Structural reforms in Southern Europe Massimo D’Antoni Dept of Economics and Statistics, University of Siena
Instituto 25 Mayo Summer School 23-26 July 2015
Ultimo aggiornamento: 23 luglio 2015 – 11:02
Plan of my lecture
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What do we mean by structural reforms and what is their theoretical/ideological background An overview of the reforms implemented and proposed in Southern Europe An appraisal of the reforms as a response to the euro crisis What is the nature of the euro crisis? Final comments
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Structural reforms
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Microeconomic reforms, mainly supply-side, aimed at improving the working of markets I I I I
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Labour market reforms, aimed at making labour more flexible Product market reforms, aimed at enhancing market competition Financial markets deregulation, aimed at increase capital mobility Institutional reforms, aimed at reducing the power of interest groups in the Parliament to stop economic reforms Improving the efficiency of public administration (tax collection, reducing red tape)
Structural reforms will bring productivity growth, hence economic growth, and help overcome the crisis by eliminating structural weaknesses (different from demand side policy, aimed at stabilizing the economy)
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
The ideological/theoretical background of reforms I I
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Emphasis on structural reforms dates well before the crisis In fact, the recipe corresponds to the standard recommendations made by the main international institutions embodied in the set of recipes known as the Washington consensus (World Bank and IMF, but also OECD): stabilize, privatize, liberalize I I I I
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Budget discipline as a precondition for macroeconomic stability Privatization of state-owned enterprises Abolition of regulation that restricts competition Liberalization of finance
This view went under severe criticism by many scholars I
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Stiglitz: recipes have a bias against government intervention, they are aimed at reducing the economic role of the state Rodrik: they are abstract recipe, which do not consider specific characteristics of countries
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
The crisis as an opportunity to reform and correct weaknesses
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Government asking for assistance were forced to implement such reforms In other cases (e.g. Spain and Italy) reforms as a condition for government bond purchases by the ECB. In this, the ECB played a political role. Everything is in the letter of the ECB to Spain and Italy of Summer 2011
The recommendation were in continuity with pre-crisis view (not a reaction to the crisis in a proper sense). The idea is that the crisis was the result of structural weaknesses.
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
The changing meaning of reforms
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Traditionally, the word reform was strictly related to the change of the (capitalist) economic model (reformists vs revolutionary) Reforms aimed at extending positive liberties and citizenship rights. The objective was to enhance distribution, improve equality Now a completely different meaning: I I
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reforms aimed at quantitative economic growth growth secured by unleashing the power of markets by removing all obstacles to their working
Reforms identified mainly with deregulation of markets, elimination of influence of government, unions, organized groups
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
The changing meaning of reforms /2
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It follows that reforms have a universal meaning, the same for all countries and situations, regardless of specificities Reforms are de-politicized: they can (or must) be imposed exogenously, they are technical, not political. Emphasis on efficiency rather than distribution: political conflict is kept out of the picture (de-policization) Best practices of reform: a competitive view of reformism, where competition among countries in an integrated area provides the incentives to reform (see below)
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Fixing structural problems of Southern economies
Structural reforms aimed at correcting some characteristics of Southern European economies (GIPS) and welfare states I Social expenditure is age-biased: high level of pension expenditure. However: I I I
not so much higher when we consider net expenditure substitution for other form of social protection longevity, family structure with male breadwinner
Labour legislation protecting career continuity (job protection) I Industrial relations based on centralized bargaining at a sectoral level These characteristics are considered sources of inefficiency and lack of flexibility I
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Labour markets reform: dismissal
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Support for reform from the high level of unemployment (expecially of young people) I I I
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employment is explained with rigidities and outdated rules reduced power of unions emphasis on duality of the labour market (pointing to privileges of workers with long-term contracts)
Reforms aimed at reducing the cost of firing for the firm I
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Portugal: for all new contracts it is now 20 days per year of service, with a cap of 12 months and elimination of the 3-months minimum Italy: since 2015 in case of lack of giusta causa the worker now receives only a monetary compensation (increasing with seniority) Spain (february 2012): reduction of dismissal costs of permanent workers for unfair dismissal, make fair dismissal easier similar reforms in Greece
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Was the labour market really rigid?
