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Commissioner started with the acknowledgement that the EU “was emerging from an economic crisis of unprecedented proportions”; this has specified the need for deep reforms and a comprehensive economic policy approach in the member states.

The crisis hasn’t only weakened aggregate demand in most of the EU-28; it has also lowered potentials for economic growth. That is why, he said, supply-side, structural reforms had been, and remain, a key part of Europe's response to the crisis.

He argues further that in order to overcome present low growth, near-zero inflation and high unemployment, the member states have to combine structural, fiscal, and monetary policies, in an integrated and growth-friendly approach (bold & italics are mine, EE). This means, tackling both the demand and supply sides of states’ economies, as the impact of the crisis has been both cyclical and structural.

Structural reforms’ controversies

Indeed, structural reforms are important for strengthening the fundamentals of EU-28 economies, to dismantle the barriers to growth and to facilitate adjustment to shocks.

However, mentioned Commissioner P. Moscovici, in many EU states structural reforms have too often been “a by-word for painful adjustment, for punishment and constraint”; thus reforms, in the eyes of many people in the EU do not mean progress any more. This is particularly the case in sectors and countries whose competitiveness had declined severely in the run-up to the crisis.

In the past, structural reforms have tended to focus on regaining price competitiveness, which in practice has meant wage moderation if not wage cuts. Therefore, it is no wonder that structural reforms and internal devaluation are often unpopular in the EU states.

Urgently needed presently (with the main adjustments now behind), is effective moves beyond internal devaluation to a broader debate on competitiveness policy – first of all in the euro area states. 

There are also other reasons why structural reforms are sometimes unpopular: in some states governments protect traditional growth sectors with strong vested interests. In such cases, the Commissioner mentions, the costs of structural reforms are clearly defined and visible in the short term, whereas their benefits, though they might be significant, are felt less intensely, by a broader population, and over a longer period of time.

These political economy considerations make the adoption and implementation of this type of structural reforms a very difficult task in some states. Excessive, unwarranted rents are economically and socially undesirable and should be tackled; they just raise prices and restrain innovation and growth. Besides, they pass on the burden of adjustment to others – usually the more vulnerable members of society, which is unfair.

It seems, in reality, that the term ‘structural reforms’ has become shorthanded for a broad and diverse range of policy actions, said Commissioner P. Moscovici. This kind of reforms is more likely to generate opposition.  

Structural reforms & new skills

Proper and efficient structural reforms are inseparable from the defining perspective directions for the labour market potentials. Such structural reforms can lead to job flexibility and wage moderation; but they are generally based on active education and vocational training as well as new skills enhancement.

These ideas have been in the member states’ political agenda for years. But without a Commission stimuli the “new skills” priority could not materialize. Recently such Commission’s support for the member states appeared, though only for a couple of years to come… 

Besides, “optimal structural reforms” can mean more competition and lower profit margins in the short term – but they can also remove barriers to growth and innovation for companies in the long term.

The Commissioner thinks that increasing EU productivity can be achieved through advanced human capital. And that means education, in its broadest sense: primary education, university education which directly impacts the level of R&D, and vocational training of workers, the unemployed and migrants. That is the main path for reforming the labour markets.

To tackle the member states’ productivity problem, the governments must invest more in knowledge-based capital and take greater advantage of the latest technological innovations. This has to be complemented with competition-enhancing structural reforms to improve the efficiently of allocated resources.

Structural reforms & employment

In general, structural reforms are closely linked to human capital improvements and innovation. At the same time, reforms can improve the market adaptability and reaction towards positive social dimension.

It is evident that rigid markets hinder employment and that broadens the gap between the employed and the unemployed part of the population. Reforms that tackle long-term unemployment minimise the risk of social exclusion and of lost potential.

Hence, the best and more effective way to share the gains from economic recovery is by increasing employment. Product market reforms also help to unlock investment, supporting job creation and social inclusion.

Consumers also stand to gain from well-functioning markets, through better quality products, lower prices and greater choice, argued Commissioner P. Moscovici. See:

http://europa.eu/rapid/press-release_SPEECH-16-2124_en.htm?locale=en

Structural reform 2.0

Policy makers in the EU-28 shall better communicate to the citizens, firms and consumers the benefits that ‘structural reforms’ can bring. They have to make clear that structural reforms are about much more than internal devaluation.

