European Commission Kicks Off Fresh Round in its Never-ending Love Affair with Structural Reform

Jörg Bibow | January 24, 2014

The Commission’s latest “Quarterly Report on the Euro Area” makes an interesting read; at least to those who simply can’t get enough of the “structural reform” gospel that has been running high in the Commission’s corridors for the past 30 years or so. So be warned: For any more enlightened minds the report is mainly of interest for what it does not talk about.

One might perhaps start by congratulating the Commission for noticing that the euro area is falling behind internationally. In case you had not known, the euro area’s GDP is still about 3 percent below its pre-crisis peak level, domestic demand about 5 percent. Few other policymakers on this planet have such a stellar record to show for themselves. And the Commission is surely part of that gang.

The Commission does not wish to talk about the crisis too much though. It is more concerned with long-run trends that started some time before the crisis. In particular, the Commission points out that after catching up quite successfully with the US in terms of productivity levels and living standards from the mid-1960s up until the mid-1990s, something seems to have happened in the mid-1990s that enabled the US to persistently outperform the euro area ever since. What happened around that time that allowed the US to achieve respectable growth but prevented the euro area from fulfilling its promise? Well, it comes as little surprise that the Commission is quick to blame the euro area’s sluggish productivity performance on nothing but a supposed lack of growth-boosting “structural reforms.” Europe talked about its “Lisbon Agenda,” but never got round to implementing it, the Commission observes regretfully.

Needless to say, the Commission is even more convinced that now is the time to really go for it. Otherwise, the future would look grim indeed, we are told. Extrapolating past trends since the mid-1990s, their “no-policy-change” or “do-nothing” scenario, the shocking prediction emerges that in 2023 “living standards relative to the US [will] be lower than in the mid-1960s. If this was to materialize, euro area living standards (potential GDP per capita) would be at only around 60% of US levels in 2023, with close to 2/3 of the gap in living standards due to lower labor productivity levels, and with the remaining 1/3 due to difference in the utilization of labor (i.e. differences in hours worked per worker and the employment rate)” (European Commission 2014, p. 14).

So, truly, it must be high time for the euro area authorities to get serious on the structural reform front. The Commission goes on to enlist the usual suspects. The rest of the world, even at Davos, may express concerns about rising income inequalities, but the Commissions sticks to its guns and recommends, for instance, unemployment benefit reform since it “puts downward pressure on wages and so boosts labor supply” (p. 20). Great idea! The euro area seems to be short of workers these days. Too many of them seem to be taking long vacations, enjoying their overly generous benefits. Let others worry about imagined threats of deflation, at least in Brussels, perhaps even more so than in Frankfurt, folks still feel quite comfortable. So don’t let me bore you with the other details of their usual voodoo economics toolbox. Somehow these micro reforms have beautiful macro effects that involve handsome growth, happy go lucky, problem solved.

Almost by accident it seems, the word “demand” actually gets mentioned, namely in the context of supposed “demand spillovers whereby policy action in one country (e.g. growth-enhancing structural reforms) influences import and/or export flows with partner economies. As we can expect structural reforms to boost growth and domestic demand, [apparently we can expect that and hence need not worry about any need for macro policy to take care of the demand issue, good to know!] reforms in one country could have a positive demand spillover effect on others” (p. 18). Hear, Hear, members of the land of the euro, never worry too much about deflationary macro policies, just embark on structural reforms jointly – and enjoy each others’ demand spillover effects as a result. This is true magic invented by King Midas of Brussels!

So now we also know why the Commission does not mention what it does not mention: the euro. Of course the sad truth is that it all started with the Maastricht convergence criteria in the 1990s. According to Brussels-think, however, the euro was just another growth-enhancing structural reform for joint prosperity, never question results, never mind reality; least of all the reality that the euro policy regime may be the most rotten macro policy regime on this planet.

Apparently the beautiful euro regime got even more beautiful of late since “over the last years with the reinforced economic governance, a strong framework has been created for advancing on the path of [structural] reforms, and Member States should implement the recommendations made to them” (p. 7). So have a go at the Commission’s latest wisdom, the “Europe 2023” agenda – if you cannot control your suicidal leanings, that is.

The Commission is surely lucky in having such intellectually obedient followers as the FT’s Tony Barber (“Worrying predictions for Eurozone living standards,” FT.com 13 January 2014), putting some spin on the simple-minded voodoo that Brussels is notorious for. I am beginning to see some wisdom in cutting Brussels’ budget, if only to perhaps spare us from this kind of pseudo-economic analysis.

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