobservable “operational target” is considered through a number of potential determinants of policymakers’ incentives structure (Xk). Finally, κi represent country “fixed effects” taking into account country-specific features not captured by other explanatory variables.

104. The model is estimated on a panel of 17 OECD countries30 over the period 1975-1998. Given the relatively long time-series dimension compared with the number of countries, Judson and Owen (1999) recommend an LSDV (least squares dummy variable) estimator. Their Monte-Carlo experiments suggest that the bias inherent in dynamic panel models estimations is small enough not to make alternative estimators more desirable. To allow for cross-section heteroskedasticity and contemporaneous correlation of error terms, a feasible Generalized Least Squares (GLS) fixed-effects estimator is used. Finally, to test for systematic differences between the behavior of policymakers inside and outside the EU, the estimated version of equation (1) also includes interactions of all explanatory variables with a dummy identifying membership to the European Union.

105. Results for product-market and labor reforms are presented in Table 1. In both cases, the dependent variable has been given a 0-1 scale with higher values representing a more flexible system. Hence, a positive (negative) sign means that an increase in the corresponding explanatory variable is conducive to (harmful for) reforms. For each reform area, there are three columns. The first column shows the effects that are common to all industrial countries, including EU-15 member states, while the second column reports the difference associated with EU membership. The third column is the sum of the first two. Notice that the product market equation uses a more parsimonious specification than the labor equation as several non-significant variables were dropped to improve the precision of other estimates.

Table 1.

Determinants of Reforms in Product and Labor Markets

(Dependent variable: change in the relevant structural index times 100)

article image
Note: Both equations were estimated using a feasible GLS estimator allowing for cross-section heteroskedastic and contemporaneously correlated errors (SUR). Significance levels are based on robust standard errors. Superscripts *, **, and *** indicate that the estimated coefficient is significantly different from zero at the 10, 5, and 1 percent level, respectively. The labor equation includes two lags of the dependent variable while the product market equation includes one lag of the dependent variable (not reported). All equations include country fixed effects (not reported).

Coefficients of the EU membership dummy interacted with the corresponding explanatory variable.

Significance levels based on Wald test that the sum of both coefficients is equal to zero.

Main results

106. Perhaps the most striking result in Table 1 is that almost all the determinants of reforms play a significantly different role depending on EU membership. This is a strong indication that the incentive structure within the EU is on average quite different from that relevant for the group of outsiders. EU membership in itself and more specific initiatives such as the Single European Act or the deepening of economic and monetary integration after 1992 also emerge as significant determinants of policymakers’ incentive structures. With the notable exception of participation in the narrow band ERM (discussed below), those EU-specific dummies are generally associated with more reforms. Since equation (1) controls for a large number of other potential determinants (including initial conditions and countryspecific political constraints), it can be concluded that EU-related initiatives and/or broadbased policy coordination within the EU may have helped national governments overcome domestic resistance to reforms. This is particularly clear in the case of labor reforms, an area in which the EU has no direct prerogative.31

107. Cross-border spillover effects appear relatively large and significant, especially for product market reforms. These spillovers – defined as the effect of lagged reforms in the 3 main OECD trading partners – are not specific to EU countries and primarily reflect the impact of reforms on a country’s competitiveness rather than the outcome of cooperative reform efforts. The importance of the external competitiveness channel is corroborated by the positive impact of trade openness on labor reforms, an effect that is specific to EU members.32 The evidence of cross-border effects is also consistent with positive learning spillovers in the sense that reforms in trading partners (often neighboring countries) provide fresh evidence of their benefits (Abiad and Mody, 2003). Yet, one might have expected learning spillovers to be greater among EU countries given the intense exchange of information among them, but this does not appear to have been the case.

108. Earlier product market reforms foster labor reforms but the reverse is not true. In line with the theoretical argument developed in Section B, the erosion of monopoly rents in product markets creates significant pressure for reforms in the labor market. Alternative explanations are less convincing. First, a simple sequencing argument according to which relatively easier reforms are passed before more contentious measures are envisaged is at odds with the fact that product market reforms are not obviously easier (see section B). Second, although learning effects across reform areas may explain this result, the one-dimensional nature of the relationship tends to downplay such an interpretation.

109. Pressure on macroeconomic policies may hinder labor market reforms, especially in the EU. On the fiscal side, an increase in the cyclically adjusted primary surplus seems to be associated with less labor market reform activity in the EU; so is a reduction in the net public debt, although it is unclear whether this is linked to time-series or cross-section variations. However, these results do not invalidate the clear synergies between labor market reforms and fiscal sustainability. On the monetary side, countries that sought to disinflate aggressively through their participation in the narrow-band Exchange Rate Mechanism of the European Monetary System undertook significantly fewer labor reforms than others. Finally, a small negative effect of popular support for the euro is observed, indicating that governments pressured to comply with the Maastricht criteria may have been distracted from structural priorities. One popular interpretation linking these findings is that governments have a limited amount of political capital to be spent on difficult policy measures such as fiscal adjustment and disinflation. Hence, “investment” in financial stability is diverted from “investment” in reforms (Eichengreen and Wyplosz, 1998). A second interpretation is that supply-friendly reforms should ideally be accompanied by expansive macroeconomic policies (Saint-Paul, 2002) so that constraints on macroeconomic instruments may end up discouraging reforms in the first place. Third, as discussed earlier, fiscal policy may have to smooth the distributive effects of reforms or absorb part of their transitory costs to rally enough supporters (Grüner, 2002).