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The main indicator is the index of EPL, where less regulation is taken to imply more efficient. Is the Italian labour market rigid?
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Labour market reform: collective bargaining
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Traditional in GIPS is collective bargaining at the sectoral level, with erga omnes regulation. Reforms aimed at moving towards a decentralized model (bargaining at firm level) This is either explicitly included in the memorandum (Greece and Portugal) or recommended as an implicit condition for bond purchasing by the ECB (Spain and Italy) In the economies of Southern Europe, which are dominated by small and medium-sized enterprises, the increasing undermining of centralised collective agreements will radically transform wage policy. Not just decentralisation, but far-reaching individualisation of wage negotiations.
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Public sector wages and minimum wage
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Freezing or cutting wages in the public sector. This is directly aimed at reducing public expenditure, but it also affects wage dynamics in the private sector I I
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Greece: nominal cut around 30% between 2009 and 2013 Spain and Portugal: cut by 5% and frozen (in Spain uncompensated reduction of hours per week) Italy: wages frozen since 2009, no renewal of contracts
In Greece reduction of the minimum wage: 32% for the young, 22% for older workers
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Privatization of public firms/assets I I
Many countries, including GIPS, already implemented extensive privatization programmes in the 1990s privatization recommended for residual public firms: I
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in Italy postal services and railways, and reduction of the public shares in large firms such as ENI (oil and gas) or ENEL (electricity) in Portugal energy suppliers and network in Spain airports, Loterias, REE (energy) and Ebro Food considered for privatization
In Greece a very ambitious (unrealistic?) privatization plan: 50 bil, more than 20% of GDP (note that total proceeds 1977-2007 amounted to 14%) I
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Assetes include: banks, state owned enterprises, public services (gas, electricity, post, railways, ports, airports and motorways, buildings and lands) A dedicated privatisation authority was brought into being, the Hellenic Public Asset Development Fund (HRADF), modelled after Germany’s Treuhand created for privatization of East Germany assets
Massimo D’Antoni
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Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Pensions I
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In GIPS relatively generous public pension systems, income-related. In some cases (e.g. Greece) differentiated along occupational lines Problem of long term sustainability and short term impact on public budget In the 1990s recommended shift to a funded system based on defined contribution. In many cases reforms already implemented before the crisis (in Italy continuously since 1995, in Portugal main reform in 2007) In Italy (1995) introduction of a Notional Defined Contribution system which switched the demographic risk to pensioners. In Spain (Toledo pact, 1995) change in the formula, less favourable for pensioners. Surpluses between 1998 and 2010 In Portugal, reform in 2007: benefits related to like expectancy, incentive to retire later I
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Sharp reduction in expenditure projections
In Greece fragmented system
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Pensions /2
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Main reforms in Greece, as a consequence of the bailout There is a lot of mythology around the Greek pension system: it is true there are areas of privilege and a lot of exception and special treatment. However, the general picture is different I
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average effective retirement age is 61 years (like Germany)
In Italy in 2012 sharp increase in retirement age, expecially for women. This broght to the problem of esodati: people who had already agreed to retire (or encouraged to do so) counting on a pension, and remained without income for years. A major political problem In general: I I I
general increase in retirement age reduction in indexation of pensions more stringent requirement for early retirement or invalidity
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Reforms as a response to the crisis
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The reforms are aimed at overcoming (alleged) structural weaknesses of GIPS, they have been proposed well before the crisis Are they an adequate response to the debt crisis? The view of the crisis prevalent in 2010-12 (and still widespread, expecially in Northern Europe) was that it was not a systemic crisis of the euro, but the effect of local problems of the interested economies I I I
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not enough fiscal discipline not enough flexibility slow growth caused by structural weaknesses
Things are different if we accept that there is a problem at the level of the euro area (recognized e.g. by Draghi)
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
What is the nature of the crisis?
