1. The co-ordination of structural reforms in EU: approach and evaluation framework Conference on Macroeconomic effects of structural reforms Ankara, 26 October 2008 Declan COSTELLO Head, of Unit European Commission Directorate General for Economic and Financial Affairs

2. Overview of presentation The Lisbon strategy for growth and jobs: rationale and co-ordination instruments The Lisbon strategy for growth and jobs: rationale and co-ordination instruments Tracking and evaluating progress with structural reforms Tracking and evaluating progress with structural reforms Possible lessons for other countries Possible lessons for other countries

3. Part I The Lisbon strategy for growth and jobs: rationale and co-ordination instruments

4. Slow growth and persistent per-capita income differences vis à vis best performers (EU5 in 2005)

5. … due to low labour utilisation (gap vis à vis EU5 in 2005)

6. … and low growth in labour productivity (gap vis à vis EU5 in 2005)

7. Hourly labour productivity: a secular decline 0 1 2 3 4 5 6 19661969197219751978198119841987199019931996199920022005 annual % change Source : Commission Services, AMECO database US EU

8. Ageing populations: an older population with a smaller share of persons of working age

9. Ageing populations: shrinking growth potential with productivity becoming the main driver EU15 0.0 1.0 2.0 3.0 4.0 5.0 2004-102011-302031-50 0.0 1.0 2.0 3.0 4.0 5.0 GDP growth Employment growth Productivity growth EU10 0.0 1.0 2.0 3.0 4.0 5.0 2004-10 2011-30 2031-50 0.0 1.0 2.0 3.0 4.0 5.0 2.2 1.8 1.3 4.5 3.0 0.9

10. The policy response: a strategy (Lisbon) for growth and jobs Established in 2000 and re-launched in 2005 as an integrated policy response to raise growth potential and to meet challenges stemming from globalisation and ageing Established in 2000 and re-launched in 2005 as an integrated policy response to raise growth potential and to meet challenges stemming from globalisation and ageing Covers macroeconomic policies, employment and microeconomic reforms to product and service markets as will as to promote innovation and human capital accumulation Covers macroeconomic policies, employment and microeconomic reforms to product and service markets as will as to promote innovation and human capital accumulation

11. The EU’s response in 2005: an integrated approach

12. A political process supported by economic analysis Based on the premise an external constraint and peer pressure can help overcome reform bottlenecks Based on the premise an external constraint and peer pressure can help overcome reform bottlenecks short-term (concentrated) costs versus uncertain long- term (dispersed benefits short-term (concentrated) costs versus uncertain long- term (dispersed benefits -rent-seeking interest groups can capture policy makers -rent-seeking interest groups can capture policy makers Also recognises that there are economic spillovers (trade, internal market) and political economy spillovers (institutional learning, demonstration effects, peer pressure) in coordinating at EU level Also recognises that there are economic spillovers (trade, internal market) and political economy spillovers (institutional learning, demonstration effects, peer pressure) in coordinating at EU level  -

13. Delivery mechanisms Overall policy objectives set by Heads of State of Government (Spring European Council) Overall policy objectives set by Heads of State of Government (Spring European Council) Some common targets, e.g. employment rates of 70% by 2010, to raise spending on R&D to 3% of GDP, reduce administrative burden in complying with regulations by 25% between 2006 and 2010 Some common targets, e.g. employment rates of 70% by 2010, to raise spending on R&D to 3% of GDP, reduce administrative burden in complying with regulations by 25% between 2006 and 2010 Member States (not the European Commission) define their key growth challenges and reform commitments Member States (not the European Commission) define their key growth challenges and reform commitments Reform priorities fixed for a three-year cycle, BUT annual reporting and evaluation exercise which leads to country specific political recommendations Reform priorities fixed for a three-year cycle, BUT annual reporting and evaluation exercise which leads to country specific political recommendations