110. These results support the idea that an institutional framework emphasizing financial discipline over the medium term while allowing flexibility in the short term is conducive to reforms. Of course, one might interpret the evidence differently and argue that institutionalized commitment to financial discipline reduces incentives to reform (Calmfors, 2001; Sibert and Sutherland, 2000). This would be misguided. The estimation period is dominated by protracted episodes of fiscal adjustment and disinflation that were necessary to correct the uncontrolled slippages of the late 1970s. Hence, the estimates show that the priority given to fiscal adjustment and disinflation reduces incentives to take tough measures on the structural front as well. A medium term financial discipline objective is clearly the best way to avoid unpopular adjustments in macroeconomic policies and focus on structural issues.

111. Overall economic performance affects the incentives to implement reforms.33 First, for all countries, but particularly EU members, periods of slow growth are conducive to product market reforms. By contrast, in labor matters, EU countries and outsiders react differently to macroeconomic conditions. While EU member states tend to accelerate reforms in years of low or negative growth and relax reform efforts as soon as stronger growth returns, outsiders implement reforms in good times and do not hesitate to increase restrictions in bad times.34 The pattern observed for the EU is consistent with the conjecture of a particularly strong status-quo bias against labor market reforms.

112. Purely political variables play a relatively minor role. In particular, ideology does not appear as a key determinant of reforms although conservative administrations seem somewhat keener on labor market reforms in the EU and on product market liberalization elsewhere. Outside the EU, the number of years spent in office seems detrimental to labor reforms, in line with the view that unpopular measures are preferably implemented early in an administration. Other political variables such as the degree of political fractionalization, the type of electoral rule (majoritarian vs. proportional) and the timing of elections does not appear to play any role in the present specification of the model (see however IMF, 2004). Finally, in the EU, a large majority in parliament seems to discourage product market liberalization while it encourages labor reforms (the latter effect is close to the 10 percent significance level). This may indicate that strong governments (backed by a large parliamentary majority) will substitute away from “easier” reforms and opt for the more difficult labor reforms and vice-versa.

113. Among other factors affecting structural policies, higher unionization rates are conducive to labor reforms, and, in the EU, to product market liberalization as well. As observed by Blanchard (2004), countries with high unionization rates—such as Sweden, Denmark and, to a lesser extent, Belgium, Germany and Netherlands—have traditionally less confrontational unions and a strong revealed preference for social dialogue and consensual decisions in association with social partners. The evidence suggests that these consensus-based systems may be more conducive to deals and mutually beneficial compromises about reforms perceived as inevitable.35 Conversely, countries with small and confrontational unions like France more likely face strong resistance to any change that would reduce workers’ monopoly rents. Finally, the results also suggest that a large share of seniors in the total population is detrimental to labor reforms, particularly in the EU. Seniors may indeed discount the long-term benefits of certain reforms more heavily. Recent evidence on the dynamic impact of reforms (IMF, 2004) indeed shows that labor reforms entail short-term costs before substantial benefits materialize in the longer term. Boeri (2004) also documents the negative impact of the share of seniors on pension reforms.

E. Structural Reforms and EU Governance

This section first investigates the economic rationale for EU-wide structural policy coordination in light of the empirical results discussed above and compares the respective merits of alternative cooperation technologies. Then, the section turns to an assessment of the open method of coordination (OMC) underlying the Lisbon strategy. Particular attention is paid to recent proposals to enhance the OMC’s effectiveness.

Spillovers and the case for EU-wide coordination

114. Whenever policies decided in one country affect economic outcomes in others, cross-country coordination may be called for. Coordination can enhance policy effectiveness by internalizing those externalities.36 Beyond the sheer size of cross-border spillovers, three conditions make coordination beneficial. First, policymakers must agree broadly on the objectives they jointly pursue and on the set of constraints they face. Second, they must be reasonably confident that other players will stick to any commitment they make. Finally, coordination in one policy area should not trigger or aggravate conflicts in other policy areas.

115. The empirical evidence reveals cross-country interdependence consistent with significant reform spillovers, especially in highly integrated economic areas such as the EU. Admittedly, the reduced form equation (1) cannot isolate and let alone quantify the various channels of interdependence precisely. Indeed, interdependence may occur through multiple explanatory variables. For example, structural reform in one country or group of countries improves market flexibility and resilience to shocks in these economies, which in turn shapes cyclical patterns, and ultimately external demand and macroeconomic policies in the reformer’s trading partners, with probable repercussions on their own incentives to carry out reforms. Also, the strong relationship between product and labor market reforms produces other indirect channels of interdependence in the latter. More generally, the empirical methodology cannot disentangle “pure” spillovers from the cross-country interdependence that normally arises from existing and partly overlapping coordination frameworks inside and outside the EU (the G7 for instance). Hence, “pure” spillovers might be smaller than they appear in estimations of equation (1).

116. Three main channels of cross-country interdependence can be identified:

  • Competition spillovers. As illustrated in section C, product and labor market reforms in one country increase competition in the domestic market, boosting productivity and reducing unit labor costs. Reforms thus make the economy more competitive and neighboring economies correspondingly less competitive. Governments in trading partners then face greater incentives to implement similar reforms.

  • Flexibility spillovers. Reforms increase market flexibility, and resilience to shocks, thereby facilitating the task of macroeconomic policymakers in general and central banks in particular. Central bankers in flexible economies typically face lower sacrifice ratios and can be more effective in their stabilization efforts (IMF, 2003). In the single market, the benefits of flexibility are maximized if all countries undertake the necessary reforms simultaneously. This is especially pertinent for those sharing the same monetary policy.

