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Structural reforms in EMU

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Structural reforms in EMU by Álvaro Nadal

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Structural reforms in EMU

  1. 1. STRUCTURAL REFORMS IN EMU National Government perspective Álvaro Nadal MP Spain
  2. 2. Juncker’s curse “We all know what to do, but we don´t know how to get re-elected once we have done it” TWO WELL-KNOWN STARTING POINTS Rodrik’s trilemma EMU style 2 Fully integrated EMU National Affirmation Democratic Politics We need to work this out much more
  3. 3. POSITIVE APPROACH There is a conflict between economic theory and practice and political theory and practice We need to undestand better the political side of structural reforms 3
  4. 4. THREE FUNDAMENTAL POLICY QUESTIONS What to do? Easier to answer: Flexibility of prices and wages (and other rents) is the key Mundellian condition for OCA (Many times forgotten) How to do it? Very difficult to answer: In most cases reforms have worked out economically and backfired politically When to do it? Very difficult as well: Example of the Spanish labour reforms in 1994 and in 2012 4
  5. 5. WHAT TO DO? Huge inflation differentials and current account imbalances have been the major source of instability in the EMU. Why aren’t we using the main nominal convergence criteria? 5
  6. 6. Straitjacket: Macroeconomic Imbalances Procedure ▰ Too many indicators (politically introduced) ▰ No thresholds, somehow arbitrary ▰ No real implementation Reform: ▰ Reputational sanctions work ▰ Only inflation and current account indicators ▰ Thresholds and procedure similar to GSP HOW TO DO IT? CURRENT SITUATION (ONLY STICKS) Growing competences to National Independent Regulators ▰ Not enough democratic legitimacy and accountability ▰ Cases of power vacuum ▰ Also subject to social or lobby pressure ▰ Do not take into account the complexities of political decision-making 6
  7. 7. ▰ Deeper knowledge of the full process of reform: more positive (vs normative) analysis including economics, public choice, political science and sociology ▰ More intensive communication and education effort ▰ Most problems come from income transfers. Instruments for (at least temporary) Kaldor- Hicks compensations are needed: budget (national and EU), taxation, redefinition of state aids… ▰ Avoid strategic games in National and European Parliament bearing in mind that now Parliaments are much more fractured ▰ Comprehensive reform plans to avoid the feeling of being the only targeted sector (the only advantage of devaluations) AND… HOW TO DO IT? SOME IDEAS AND CARROTS 7
  8. 8. An enormous ammount of wisdom, courage, luck, common sense, communication skills and experience. 8
  9. 9. 9 THANKS!

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