14. Part II Tracking and evaluating the impact of structural reforms

15. Three main instruments Better information on progress with structural reforms under way in Member States Better information on progress with structural reforms under way in Member States A systematic framework for identifying underperforming GDP components and policy areas A systematic framework for identifying underperforming GDP components and policy areas The use of modelling tools and econometric studies The use of modelling tools and econometric studies

16. 1. Improved information on structural reforms underway in Member States Basis for a consistent assessment of progress across policy areas, countries and over time Basis for a consistent assessment of progress across policy areas, countries and over time Has EMU helped/hindered structural reforms? Has EMU helped/hindered structural reforms? Raise external awareness of progress with structural reforms within the EU Raise external awareness of progress with structural reforms within the EU Enhance peer pressure from external stakeholders Enhance peer pressure from external stakeholders Could facilitate more regular updating of OECD indicators, e.g. on product market regulations Could facilitate more regular updating of OECD indicators, e.g. on product market regulations Can be used to devise shocks for modelling exercises Can be used to devise shocks for modelling exercises

17. TEXT DROP-DOWN LISTS

18. Using LABREF to track patterns of labour market reforms

19. 2. Systematically identifying under- performing growth components and policy areas Jointly developed by Commission with national authorities Jointly developed by Commission with national authorities Pilot test for 10 Member States to be completed by November 2007 Pilot test for 10 Member States to be completed by November 2007 Solid basis for identifying reform priorities and monitoring progress in next three year cycle 2008-11 Solid basis for identifying reform priorities and monitoring progress in next three year cycle 2008-11 Consistency across countries and policies based on objective data linked to growth and policies; Consistency across countries and policies based on objective data linked to growth and policies; Bottom-up approach that takes account of country specific circumstances and « national ownership » Bottom-up approach that takes account of country specific circumstances and « national ownership »

20. Case study: the sources of growth in Belgium

21. Case study: Belgium

22. Reform areaModelling approachCoverage Labour and product markets QUEST II econometric estimates EU15 13 OECD countries [1] [1] Effective retirement age ECFIN ageing modelEU15 aggregate Internal MarketQUEST IIEU25 aggregate Administrative burdenQUEST III WorldScan EU15 aggregate EU25 Increased R&D spending QUEST III WorldScan EU15 aggregate EU25 [1] [1] Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain, Sweden, United Kingdom. Modelling the impact of structural reforms: Commission simulations

23. Reform areaInput into modelsResults Labour and product markets Changes in policy variables (e.g. tax wedge, taxes, unemployment benefits and regulation of PMs) since 1995. 2% increase in EU15 GDP and 1.4 p.p. reduction in structural unemployment Effective retirement age One year increase in retirement age 1.5% increase in EU15 GDP by 2025 and 2.5% by 2050 Enlarged Internal Market Gains from greater integration and enlargement (e.g. higher competition and more trade) over 1992-2006 2.2 increase in EU25 GDP and 1.4 increase in employment Administrative burden 25% reduction in administrative burden by 2010 1.3% increase in GDP by 2025 Increased R&D spending Reaching national R&D expenditure targets by 2010 2.6 to 4.4% increase in EU25 GDP (25-30% due to spillovers) Main results

24. A closer look at labour markets Econometric simulations on the basis of Bassanini and Duval (2006) Econometric simulations on the basis of Bassanini and Duval (2006) - estimated coefficient from the static panel regression used to calculate the impact of reforms on structural unemployment - considered reform areas: tax wedge (OECD model, National Accounts data), replacement ratio, EPL, product market regulation (OECD non-manufacturing industries), union membership, centralisation/coordination of wage bargaining Results of econometric simulations Results of econometric simulations - between 1995 and 2003 the EU15 unemployment rate fell 2.7 percentage points - structural reforms are responsible for 70% to 80% of the total decline (if data on tax wedge, including consumption taxes, from national accounts are used it is only 1/3) Model-based simulation Model-based simulation - QUEST II model - considered reform areas: tax wedge, replacement ration, product market regulation (impact through lower mark-ups) - results broadly in line with econometric simulations