  • Learning spillovers. Countries learn from one another’s successes (or failures) with structural policies (Abiad and Mody, 2003). By promoting the exchange of information, cross-country coordination helps take advantage of those spillovers.

Learning and flexibility spillovers are positive in the sense that reforms in one country benefits others. By contrast, competition spillovers are negative.

117. Besides economic spillovers, the political dimension of structural policies entails additional benefits from coordination. Coordination helps stifle domestic constraints, such as the resistance of special interests, by deflecting part of the political cost from domestic policymakers. The relevance of such political “fringe benefits” from coordination can be seen from the eagerness of special interest groups to set up cross-border networks, and from the tendency of national governments to blame “Brussels” for unpopular choices. In Table 1, the positive effect of EU-related dummy variables on reforms probably captures part of those political fringe benefits.

Methods of coordination

118. The commitment to enact cooperative policies can take various legal forms. Under “hard law,” commitments are enshrined as legally binding obligations that are precise, and delegate authority for interpreting and implementing the law (Abbot and Snidal, 2000). Hard law implies a firm legal obligation so that parties are bound by rules or commitment, as distinct from non-legal norms; contingent obligations and escape clauses would fit somewhere in between. Hard law is also usually “precise” in the sense that rules unambiguously define the conduct they require, narrowing the scope for interpretation. Treaties with only vague commitments are examples of imprecision. Using hard law for international policy coordination would lead to delegation to third parties such as courts, arbitrators, or administrative organizations. “Soft law” is defined as that general space whereby legal arrangements are weakened along one or more of these dimensions. Rather than a black-and-white categorization, international agreements often tend to occupy a whole continuum between hardest and softest law. For example, the “softest” attempt at coordination would involve vague norms with no legal consequences for violation, and enforced by mere political bargaining. The Lisbon process sits squarely in the soft law arena.

119. Soft law has its own distinct advantages in the arena of international policy coordination. When spillovers call for coordination, soft law may be the appropriate response. Soft law entails fewer contracting costs, and lower sovereignty costs, among states jealous of national economic policy prerogatives. Also, soft law is a tool of compromise, a way of navigating through the thicket of heterogeneous preferences across countries. Finally, and crucially in the economic policy context, soft law provides the means to deal with uncertainty. Flexibility is attractive when countries are unsure of the exact future consequences of an agreement, or the nature of compliance.

120. The EU has embraced softer forms of coordination, which are particularly apt for labor market reforms. Reacting to concerns about excess centralization, the EU moved away from its traditional mode of economic governance which emphasized delegation to the center, and instead embraced the principle of subsidiarity in the Maastricht treaty. A number of soft law innovations emerged from treaty commitments, including the Broad Economic Policy Guidelines (BEPGs), which set broad economic policy recommendations for each country; the multilateral surveillance arm of the SGP, which calls for countries to achieve underlying balance; and the European Employment Strategy, which issues recommendations designed to boost employment (Begg, Hodson, and Maher, 2003). This “guided” coordination entails agreement over common objectives, each member formulating a plan, and assessment of this plan through multilateral surveillance. In the specific area of labor market reforms, a consensus emerged in 1990s that the welfare state was hurting labor participation and that this was not sustainable (Mosher and Trubek, 2003).

121. Depending on circumstances, there are different ways to operationalize the coordination needed to foster pro-competitive reforms. A variety of coordination frameworks are possible and, in fact, already at work in different policy areas. Three are listed below: the first relies on hard law, the second on softer coordination, while the third is compatible with harder or softer elements.

  • Supranational delegation. Governments explicitly delegate (in part or in full) policy prerogatives to a supranational authority. This approach is tilted firmly in the direction of hard law. Traditionally, delegation is deemed desirable when spillovers are evidently large, and policymakers have relatively homogeneous preferences about objectives and methods (Alesina and Wacziarg, 1999). Monetary, agricultural and trade policies are the purest examples of delegation in the European Union. Some aspects of product market liberalization also fall into that category, such as those related to the completion of the internal market.

  • The Open Method of Coordination (OMC). This is a particular form of soft law coordination based on mutual appreciation of common goals and agreement on the appropriate policy response (Hodson and Maher, 2001; Morelli and others, 2002). Learning, exchange of information, and performance assessments are the main vehicles of the method. It emphasizes multilateral surveillance, benchmarking, best practices, and peer pressure. It is most useful in situations with common problems, but no uniform solutions, combined with uncertainty about the best way to go forward (Mosher and Trubek, 2003). Policy decisions, including the orientation, scope and the precise timing of the reforms remain fully decentralized. The OMC takes subsidiarity one step further, making it dynamic in nature (Hodson and Maher, 2001). This is the approach adopted at the March 2000 Lisbon summit in the hope of boosting structural reforms.

  • Leadership. Another form of coordination in which policy choices remain fully decentralized occurs through the emergence of a “leader.” Leaders, or leading groups, are important enough (economically and/or politically) to incite other countries to adopt similar policies. The EU external policy broadly follows this pattern. In the context of structural reforms, the emergence of a leader-follower pattern would be consistent with the operation of competition spillovers. The thorny issue of course is the emergence of a leader. Small and open economies clearly have stronger incentives to gain a competitive edge by taking the lead, but are unlikely to become leaders in the game-theoretic sense. Coordination through leadership rests on the sheer political will and focus of large countries.

