The short-term fiscal implications of structural reforms

Abstract:

The economic and sovereign debt crisis revealed significant gaps in the economic resilience of several euro area countries, pointing to a strong need for structural reforms. Despite the long-term benefits of structural reforms, their implementation prior to the crisis was suboptimal. Typically, the main resistance to the adoption and implementation of structural reforms stems from the vested interests of affected groups in society. Besides this, the possible short-term economic and fiscal costs of structural reforms are also sometimes mentioned as a reason for postponing their adoption, suggesting a short-term trade-off between fiscal consolidation and reforms.

The European Commission’s Communication on making the best use of the flexibility within the existing rules of the Stability and Growth Pact (SGP) follows this logic and foresees an allowance for the direct short-term fiscal costs of reforms, enabling European Union (EU) Member States implementing structural reforms to delay fiscal adjustment compared with the SGP benchmark requirement. This article reviews the evidence of the short-term effects of structural reforms, given the prominence that the latter may gain in the application of the SGP. Their quantification is surrounded by uncertainty and is conditional on a large number of assumptions. That said, only a small set of structural reforms appear to have direct short-term fiscal costs, with 'systemic' pension reforms being the most prominent example. This suggests that the structural reform clause should be carefully applied. In particular, it is important that the assumptions underlying the decision to apply such a clause are spelled out in a clear and transparent way, which will also ensure a consistent application over time and across countries.

ECB: Publications: Economic Bulletin https://www.ecb.europa.eu/pub/economic-bulletin/html/index.en.html

EurActiv, 03.11.15: ECB attacks Commission's easing of fiscal rules http://www.euractiv.com/sections/euro-finance/ecb-attacks-commissions-easing-fiscal-rules-319100

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