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16 March 2015

ECB: Progress with structural reforms across the euro area and their possible impacts

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This article illustrates the effects of structural reforms on key macroeconomic variables, describes the recent progress of product and labour market reforms, and suggests that further structural reforms could be a powerful tool to restore growth and competitiveness in the euro area.

Structural reforms have the potential to substantially boost productivity and employment and to reinvigorate growth in the euro area, while also improving the ability of countries to rapidly adjust to shocks, reallocate resources and restructure their economies.

With the appropriate design, as well as credible and careful implementation, reforms can minimise or eliminate possible negative short-term dynamics for some components of GDP and maximise longer-run positive impacts. The credibility of reforms and their implementation plays a crucial role by strengthening confidence channels and bringing forward the positive impacts of reforms via higher anticipated incomes and positive responses in the financial markets.

There are signs that reforms undertaken since the start of the crisis have already had a positive impact; wages and prices appear to be more flexible and have helped the adjustment process, while export performance also seems to have improved in countries which have adopted reforms.

More reforms are needed at the country level to reinforce and stimulate the Monetary Union’s growth potential.

Although significant progress has been made in recent years, there is still considerable scope and urgent need for more structural reforms across the euro area. Countries with comparatively more rigidities will benefit the most from structural reforms. While reforms remain first and foremost in the interest of the individual euro area country concerned, they also facilitate the smooth functioning of the Monetary Union as a whole by making the euro area more flexible and resilient in response to macroeconomic shocks and also facilitating the restructuring of economies

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