122. As the EU experience shows, these frameworks are not mutually exclusive and may actually complement each other. Centralization is more suited to the single market program, given the commonality of objectives and large spillovers. This resulted in the prominence of the supranational delegation model (see also Sapir and others, 2003). Softer forms of coordination are more appealing in the arena of labor market reforms. Within the EU in particular, members have jealously guarded control over social and employment policy. Vested interests are strong, and preferences are divergent—between those, for example, who value more flexible labor markets and those who place a premium on social protection. Also, given the relatively low level of cross-border labor mobility, direct externalities are not obviously strong. Finally, negative externalities through the impact of labor reforms on competitiveness caution against hard forms of coordination in that domain because it could actually increase the anti-reform bias. The OMC thus appears appropriate for those policy prerogatives that should remain in national hands but about which the EU has a broad interest in a certain policy stance.

Coordination and the Lisbon strategy

123. The Lisbon strategy has been criticized as too diffuse and unfocused. As some have noted “narrow intermediate objectives, precisely defined means and effective instruments have been replaced by broader objectives, softer means and weaker instruments.” (Sapir and others, 2003, p. 85). There is a widespread impression that the multiple and partly overlapping decision-making processes only create confusion and hinder action instead of promoting it (Alesina and Perotti, 2004). The recent progress report of the European Commission on the Lisbon Agenda seems to confirm this pessimistic assessment (see Box 2 for a summary). Economic reforms lag behind in many member states and it seems increasingly likely that key targets set for 2010 will not be attained. The labor participation goal seems particularly ambitious, and some observers have wondered how the 15 million jobs needed to reach the employment rate target of 70 percent by 2010 will be created (European Commission, 2004b).

124. While many see the supranational delegation model as the superior form of coordination, its enforcement record is also not perfect. Sapir and others (2003) contrast what they see as the clarity and effectiveness inherent in the delegation model with the paralysis engendered by looser coordination mechanisms such as the OMC. However, as already noted, delegation is not suited to labor market institutions. Furthermore, the delegation model may be weaker than it looks. To have any traction, EU legal instruments heavily rely on national enforcement mechanisms, and in the case of directives, on possibly slow and unwilling national legislatures.37 As regards regulations, which require no national legal interface, 38 the Commission is burdened by hundreds of infringement cases, again pointing to significant enforcement difficulties.

125. The current EU governance structure in structural matters is two-pronged, reflecting the allocation of policy prerogatives between the center (delegation) and national governments (OMC). The delegation pillar focuses mainly on the completion of the internal market, a dimension that the empirical analysis in this paper has approached through the specific angle of product-market reforms. Softer norms are used to facilitate cross-country coordination on areas like labor market reforms, areas which are central to the Lisbon strategy. The two-pillar model seems appropriate as it does not lead to an undue centralization of prerogatives that should remain in the realm of national decision-making.

126. The weaknesses in the OMC have prompted calls for reform. The European Commission (2004b), supported by the European Council (2004), put forward a number of recommendations designed to improve the process. Proposals include enhanced monitoring, a greater emphasis on follow-up, publicizing successful achievements, streamlining recommendations, and enhancing the exchange of information. These propositions reflect the inherent limitations of patching up a method that rules out direct action on incentives. By design, the OMC ultimately relies on the governments’ goodwill and the lack of it breaks the critical link between monitoring and incentives. In terms of moving forward, these proposals are a step in the right direction in view of the empirical analysis of this paper. These measures help take fuller advantage of the learning spillovers.

127. The Lisbon strategy should be strengthened by making peer pressure more effective. Given the absence of an external enforcer under the OMC, incentives must be put in place to promote self-enforcement, which will be facilitated by building consensus over a core body of reforms and making peer pressure more effective. There are two types of incentives in particular that can lead countries to enforce the softer coordination involved in the Lisbon agenda (see Padoan, 2002). First, a state that takes no action to boost employment would see its reputation diminish in the policy arena, as it loses influence in the EU domain, and in the market, as it becomes less attractive for investment. Second, harmful behavior in one country weakens others, making the euro area as a whole less attractive. These factors could help make peer pressure more effective.

128. In particular, the focus of reform could be on the following:

  • Streamline policy advice. In particular, there needs to be more focus on labor market reform, especially geared towards raising labor utilization. While the Lisbon process does emphasize the employment rate, there is a plethora of other policies and platforms on the agenda which distract from the core labor market issues. The link between monitoring and incentives should also be tightened. Streamlining is likely to boost the efficacy of peer pressure.

  • Bolster the multilateral surveillance process. The Commission could pursue a “naming and shaming” strategy by ranking and publicizing relative country performances. This could be given more traction through the multilateral surveillance lever of the BEPGs, which are Treaty-based. The Commission could also contribute to fostering consensus by promoting the benefits of structural reforms more aggressively.

  • Step up reforms under the supranational delegation pillar. Conventional analyses often fail to appreciate the complementarities between the delegation and the OMC pillars. The empirical evidence on structural reforms in goods and labor markets suggests that resolute actions by the center to implement reforms falling under its responsibility would complement peer pressure by reinforcing individual incentives to carry out reforms. The uneven record in the area of labor markets should therefore encourage an acceleration in competition-enhancing initiatives by the center, including an increase in the scope of product market reforms to cover still heavily protected industries like retail trade, banking, and other services.

  • Promote large country leadership. Maximizing learning spillovers and publicizing achievements would gain in effectiveness if large countries with a significant influence on the competitiveness of smaller trade partners took the lead. Like in other policy areas (such as foreign policy), the recognition by large countries of their particular stake in the success of EU-wide coordination would facilitate the operation of the OMC by making reforms incentive-compatible for a larger number of countries given competition spillovers.