As soon as most of the EU states have overcome the acute phase of the economic crisis, it is the right time to evaluate the legacy of the crisis and prepare for the future by designing what the Commissioner calls "structural reforms 2.0".

According to the Commissioner, the key word of structural reforms 2.0 is productivity, because higher productivity leads to higher living standards and greater prosperity. Weak productivity performance has been recently the main damaging factor of the long-term decline in the EU’s output growth.

As soon as the EU population is aging and labour forces grow more slowly, output growth will increasingly depend on the states’ ability to improve productivity and investment.

The Commissioner underlined that “main causes behind the productivity slowdown are still debated; there are many theories and the answer is probably a combination of all of them”.

Reforms & EMU

Structural reforms 2.0 are particularly relevant for the member states’ economic resilience and the functioning of the EMU. However, it is high time to shift the focus towards more forward-looking, people-centric measures that will boost productivity in a holistic way.

In this sense, reforms would mean social progress: i.e. people in EU would be capable of taking ownership of reforms; however, this is unfortunately not the common picture in the EU-28.

Alongside human capital, flexicurity is another pillar of the new generation of structural reforms. This is mostly about: a) protecting workers by investing in their training, and b) retraining and designing active labour-market policies that provide tailored support for workers to help them transition out of jobs that are no longer sustainable, stressed Commissioner P. Moscovici.  

Besides, it is about worker security (not just job security); that means the member states need to ensure that quality education, worker mobility and re-skilling are becoming a reality.

Reforms & public expenditures

Because of the member states’ and the EU budgetary constraints, the states have to ensure both the quality and quantity of public expenditure; quality is becoming more important presently. Every euro spent must be spent as carefully as possible, and against debt. To do this, three practices must systematically be applied: experimentation, evaluation, and simplification.

There is a need, however, to improve evaluation methods of the quality of public expenditure; in this regard the Commission strongly supports a systematic evaluation of public policies, as well as structural reforms in particular.

Due to financial constraints, some member states’ particular reform policy may not work and the EU institutions have to know the reasons. Despite recent efforts, by the Commission and other institutions such as the OECD, the quality of the debate on that point in the EU-28 is still poor and too often ideological rather than fact-based; this is why evaluation is crucial.

Improving policy decisions & practical steps

More structured, systematic and independent analyses of structural reforms at the national level would improve policy decisions. The national competitiveness authorities proposed in the Five Presidents' Report could potentially play an important role on this front. Important so far is that the foundation stone of structural reforms 2.0 should be for all countries to put in place mechanisms for the systematic and independent analysis and assessment of structural reforms.

See: “Completing Europe’s Economic & Monetary Union”, European Commission, 2015,-24pp.

According to the Commissioner, the EU “practical steps” to forward for structural reforms are through carefully considered proposals to bring down barriers and to expand the single market.

Thus, already in June 2016, the Commission adopted proposals to enhance the digital single market, which will bring clear benefits to consumers and firms.

Important are as well those “new skills” proposals described above.

Then, the EU has also narrowed the scope of Semester’s country-specific recommendations, which are the Commission’s main vehicle for promoting structural reforms in the member states.

However, argued the Commissioner, the implementation of these recommendations is still very uneven; they need to get more traction.

The national competitiveness authorities envisaged in the Five Presidents' Report could become a perfect channel to build awareness about both the economic and social benefits of sound structural reforms, and to foster their implementation.

At the new period in the EU’s economic recovery the member states need to come to an end with the first generation of structural reforms. Now the EU and the states need to pave the way for a time when people will be able to feel proud and happy of the reforms led by the EU institutions: that is the time is for structural reforms’ “generation 2.0”.

Reference: Speech by Commissioner P. Moscovici: "Structural reforms 2.0: for a stronger and more inclusive recovery", Brussels, 9 June 2016. In:

http://europa.eu/rapid/press-release_SPEECH-16-2124_en.htm?locale=en