25. A c A c loser look at labour markets Simulated contribution of all observed policy changes Simulated contribution of favourable policy changes 1995-2003 Cumulative GDP growth : EU12 0.761.6818.48 EU15 1.182.0419.66 Change in NAIRU: EU12-0.28-1.14-0.75 ( 9.22 - 8.47) EU15-0.56-1.38-0.78 (8.71 - 7.93)

26. Part III Possible lessons for other countries from the EU’s experience

27. An evidence-based approach Use evidence-based approaches to defining reform priorities and evaluating progress, BUT Use evidence-based approaches to defining reform priorities and evaluating progress, BUT - avoid simplistic or mechanical targets and interpretations of policy and performance indicators; - Evaluate progress annually, but be realistic about the time lags involved in enacting structural reforms and seeing their impact - - make use of all modelling and econometric tools to support debates on structural, but in a prudent a realistic manner Don’t reinvent the wheel: make use of existing OECD analysis and other cross-country analysis and indicators Don’t reinvent the wheel: make use of existing OECD analysis and other cross-country analysis and indicators

28. “Framing” a consensus amongst stakeholders Combination of evidence-based analysis supported by a political process can generate results Combination of evidence-based analysis supported by a political process can generate results Can take years to “frame” a consensus on the nature/scale of policy challenge, and on the policy reforms needed to tackle them Can take years to “frame” a consensus on the nature/scale of policy challenge, and on the policy reforms needed to tackle them

29. “Ageing” an EU success story ? Drew upon OECD analysis in the 1990s on “Maintaining prosperity in an ageing society” and added urgency with launch of the euro in 1999 Drew upon OECD analysis in the 1990s on “Maintaining prosperity in an ageing society” and added urgency with launch of the euro in 1999 First step was to produce more comparable projections for public spending on pensions and health care up to 2050 (in collaboration with OECD) First step was to produce more comparable projections for public spending on pensions and health care up to 2050 (in collaboration with OECD) Second step was to establish annual peer review on “Sustainability Risks” leading to policy recommendations in Stability and Growth Pact Second step was to establish annual peer review on “Sustainability Risks” leading to policy recommendations in Stability and Growth Pact Third step was to devise policy responses (debt reduction, pension reform, extension of working lives) which also caters for social considerations on the adequacy of retirement income Third step was to devise policy responses (debt reduction, pension reform, extension of working lives) which also caters for social considerations on the adequacy of retirement income

30. Projected changes in public pension expenditure 2004-2050 (% of GDP)

31. Large sustainability gap in the EU and big differences between the Member States European Commission

32. Overall risk assessment of public finance sustainability European Commission Risk Category CountryLow Denmark, Estonia, Latvia, Lithuania, the Netherlands, Austria, Poland, Finland and Sweden Medium Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, Malta, Slovakia and the United Kingdom High The Czech Republic, Greece, Cyprus, Hungary, Portugal, Slovenia

33. A three-pronged strategy to ensure sustainability European Commission Ensuring sustainability Reducing debt at a fast pace Raising employment and productivity Reforming pension, health-care and long-term care systems

34. … which has contributed to reforms in many countries Pension systems Pension systems Since 2001, FR, DE, ES IT, NL, AT, PT, FI introduced reforms to public pension systems Since 2001, FR, DE, ES IT, NL, AT, PT, FI introduced reforms to public pension systems In 2006: PT, DE, NL In 2006: PT, DE, NL Announcements: IE, EL, FR, IT, LU Announcements: IE, EL, FR, IT, LU Early retirement Early retirement in BE,DE, ES, IT, LU, NL AT, PT, FI. in BE,DE, ES, IT, LU, NL AT, PT, FI. Health care Health care BE, DE, EL, FR, IT, NL, PT BE, DE, EL, FR, IT, NL, PT Social protection Social protection BE, DE, FR, NL BE, DE, FR, NL

35. The impact of pension reforms Source: 2006 EPC/Commission report on ageing. 20 25 30 35 40 45 50 55 60 65 20042010202520502004201020252050 males females cohort & demographic composition effects pension reform effect