Transcript The Euro and Structural Reforms

The Euro and Structural
Reforms
Authors:
Alberto Alesina
Silvia Ardagna, Vincenzo Galasso
Presentation: Mihaela Gurbulea, Tereza Tachovska
18 March, 2014
Outline
 Introduction
 The link between structural reforms and the
Euro
 Product Markets: the evidence
 Labor Markets: the evidence
 Conclusions
Introduction
 Have members of the Euro area had a better
policy performance after adopting the common
currency?
 Has Euro accelerated the deregulation in the
product markets and liberalization in the labor
markets?
 Is it more feasible to proceed first with product
market deregulation or labor market
deregulation?
Why Should the Euro Matter?
 Pro-arguments:
 Counter-arguments:
- Entrance into the EMU
- Under the ESM, the up-
pushes countries to
reform;
- Single currency increases
price transparency;
- Facilitation of trade
among members of the
monetary union.
front cost of structural
reforms may increase;
- Higher short-term
unemployment;
- Inflexibility of unions to
adjustments of nominal
and real wages.
Data
Yearly data on 21 OECD countries.
Product Markets:
 1975
– 2003;
 3 sectors;
2
additional sectors in augmented regression;
 Regulatory
indicators measure.
Labor Market:
 1985
– 2003;
 2 different regulatory indicators measures.
Methodology
 GLS regression allowing for heteroscedasticity of
the error term.
 Lagged term of the left–hand side, country and
time dummies;
 Product markets: sector dummies;
 Additional independent variables for more
detailed information.
Patterns of Product Market
Deregulations
Source: ALESINA A., ARDAGNA S., GALASSO V. (2008)“The Euro and Structural Reforms”. NBER Working Paper Series, No. 14479.
 Late 70s: beginning of deregulation;
 Difference: initial positions and timing;
 Last two decades: convergence.
Basic Specification Regression
Source: ALESINA A., ARDAGNA S., GALASSO V. (2008)“The Euro and Structural Reforms”. NBER Working Paper Series, No. 14479.
Summary of Results
 Introduction of the Euro has contributed to
structural reforms in the product markets;
 Deregulation was stronger in the EMU with
higher initial levels of regulations.
Devaluation and Deregulation
Common currency → devaluation channel is no
more available → reforms to regain
competitivness.
Deregulation reforms do not generally occure in
countries that are loosing competitivness;
 Not true for the EMU countries;
The more devaluations a country did from 1979
to 1993, the larger the decrease of the
regulatory index.
Other Determinants of Product
Market Reforms
 Macroeconomic conditions
 Regulation decreases when value added and labour costs of the
sector fall.
 Product markets are deregulated in country-sectors-years with
lower employment.
 Macroeconomic and political control
 Reforms are more likely to occur in bad times.
 The higher the primary deficit as a share of GDP, the lower the level of
regulation.
 Product market reforms happen at the begining of the political term.
 Deregulation in trading patterns fosters deregulation at home.
Evidence from the Labor Market
 The introduction of EURO led to an increase in
the generosity of unemployment benefit, while
ESM had no impact;
 No effect of EMU on employment protective
legislation;
 For the period 1993-1999 there has been
significant increase in the wage moderation in
countries that joined EMU in 1999.
Conclusion
 Significant effect on the product markets
deregulations;
 No effect on the primary labor market
deregulations;
 Sequencing and interactions
 Less labor-intensive sectors → easier product
markets deregulations;
 More generous unemployment subsidies → easier
product markets deregulations, higher firing costs
→ more difficult product markets deregulations.
References

Alesina, Alberto, Silvia Ardagna and Francesco Trebbi. (2006) "Who Adjusts and
When? On the Political Economy of Stabilizations." IMF Staff Papers, Mundell
Fleming Lecture, 53: 1-49.

Alesina, Alberto, Robert Barro and Silvana Tenreyro. (2002) "Optimal Currency
Areas." NBER Macroeconomic Annual, 301-55, MIT Press, Cambridge, MA.
Alesina, Alberto and Roberto Perotti. (2004) "The European Union: A politically
incorrect view." Journal of Economic Perspectives, (Winter) 26-48.
Duval, R. and J. Elmeskov. (2005) "The Effects of EMU on Structural Reforms in
Labour and Product Markets." OECD Economics Department Working Papers, No.
438.
Fiori, Giuseppe, Giuseppe Nicoletti, Stefano Scarpetta and Fabio Schiantarelli. (2007)
"Employment Outcomes and the Interaction between Product and Labor Market
Deregulation: Are They Substitutes or Complements?“ IZA Discussion Papers 2770,
Institute for the Study of Labor, Bonn, Germany.
IMF. (2004) "Fostering Structural Reforms in Industrialized Countries.“ World
Economic Outlook, April, 24-128.
Rose, A. (2000) "One money, one market: the effect of common currencies on trade"
Economic Policy, 9-45.
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Appendix A: The Euro, Product Markets
Reforms and Competitivness
Source: ALESINA A., ARDAGNA S., GALASSO V. (2008)“The Euro and Structural Reforms”. NBER Working Paper Series, No. 14479.
Appendix B: The Euro and Unemployment
Benefits
Source: ALESINA A., ARDAGNA S., GALASSO V. (2008)“The Euro and Structural Reforms”. NBER Working Paper Series, No. 14479.
Appendix C: Deregulation in Product and
Labor Markets
Source: ALESINA A., ARDAGNA S., GALASSO V. (2008)“The Euro and Structural Reforms”. NBER Working Paper Series, No. 14479.