129. In sum, the current two-pillar system possesses built-in strengths that have not yet been fully exploited. First, the flexible design of the OMC pillar allows it to take advantage of different spillover effects while providing non-negligible political fringe benefits. In particular, it accommodates the leadership coordination game that may prove decisive in nudging incentives towards a more activist stance on pro-competitive reforms. Second, the two-pillar approach avoids the temptation to unduly centralize policy prerogatives, such as labor market policies. Third, there are important strategic complementarities between the actions undertaken under each pillar, notably those reflecting the fundamental interdependence between goods and factors markets.

APPENDIX I Data Sources and Definitions

Labor market flexibility

The labor market flexibility index was constructed on the basis of the following variables:

  • Employment protection. Index measuring the restrictiveness of employment protection, ranging from 0 to 2.

  • Benefit replacement rates. Average first-year unemployment benefits as a percentage of average earnings before tax.

  • Benefit duration. Ratio of the average benefit replacement rates in the second to the fifth year of an unemployment spell to the average benefit replacement rate in the first year of an unemployment spell.

These annual time-series cover the period 1960-1998. They come from the Labor Market Institutions Database set-up by Nickell and Nunziata (2001) and extended by IMF staff on the basis of OECD data provided by Giuseppe Nicoletti (see IMF, 2003). In view of their aggregation, those indices were rescaled on the 0-1 interval, with higher values meaning improved incentives to supply and demand labor.

Product market regulatory indices and industry-level data

The paper uses annual time series of regulatory restrictions indices constructed by the OECD and covering the period 1975-98 period for the following industries: gas, electricity, post, telecommunications, passenger air transport, railways and road freight. Depending on the industry, 2 to 4 dimensions of the regulatory restrictions are available: barriers to entry, public ownership, market structure, vertical integration, and price controls. The text figures use simple averages of the original indices, which range between 0 and 6, where 6 indicates the highest level of restrictions. To ease comparisons between labor and product market reforms, the regression analysis considers an average index over all industries and rescaled between 0 and 1, with 1 indicating the lowest level of restrictions.

As far as the analysis of the transportation industry is concerned, time-series covering the period 1975-1998 are available for passenger air transport, railways and road freight. Figures 2 and 3 depict average regulatory restrictiveness indices for those three industries as vertical bars. Industry data on value added, employment and wages refer to the “transport, storage and communication” sector in the OECD STAN database. Similar analysis on post and telecommunications revealed broadly similar patterns as for the transportation industry although the regulatory reforms in France were more limited in scope and came much later. Nicoletti and Scarpetta (2003) provide a detailed discussion of those data, including quality and other mismatches.

Additional data used in the regression analysis

  • Share of seniors: percentage of the total population over the age of 65 (source: World Development Indicators).

  • Cross-border spillovers: difference (lagged once) between the value of structural indicator in a specific country and the weighted average of its three main trade partners (on the basis of exports) among the group of 20 OECD countries considered in the study (source of the trade weights: World Economic Outlook).

  • Trade openness: sum of imports and exports of goods and services in percent of GDP (Source: OECD Analytical Database).

  • “Bad” year: dummy set equal to 1 when annual real GDP growth is at or below 1 percent.

  • Number of bad years over the last three years: sum of the above dummy over the three preceding years.

  • Cyclically adjusted primary surplus: primary surplus adjusted for the cycle in percent of potential GDP (source: OECD Analytical Database).

  • Net government debt: Net government liabilities in percentage of GDP (source: OECD Analytical Database).

  • Country size: Real GDP divided by US GDP (source: OECD Analytical Database).

  • Union density: Total reported union members divided by wage and salaried employees (source: Nickell and Nunziata, 2001).

  • Conservative government: dummy set equal to 1 if the chief executive’s ideology is conservative. (Source: World Bank - Database of Political Institutions).

  • Size of government majority: number of government seats in Parliament divided by total number of seats. (Source: World Bank - Database of Political Institutions).

  • Number of years in office: World Bank - Database of Political Institutions.

  • Popular support for the euro: survey data showing percentage of people supporting the adoption of the euro by their country (Source: European Commission – Eurobarometer, various issues, http://europa.eu.int/comm/public_opinion/).

  • ERM “hard-core”: dummy variable equal to 1 for all long-term members of the narrow-band ERM (1979-1993), including after the widening of the bands to 15 percent. Italy was considered a member of the hard core ERM in 1990 and 1991 only.

References

  • Abbot, Kenneth W., and Duncan Snidal, 2000, “Hard and Soft Law in International Governance,International Organization, Vol. 54, No. 3., pp. 421456.

    • Search Google Scholar
    • Export Citation
  • Abiad, Abdul, and Ashoka Mody, 2003, “Financial Reform: What Shakes It? What Shapes It?IMF Working Paper 03/70 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Agell, Jonas, 1999, “On the benefits from rigid labour markets: norms, market failures, and social insurance”, The Economic Journal, Vol. 109 (February), pp. F143F164.

    • Search Google Scholar
    • Export Citation
  • Alesina, Alberto and Alan Drazen, 1991, “Why Are Stabilizations Delayed?”, American Economic Review, Vol. 81 (December), pp. 117088.

    • Search Google Scholar
    • Export Citation
  • Alesina, Alberto and Roberto Perotti, 2004, “The European Union: A Politically Incorrect View”, NBER Working paper No 10342 (Cambridge, Massachusetts: National Bureau of Economic Research).

    • Search Google Scholar
    • Export Citation
  • Alesina, Alberto and Romain Wacziarg, 1999, “Is Europe going too far?” Carnegie-Rochester Conference Series on Public Policy, Vol. 51 (December), pp.149.

