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Markus Kuger

Supply-Side Reforms: Lost on the Eurozone

by Markus Kuger | Dun & Bradstreet Editor

April 20, 2015 | No Comments »

EU CommissionThe reluctance of many European countries to implement supply-side economic reforms continues to hamper the eurozone’s ability to get out of the murky trough into which the region has sunk.

Yes, excessive government deficits in Greece and Portugal (and later Cyprus) and the oversized and dangerously undercapitalized banking sector in Ireland and Spain are popular places to point fingers when assessing blame for the euro crisis.

But the role of — or a lack of — supply-side reforms should not be underestimated.

Countries such as Italy, Spain, and France are correct in highlighting that the EU-imposed austerity measures, combined with plummeting investment and private consumption amid record-high unemployment levels, added further pain to the troubled countries around the Mediterranean. But German Chancellor Angela Merkel surely has a point when she stresses the importance of business-friendly supply side reforms.

In the more than five years since the eurozone crisis began, progress on opening up goods, services, and especially labor markets has been slow to nonexistent, with a few notable, positive exceptions. Labor market efficiency, as measured by the World Economic Forum’s (a Switzerland-based NGO) Global Competitiveness Report, improved in only one big country — Germany, which went from 70th in 2008-09 to 35th in 2014-15.

France implemented business-friendly reforms in 2014-15, resulting in an improved ranking but no reduction in the country’s record-high unemployment rate yet. In labor-market efficiency, France went from 67th in 2008-09 to 61st in 2014-15. Ratings for Spain, Greece, and Italy worsened over the same interval.

During the same period, the EU repeatedly urged countries to open up heavily regulated labor markets and reduce dismissal protection and, to a lesser extent, employee rights. Neither Spain, Greece, nor, especially, Italy has delivered on any significant scale yet. Certainly, with unemployment rates standing around 25% in Spain and Greece, labor market reforms would not be a panacea, but they could improve the situation over the medium to long run. However, public opposition has made implementation difficult without severe risks.

The EU also has not made much headway in opening up goods and especially services markets. World Economic Forum data show that none of the four biggest eurozone economies (plus Greece) made progress in increasing the efficiency of its goods market. Germany again performed the best, but still slipped from 18th in 2008-09 to 19th in 2014-15. France dropped from 25th to 46th over the same period in the market-efficiency rankings, according to the World Economic Forum.

Trade barriers in the region remain too high, and red tape is a severe obstacle for any company trying to enter European markets. Although the new European Commission (in office since November 2014) gave completion of the single market — and especially digital services — a high priority in its five-year term, progress has been minimal.

The creation of a free-trade area between the EU and the US would be much welcome news in this context. But given concerns regarding consumer and investor rights, public opinion in the EU is becoming increasing against signing the Trans-Atlantic Trade and Investment Partnership. While the TTIP likely will eventually be signed, several sectors might remain effectively closed (like genetically modified crops) due to consumer rights or environmental reasons.

As a result, despite the need to liberalize markets, the pace of progress in the EU remains painfully slow in most countries. Without much-needed changes on the supply side, especially to the labor code, the eurozone is unlikely to fully emerge from the crisis any time soon.


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