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The EMU: bringing together, under a common currency and monetary policy, very different countries I I
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structural differences (international specialization, institutions) differences in their ability to control wage growth and inflation
Elimination of the possibility to correct unbalances through the price mechanism provided by exchange rate—rigidity introduced When you have a country which is more able at controlling wage dynamics, this is equivalent to competitive devaluation Additionally, the role of financial flows: I I
the euro eliminated the exchange rate risk for investors it created the expectation that there was not a risk of sovereign debt default—no country specific risk
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
It was not a problem of fiscal irresponsibility
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Some of the countries (e.g. Spain) were a model of fiscal virtue, the other had been able to keep their debt/deficit under control
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Meanwhile, it was private debt that was growing
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
What were the forces at work? I I
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Flows of private capitals from the core to the periphery This was encouraged by low demand in core countries: saving surplus which financed peripheral countries This happened mainly through the banking system, inflating private debt of countries like GIPS (and Ireland) this brought to current account imbalances and loss of competitiveness What happened in 2008 was a sudden stop of financial flows, a phenomenon typical of less developed countries which borrow in a foreign currency deadly loop: government had to save banks, incrasing their debt; banks held foreign bonds. A sudden nationalization of financial system. In the background, the ECB did not play as a lender of last resort
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Current account imbalances
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
What is the nature of the crisis? To summarize I I
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It was not lack of fiscal discipline that caused the crisis the fact that there are structural rigidities or backwardness may explain slow growth (although GIPS used to grow very fast in the past) but it is not per se an explanation for the current crisis Mobility of capitals within a financial system which is still national are a destabilizing force, that creates asymmetries. Capital mobility is very often destabilizing, but this is more the case with a common currency (super-fixed exchange rates) The fact that the main economy in the area (Germany) relied on the demand of peripheral countries and cumulated surplus and credit feeds such destabilizing forces The EU failed to recognize that the problem was systemic, and imposed to debtors the whole burden of adjusting imbalances, through austerity This was encouraged by treaties
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Draghi’s view I
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“The minimum requirements for monetary union” on 27 November 2014 at Helsinki “When shocks do occur – as they inevitably will – adjustment has to take place through other channels. In all national economies, permanent transfers take place from richer to poorer regions; from more densely populated to more sparsely populated areas; and from those better endowed with natural resources to those less endowed. This is true in the United States, within Germany, within Italy, within Finland. Fiscal transfers, so long as they remain fair, often help cement social cohesion and protect against the temptation of secession. But as such transfers are not foreseen within the euro area, this model does not apply for us. He fails to recognize that the capital mobility (and the euro itself) is a destabilizing force He rules out the political feasibility of a fiscal union.
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
Draghi’s view /2
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Greater cross-country mobility would be welcome, and we should encourage measures that facilitate it. But research suggests that it is unlikely that cross-country migration flows will ever become a key driver of labour market adjustment Countries need to be flexible enough to respond quickly to short-term shocks, including through adjustment of wages or reallocating resources across sectors. For national fiscal stabilisers to be able to play out in full, sovereign debt has to act as a safe haven in times of economic stress. This means having sufficient buffers over the cycle to absorb exceptional shocks. The other ingredient of a working monetary union is a deeper financial integration.
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
What kind of Europe? I I
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Austerity a structural characteristic of the eurozone. Within the euro, there will be always the incentive to play Germany: keep wages low to increase competitiveness. This is not good competition. The result is to cumulate surplus and export unemployment. A similar incentive to reduce the welfare state, inasmuch as its cost increase labour cost The euro was introduced deliberately as a way to force countries to reform: reduce the bargaining power of labour, force rolling back of costly welfare states This is the meaning of competitive reformism
What about the European social model?
What is the purpose to have an integrated Europe which gives up its social model? Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
The alternative (is there an alternative?)
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Political and fiscal union. Draghi says it is not on the table. Fiscal union is ruled out by richer countries, not accepting the idea of funding poorer countries welfare states’. Fiscal transfers would be one-way. Political union requires solidarity and a true common political space, where being German or Greek of Spanish or Italian does not matter that much. If national interests and identity are too strong, a political union would exacerbate the asymmetries among countries. It would reduce the ability of countries to defend their people’s interest. Is there an alternative within the euro?
Massimo D’Antoni
Instituto 25 Mayo, Summer School 23-26 July 2015
Dept of Economics and Statistics, University of Siena