    • Search Google Scholar
    • Export Citation
  • Beetsma, Roel and Xavier Debrun, 2004, “Reconciling Stability and Growth: Smart Pacts and Structural Reforms,IMF Staff Papers, forthcoming (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Beetsma, Roel, Xavier Debrun and Franc Klaassen, 2001, “Is Fiscal Policy Coordination in EMU Desirable?”, Swedish Economic Policy Review, Vol. 8 (Spring), pp. 5797.

    • Search Google Scholar
    • Export Citation
  • Begg, Ian, Dermot Hodson, and Imelda Maher, 2003, “Economic Policy Coordination in the European Union,National Institute Law Review, Vol. 183, pp. 6677.

    • Search Google Scholar
    • Export Citation
  • Blanchard, Olivier, 2002, “Designing Labor Market Institutions” (unpublished; Cambridge, Massachusetts: MIT). Available via the Internet: http://econwww.mit.edu/faculty/blanchar/papers.htm.

    • Search Google Scholar
    • Export Citation
  • Blanchard, Olivier, 2004, “The Economic Future of Europe”, NBER Working Paper No 10310 (Cambridge, Massachusetts: National Bureau of Economic Research).

    • Search Google Scholar
    • Export Citation
  • Blanchard, Olivier, and Francesco Giavazzi, 2003, “Macroeconomic Effects of Regulation and Deregulation on Goods and Labor Markets,Quarterly Journal of Economics, Vol. 118 (August), pp. 879907.

    • Search Google Scholar
    • Export Citation
  • Blanchard, Olivier, and Thomas Philippon, 2003, “The Decline of Rents, and the Rise and Fall of European Unemployment” (unpublished; Cambridge, Massachusetts: MIT). Available via the Internet: http://econ-www.mit.edu/faculty/blanchar/papers.htm.

    • Search Google Scholar
    • Export Citation
  • Blanchard, Olivier, and Jean Tirole, 2003, “Contours of Employment Protection Reform,” (unpublished; Cambridge, Massachusetts: MIT). Available via the Internet: http://econ-www.mit.edu/faculty/blanchar/papers.htm.

    • Search Google Scholar
    • Export Citation
  • Boeri, Tito, 2004, “Labor and Product Market Reforms: Why So Many and So Difficult?” (unpublished; Washington: International Monetary Fund). Available in the Internet at: http://www.igier.uni-bocconi.it/boeri.

    • Search Google Scholar
    • Export Citation
  • Boeri, Tito, José Ignacio Conde-Ruiz, and Vincenzo Galasso, 2003, “Protecting Against Labour Market Risks: Employment Protection or Unemployment Benefits?CEPR Discussion Paper No. 3990 (London: Centre for Economic Policy Research).

    • Search Google Scholar
    • Export Citation
  • Bulow, Jeremy, Geanakoplos, J., and Paul Klemperer, Multimarket Oligopoly: Strategic Substitutes and Complements”, Journal of Political economy, Vol. 93, pp. 488511.

    • Search Google Scholar
    • Export Citation
  • Calmfors, Lars, 2001, “Unemployment, labor market reform, and monetary union”, Journal of Labor Economics (April), Vol. 19, pp. 26589.

    • Search Google Scholar
    • Export Citation
  • Canzoneri, Matthew B., and Dale W. Henderson, 1991, Monetary policy in interdependent economies: A game-theoretic approach (Cambridge and London: MIT Press)

    • Search Google Scholar
    • Export Citation
  • Coe, David T., and Dennis J. Snower, 1997, “Policy Complementarities: The Case for Fundamental Labor Market Reform,Staff Papers, International Monetary Fund, Vol. 44 (March), pp. 135.

    • Search Google Scholar
    • Export Citation
  • Commission of the European Communities, 2004a, “Delivering Lisbon. Reforms for the Enlarged Union,” Report to the Spring European Council on the Lisbon Strategy of Economic, Social, and Environmental Renewal (Brussels: European Commission).

    • Search Google Scholar
    • Export Citation
  • Commission of the European Communities, 2004b, “Strengthening the Implementation of the European Employment Strategy,” Communication from the Commission (Brussels: Commission of the European Communities).

    • Search Google Scholar
    • Export Citation
  • Drazen, Allan, and William Easterly, 2001, “Do Crises Induce Reform?: Simple Empirical Tests of Conventional Wisdom,Economics and Politics, Vol. 13 (July), pp. 12957.

    • Search Google Scholar
    • Export Citation
  • Drèze, Jacques and Christian Gollier, 1993, “Risk Sharing on the Labour Market and Second-Best Wage Rigidities”, European Economic Review, Vol. 37 (December), pp. 145782.

    • Search Google Scholar
    • Export Citation
  • Eichengreen, Barry and Charles Wyplosz, 1998, “The Stability Pact: More than a Minor Nuisance?”, Economic Policy, No 26 (April), pp. 65104.

    • Search Google Scholar
    • Export Citation
  • Elmeskov, Jorgen, John Martin, and Stefano Scarpetta, 1998, “Key Lessons for Labour Market Reforms: Evidence from OECD Countries’ Experiences”, Swedish Economic Policy Review, Vol. 5 (Autumn), pp. 20552.

    • Search Google Scholar
    • Export Citation
  • European Council, 2004, Presidency Conclusions, Brussels European Council 25/26 March, Brussels.

  • Fernández, Raquel, and Dani Rodrik, 1991, “Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty,American Economic Review, Vol. 81 (December), pp. 114655.

