Structural Reforms and Macroeconomic Performance in the Euro Area Countries: A Model‐Based Assessment

Abstract

The recent financial crisis is likely to have damaged the potential output of many countries belonging to the euro area. Moreover, the heterogeneity in long‐run macroeconomic performance among Member States may not be sustainable in the presence of strong monetary and financial integration, thus suggesting the need for coordinating structural reforms. Using a multi‐country dynamic general equilibrium model of the euro area, we assess the macroeconomic effects of increasing competition in the labour and services markets in Germany and the rest of the euro area and, in an alternative scenario, Portugal and the rest of the euro area. Our main results suggest that (i) a unilateral increase in competition in the labour and services markets would increase long‐run output; and that (ii) cross‐country coordination would make the macroeconomic performance of the different regions more homogeneous, in terms of both price competitiveness and of real activity.

Fiscal devaluation in the euro area: A model-based analysis

“…18 (Gross) real exports increase by 2 percent after two years, while gross imports marginally decrease. Net exports increase towards all destinations (rest of the euro area, US and rest of the world).…”

The German Labour Market Reforms in a European Context: A DSGE Analysis

“…Bayoumi, Laxton, and Pesenti (2004), Everaert and Schule (2008) and Gomes, Jacquinot, Mohr, and Pisani (2011) approximate the rigidity of labour market institutions by a mark-up parameter that drives a wedge between marginal costs of labour and real wages. While those analyses are illuminating, they do not deal with institutional parameters that policy-makers can address directly and abstract from labour market frictions inducing involuntary unemployment.…”

The Short-Term Effects of Structural Reforms

“…changes in imports dampen the aggregate demand impact of any reform-driven change in domestic demand, thereby helping stabilise the economy; ii) openness can also magnify the net external demand gains from reforms that reduce domestic prices and improve external competitiveness, helping crowd in demand more in smaller, more open economies; iii) at the same time, insofar as the real exchange rate depreciates and triggers a terms of trade loss, the associated negative effects on households' consumption may be larger in more open economies, where imports have a larger weight in domestic demand (Gomes et al, 2011).…”

“…Another related argument in favour of cross-country coordination is that it limits the deterioration of relative prices and purchasing power that a country faces when implementing the reforms unilaterally, especially for a small open economy (see e.g. Gomes et al, 2011).…”