05 September 2013

SciencesPo/Timbeau: Economic reforms in the euro area - Fiscal and macro-structural challenges

This briefing, prepared for an ECON hearing, argues that fiscal consolidation has been a factor explaining poor economic performance for the years 2010 to 2012 and will probably again be a negative factor for the years 2013 and 2014.

This briefing was prepared for the Economic Dialogue with the President of the Eurogroup in ECON on 5 September, 2013.

The euro area economic situation appears stabilised as concerns about the future of the common currency vanish. Fiscal consolidation may have been the very reason why the euro area debt crisis was overcome, but implicit debt mutualisation is a much [more] convincing explanation. Despite this significant improvement, euro area economies have still to recover from the crisis.

2013 Country Specific Recommendations propose a way out of the crisis, mainly based on structural reforms and the continuation of fiscal consolidation. The authors argue here that fiscal consolidation has been a factor explaining poor economic performance for the years 2010 to 2012 and will probably again be a negative factor for the years 2013 and 2014. Ease of the fiscal consolidation path, with a string commitment toward long term fiscal equilibrium, is not sufficient for allowing a clear decrease in unemployment, at least for southern countries.

2013 CSRs propose some structural reforms for improving growth and reducing unemployment. Among them, labour market reforms and services sector opening is seen as a major tool for recovery. The authors point out that such line of reforms may be set on the wrong timing and is difficult to combine with strong fiscal consolidation. Fiscal consolidation pace should be slowed, especially for large negative output gap countries, allowing for unemployment reduction and prudent planning of structural reforms. It is also suggested that a narrative about growth and transition toward a low carbon economy could be a positive factor needed in CSRs.

Full briefing

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