    • Search Google Scholar
    • Export Citation
  • Gersbach, Hans, 2003, “Structural Reforms and the Macroeconomy: The Role of General Equilibrium Effects,” Invited Lecture, IEA meetings, Lisbon, September.

    • Search Google Scholar
    • Export Citation
  • Grüner, Hans Peter, 2002, “Unemployment and Labour-Market Reform: A Contract Theoretic Approach,Scandinavian Journal of Economics, Vol. 104 (December), pp. 64156.

    • Search Google Scholar
    • Export Citation
  • Hodson, Dermot, and Imelda Maher, 2001, “The Open Method as a New Mode of Governance: The Case of Soft Economic Policy Co-ordination,” Journal of Common Market Studies, Vol. 39 (November), pp. 71946.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2003, “Unemployment and Labor Market Institutions: Why Reforms Pay Off,” Chapter IV, World Economic Outlook – April (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2004, “Fostering Structural Reforms in Industrial Countries,” Chapter III, World Economic Outlook April (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Judson, Ruth and Ann Owen, 1999, “Estimating Dynamic Panel Data Models: A Guide for Macroeconomists”, Economics Letters, Vol. 65 (October), pp. 915.

    • Search Google Scholar
    • Export Citation
  • Koedijk, Kees and Jeroen Kremers, 1996, “Market Opening, Regulation, and Growth in Europe,Economic Policy, No. 23 (October), pp. 445485.

    • Search Google Scholar
    • Export Citation
  • Krueger, Anne O., 1974, “The Political Economy of the Rent-Seeking Society,American Economic Review, Vol. 64 (June), pp. 291303.

    • Search Google Scholar
    • Export Citation
  • Morelli, Pierluigi, Pier Carlo Padoan, and Lisa Rodano, 2002, “The Lisbon Strategy to the New Economy. Some Economic and Institutional Aspects,” paper presented at the XIV Villa Mondragone International Economic Seminar on Institutions and Growth: The Political Economy of International Unions and the Constitution of Europe, University of Rome, June 2627.

    • Search Google Scholar
    • Export Citation
  • Mosher, James S, and David M. Trebek, 2003, “Alternative Approaches to Governance in the EU: EU Social Policy and the European Employment Strategy,Journal of Common Market Studies, Vol. 41, no. 1., pp. 6388.

    • Search Google Scholar
    • Export Citation
  • Mundell, Robert, 1961, “A Theory of Optimum Currency Areas”, American Economic Review, Vol. 51, pp. 657665.

  • Nickell, Stephen and Luca Nunziata, 2001, “Labour Market Institutions Database” (London: Centre for Economic Performance, London School of Economics). Available via the Internet: http://cep.lse.ac.uk/pubs/download/data0502.zip.

    • Search Google Scholar
    • Export Citation
  • Nickell, Stephen and Luca Nunziata, Wolfgang Ochel, and Glenda Quintini, 2003, “The Beveridge Curve, Unemployment and Wages in the OECD from the 1960s to the 1990s,” in In Knowledge, Information and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, ed. by Philippe Aghion, R. Frydman, Joseph Stiglitz, and Michael Woodford (Princeton, New Jersey: Princeton University Press).

    • Search Google Scholar
    • Export Citation
  • Nicoletti, Giuseppe, and Stefano Scarpetta, 2001, “Interactions Between Product and Labor Market Regulations: Do They Affect Employment? Evidence from OECD Countries,” paper presented at the Banco de Portugal Conference on “Labour Market Institutions and Economic Outcomes,Cascais, Portugal, June 34.

    • Search Google Scholar
    • Export Citation
  • Nicoletti, Giuseppe, and Stefano Scarpetta, 2003, “Regulation, Productivity and Growth: OECD Evidence,Economic Policy, Vol. 18, No. 36, pp. 1972.

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development, 2002, Employment Outlook (Paris: Organization for Economic Cooperation and Development).

    • Search Google Scholar
    • Export Citation
  • Olson, Mancur, 1965, The Logic of Collective Action (Cambridge, Massachusetts: Harvard University Press).

  • Padoan, Pier Carlo, 2002, “EMU As An Evolutionary Process,” in David M. Andrews, C.

  • Randall Henning, and Louis W. Pauly [eds.] Governing the World’s Money, Cornell University Press.

  • Rodrik, Dani, 1996, “Understanding Economic Policy Reform?Journal of Economic Literature, Vol. 34 (March), pp. 941.

  • Rodrik, Dani, 1998, “Why Do More Open Economies Have Bigger Governments?Journal of Political Economy, Vol. 106 (October), pp. 9971032.

    • Search Google Scholar
    • Export Citation
  • Saint-Paul, Gilles, 1996, “Exploring the Political Economy of Labour Market Institutions,Economic Policy, Vol. 23 (October), pp. 265315.

    • Search Google Scholar
    • Export Citation
  • Saint-Paul, Gilles, 2002, “Some Thoughts on Macroeconomic Fluctuations and the Timing of Labor Market Reform,” IZA Discussion Papers, No 611 (Bonn: Institute for the Study of Labor – IZA)

    • Search Google Scholar
    • Export Citation
  • Sapir, André, Philippe Aghion, Giuseppe Bertola, Martin Hellwig, Jean Pisani-Ferry, Dariusz Rosati, José Viñals, and Helen Wallace, 2003, An Agenda for a Growing Europe: Making the EU Economic System Deliver, Report of an Independent High-level Study Group established on the initiative of the President of the European Commission, Brussels.

