1. Bruegel, Bruxelles, 18 September 2018
Structural reforms IN EUROPE: POLICY LESSONS FROM THE CRISIS Paolo Manasse University of Bologna
Bruegel, Bruxelles, 18 September 2018
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

2. Political Economy and Design
Labour, Product, Banking Sector Reforms in Spain, Portugal, Greece, Cyprus
Edited with D Katsikas with contributions from Otero-Iglesias, Steinberg, Panagiotarea, Clerides, Petralias, Anastasatou, Geli, Herrero, Turrini,Catao, Aksoy,Terzi
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

3. What conditions for successful implementations and main obstacles?
Policy Lessons: Large Heterogeneity of Institutions, Economic Conditions, Gov. Orientation/competence, History
What conditions for successful implementations and main obstacles?
What characteristics of policy design and implementation were crucial for success?
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

4. Crucial Elements for Success/Failure
Delay
Ownership
External Constraints
Timing
Balance Fiscal Consolidation/Reforms
Sequencing
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

5. 1.Delay
Economic Crises may happen over-night but result from decade-long imbalances
productivity growth (Portugal, Greece, Italy)
Institutions in Collective Bargaining, hiring/firing (Portugal, Greece, Spain, Italy)
Entry Barriers / bureaucracy product markets (Greece, Portugal)
Inefficient supervision, nepotistic corporate governance/political interference (Cyprus, Greece, Spain, Portugal) => longer the delay in reforms the worse (large resistance, NPL, unemployment, credit crunch, recap costs)
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

6. 2. Ownership
Delay -> perverse Illusion : Obsolete institutions are fine, and Reformers are to blame
Example: Italy (Jobs’Act), Greece, Spain (Banking), Cyprus (CB/Gov conflict on recapitalization) . No consensus
Counter example: in Portugal (Banking, and Labor), Spain (Labor) public awareness, history of partial reforms
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

7. 3. External Constraints Scapegoat role?
IFI enforcement power has limits with Reforms (particularly EU compared to IMF) , poor substitute for ownership (implementation, banking resolutions in Greece)
..but lack of it can be detrimental (Cyprus and Russia, Spain delayed bank-bailout)
Micro-management ineffective (Portugal labor reforms)
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

8. 4. Timing of Reforms Crisis are catalyst for Reforms ?
- No if the economy has already deteriorated
as social consensus impossible (political constraint)
Example: Greece’s lack of early debt relief and harsh fiscal consolidation played in the hands of anti-reformers
- Yes early recession forces consensus. Example Portugal and Spain labor reforms + ownership
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

9. 5.Balance Fiscal /Structural Reforms
Often positive effects of SR swamped by Fiscal Consolidation
Examples:
product market reforms in Greece: prices, employment
Trade-off of Reforms: resilience (impact)/speed of recovery (dynamics) in Labour Markets
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

10. Greece, 2005-15 Product Market Reforms and GDP Employment, Quarterly Data
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

11. Greece, 2005-15 , Product Market Reforms and Tax Rise Prices, Quarterly Data
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

12. Unemployment: Trade-off impact (beta) and persistence (alpha) of shocks
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

13. 6. Sequencing
POLITICAL CONSTRAINTS: Political Capital is limited and should not be dissipated
- concentrate on «bottle-necks» to growth
Labour Mkt Reforms in Portugal: ownership
Labor Mkt Reforms in Greece: less resistance
SOCIAL/FAIRNESS CONSTRAINT: distribution of burden
Greece: lack of priority of product market reforms, focus on labor and fiscal, real wages, aggregate demand, lack of productivity and competitiveness
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

14. The End
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

15. Data Unemployment and GDP gap data cover the year between 1965-2015.
Data on labor and product markets, 19 EUZ countries,
Product Market: OECD’s Product Market Regulation (PMR) Dataset ,
Labor Market: OECD’s Employment Protection Legislation Dataset (EPL),
ICTWSS’s Centralization of Wage Bargaining (CWB) Dataset,
Each indicator varies between 0-6 with higher values corresponding to more regulation.
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

16. Empirical Analysis First step: Basic estimation equation
𝑢 𝑖𝑡 − 𝑢 𝑖𝑡 𝑝 = 𝛽 𝑖 𝑦 𝑖𝑡 − 𝑦 𝑖𝑡 𝑝 + 𝛼 𝑖 𝑢 𝑖𝑡−1 − 𝑢 𝑖𝑡−1 𝑝 + 𝑣 𝑖𝑡 (1)
Second Step: Assume
𝛽 𝑖𝑡 = 𝛽 0 +𝛽 1 𝐼𝑁𝐷 𝑖𝑡 and 𝛼 𝑖𝑡−1 = 𝛼 0 +𝛼 1 𝐼𝑁𝐷 𝑖𝑡−1
Substituting:
𝑢 𝑖𝑡 − 𝑢 𝑖𝑡 𝑝 =( 𝛽 0 + 𝛽 1 IND 𝑖𝑡 )( y 𝑖𝑡 − 𝑦 𝑖𝑡 𝑝 )+ (𝛼 0 + 𝛼 1 IND 𝑖𝑡−1 )(𝑢 𝑖𝑡−1 − 𝑢 𝑖𝑡−1 𝑝 )+ (𝑐 0 + 𝑐 1 IND 𝑖𝑡 ) + 𝑣 𝑖𝑡
(2)
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018

17. Figure 7: Counterfactual analysis for Greece
Paolo Manasse, Structural Reforms in Europe, Bruegel, Bruxelles 18/9/2018