If any good came from the euro area's sovereign debt crisis it was the resulting drive for reform in the region, both at a national and European level. Under huge pressure from the financial markets, the peripheral countries implemented a wide range of reforms to correct macroeconomic imbalances accumulated during the boom that followed the euro coming into circulation. This Dossier analyses the impact of the reforms which, to a greater or lesser degree, were carried out in Spain, Ireland, Portugal, Italy and Greece and which affected many different areas, including the labour and goods markets and the public and financial sectors. The evidence available suggests that all this effort has not been in vain: the surprisingly vigorous economic recovery of the peripheral countries is largely thanks to the positive impact of the reforms adopted, laying the foundations for more balanced and sustainable growth in the long term.
The first financial assistance programme for Greece, signed in May 2010, marked the start of the wave of reforms that spread through the euro area. Logically the reforms were more sweeping in those countries requesting external financial assistance, given the explicit conditions contained in such programmes. But the need to adopt structural measures affected a broader group of countries such as Italy which, in 2011 and in 2012, also significantly increased its response to the structural reforms recommended by the OECD (see the first graph). As is widely known, priority was given to fiscal consolidation measures in order to reduce the public deficit and redirect public debt towards a sustainable path, with the aim of putting a stop to the sovereign debt crisis. Banking reforms were also crucial in those countries that had experienced a credit boom, such as Ireland and Spain. Over time, when financial tensions had eased considerably, there was a slight shift in economic policy towards growth-friendly fiscal adjustment and reforms aimed at restoring the competitiveness of these economies came to the fore.
After more than five years of reforms, and at a time when the recovery is gaining ground in most peripheral countries, it is a good moment to look back and judge how successful they have been. Overall the assessment is positive given the significant progress made in reducing macroeconomic imbalances. Firstly, reforms in the labour and goods markets have helped to restore the competitiveness lost, as seen in a clear improvement in the current account balance (see «Competitiveness in the periphery: liberalisation of labour and the goods and services market»). Secondly, considerable progress has also been made in reducing the public deficit and sovereign debt has stabilised, albeit it is still at a high level (see «Will fiscal consolidation in the periphery entail a different model for public accounts?»). Lastly, the improvement of balance sheets in the private sector and financial institutions is firmly on track (see «The restructuring of periphery banks»). In this respect, it can be stated that the measures were generally adequate. The growth now being experienced by peripheral Europe should be partially attributed to a more competitive economy, public finances oriented towards sustainability, lower private sector debt and a banking industry with more capacity to grant credit and support the recovery.
It is sometimes argued that the results achieved might have been better if the programmes had been implemented in their entirety and more rapidly. The IMF's register1 that monitors these programmes sheds some light on this area. Specifically, the proportion of measures carried out (with and without delay) is over 95% in the cases of Portugal and Ireland while Greece, so often criticised for an alleged lack of commitment to reforms, has implemented 90% of the measures. The fact that such reforms may not have been as effective as expected should therefore be blamed on the difficulty in designing effective programmes that are in relation to the specific conditions of each country and, on the other hand, on the importance for local authorities to be committed to and lead the reforming drive. Another factor that may have influenced the perception of the effectiveness of the reforms implemented is the negative public opinion generated by any reforming process, especially when such reforms are far-reaching. There is normally a minority who are very directly damaged by the reform in question and they fight for it not to be carried out, even when it may be advantageous for society as a whole. The difficulty lies in the fact that the benefits are shared among many different agents while the costs are borne by a minority that is very reluctant to change. This problem is even greater for economic reforms of a structural nature given the time lapse between their implementation and outcome. Although empirical studies show that structural reforms provide great benefits over the medium to long term, it is true that the short-term gains are very limited because, for example, of the costs of reassigning productive resources to different sectors (Bouis and Duval, 2011).
One way of easing the negative effects in the short term is to use fiscal and monetary stimuli. Given the little (or zero) fiscal margin enjoyed by peripheral countries, monetary policy appeared to be the main tool available. In this respect the ECB did its duty, especially after July 2012, via ultra-accommodative monetary policy: it cut the interest rate to an all-time low, adopted numerous measures to improve the banking system's access to liquidity and finally, in March 2015, it embarked on a programme to purchase sovereign bonds that ended up supporting the recovery in the periphery. In particular, the drop in risk premia has helped to considerably improve conditions for accessing credit in these countries. Moreover, falling oil prices and the euro's depreciation have also helped to boost growth. All this can be seen in the spectacular improvement in growth prospects for 2015, especially in Ireland and Spain. While, in January of 2014, Ireland's GDP was expected to grow by 2.2%, the current forecast is 5.4% (a difference of more than 3 pps, as shown in the second graph). The upward revision of forecasts has also been substantial for the Spanish economy and, to a lesser extent, the Portuguese.2 However, forecasts for the core countries have remained almost unchanged, even when they have also benefitted from the aforementioned positive shocks. It therefore seems that, beyond the factors providing temporary support, the reforms implemented lie behind this better relative performance by the peripheral countries.
There is broad consensus that structural reforms have a positive impact on an economy's long-term growth, backed up by a large number of empirical analyses. Moreover, we can estimate what kind of reform would have a greater effect for each country. For instance, a study by the European Commission3 estimates that Greece would benefit substantially from reforming its goods market; encouraging competition and reducing barriers to entry would lead to a 47% increase in the level of Greek GDP in the long term. The study also shows that reforms aimed at improving the training of unskilled workers would be very positive in all the peripheral countries, particularly in Portugal where the level of GDP would rise by 28% in the long term. Based as they are on a variety of models and hypotheses, these estimates are inexact but, nevertheless, the message conveyed is that structural reforms have a very positive effect.
In spite of the significant progress made over the last few years, countries must continue their reforming efforts to ensure their long-term growth capacity. Although risk premia are low, and thus are no longer exerting pressure, and the cycle has evidently improved, reforms must continue to be implemented both at a national level and also by progressing with the construction of the European architecture. There is no room for complacency.
Macroeconomics Unit, Strategic Planning and Research Department, CaixaBank
1. Data taken from «Monitoring of Fund Arrangements» (MONA), IMF.
2. The positive trend in growth prospects for 2015 contrasts with the deterioration seen in 2012, when estimates for Spain went from 1.2% growth in January 2011 to –1.4% in December 2012 (a drop of 2.6 pps).
3. «Growth effects of structural reforms in Southern Europe», Economic Papers no. 511, European Commission, December 2013.