    • Search Google Scholar
    • Export Citation
  • Scarpetta, Stefano and Thierry Tressel, 2002, “Productivity and convergence in a panel of OECD industries: Do regulations and institutions matter?”, OECD Economics Department Working Paper No 342, (Paris: Organization for Economic Cooperation and Development).

    • Search Google Scholar
    • Export Citation
  • Seldeslachts, Jo, 2002, “Interaction Between Product and Labor Market Reforms” (unpublished; Barcelona, Spain: Department of Economics and Economic History, Universidad Autónoma de Barcelona).

    • Search Google Scholar
    • Export Citation
  • Sibert, Anne C, and Alan Sutherland, 2000, “Monetary Union and Labor Market Reform,Journal of International Economics, Vol. 51 (August), pp. 42135

    • Search Google Scholar
    • Export Citation
15

Prepared by Xavier Debrun and Tony Annett.

16

See among others, Elmeskov, Martin and Scarpetta (1998), OECD (2002), Nickell et al. (2003), and Nicoletti and Scarpetta (2001, 2003).

17

There is now a vast microeconomic literature laying out key features of optimal tax and transfer systems, and regulations of particular sectors or industry (especially utilities and financial institutions). Attempts to portray optimal market institutions and regulations in a broader macroeconomic framework are only very recent; in the area of labor markets see Blanchard, 2002; Blanchard and Tirole, 2003; and Saint-Paul, 1996.

18

For instance, at a given level of social protection, a system of tax credits for low income workers (“negative income tax”) is certainly more market-friendly than pricing these workers out of the labor market with high minimum wages. Of course, there are limits to pushing back the frontier.

19

These indices, described in the Appendix, have been used in a large number of studies on the macroeconomic effects of labor and product markets reforms.

20

A classic and comprehensive survey of the literature is Rodrik (1996). He also studies events that encourage reforms such as crises. These aspects are discussed in the empirical analysis.

21

Among other things, that uncertainty relates to the risk for the currently employed to lose her job or the uncertainty of the unemployed about finding a new one.

22

The same individual could actually be a winner and a loser. The point here is that her future taxes will pay for her present compensation.

25

See Scarpetta and Tressel (2002) and Nicoletti and Scarpetta (2003) for more detailed and systematic analysis of the impact of product market reforms. The choice of countries is dictated by data availability and by notorious differences in labor market flexibility.

26

For details about the data, see the Appendix.

27

The numbers refer to labor productivity per person (full-time equivalent). The positive effect of deregulation on multi-factor productivity growth is studied more formally by Scarpetta and Tressel (2002) and Nicoletti and Scarpetta (2003).

28

Notice that over the period 1998-2002, virtually all reforms were deemed marginal by the FRDB. The reform count operated by IMF staff considered that one “structural” measure was equivalent to three marginal measures. In any case, only France would be affected by a change in that assumption.

30

Those countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, New Zealand, Portugal, Spain, Sweden, the United Kingdom and the United States. Over the estimation period, the number of EU members increased from 7 (1975) to 12 (1998).

31

Of course, these variables may also partly capture the effect of EU policies in areas not covered by product market indices, such as financial integration or increased competition in other sectors.

32

Trade openness has a negative impact on reforms elsewhere, indicating that more open countries may be reluctant to give up protection against external disturbances (Agell, 1999; Rodrik, 1998). That variable inevitably has an ambiguous role since it potentially affects policy objectives (demand for protection) and constraints (the need to remain competitive).

33

It should be noted that the results obtained with dummies for “bad” years are robust to the use of other indicators of economic performance such as the output gap or real GDP growth. See Rodrik (1996) and Drazen and Easterly (2001) on the role of crisis in fostering reforms.

34

This partly reflects the fact that some countries (like the US) increase the generosity of unemployment insurance when unemployment is on the rise.

35

Incidentally, such deals on “inevitable” reforms with social partners might be easier to strike in “bad times” when the perceived cost of status quo is high. That might explain the typically European pattern of reforming in bad times.

36

See Canzoneri and Henderson (1991) for a detailed exposition of the game-theoretic arguments underlying the case for coordination, including a discussion of counter-productive coordination (on the latter see also Rogoff, 1985; and, in the EU context, Beetsma and others, 2001).

37

Sapir and others (2003) lament at the fact that in May 2003, 2.4 percent of the 1500 directives related to the single market program had not yet been transposed by all member states within the agreed deadlines. The European Commission (2003) also notes that the “transposition deficit” of internal market directives has been rising since 2002.

38

Sapir and others (2003) cite the number of 2000 infringement cases. The European Commission (2003) also notes that open infringement cases has increased by 6 percent between 2002 and 2003.

Euro Area Policies: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Reforms and the Equity-Growth Trade-Off, 1960-2004

  • View in gallery

    Liberalization and Labor Productivity in the Transportation Industry: France Versus the United States, 1975-1998

  • View in gallery

    Liberalization and Real Unit Labor Costs in the Transportation Industry: France Versus the United States, 1975-1998

  • View in gallery

    Regulatory Restrictions in Product Markets and Labor Market Flexibility: Industrial Countries, 1975-1998

  • View in gallery

    Cumulative Reform Efforts in Industrial Countries, 1975-1998

  • View in gallery

    Cross-Country Dispersion of Structural Conditions, 1975-1998

  • View in gallery

    Net Number of Flexibility-Enhancing Labor Reforms Per Year: Before Lisbon and After

  • View in gallery

    Net Number of Flexibility-Enhancing Labor Reforms: Employment Protection (EPL) Versus Non-Employment Benefits (NEB)

  • View in gallery

    Total Number of Labor Reforms in the EU, 1998-2002