Competitiveness in the periphery: liberalisation of labour and the goods and services market

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Clàudia Canals, CaixaBank Research
Clàudia Canals
November 12th, 2015

After European monetary union was formed the external imbalances of the periphery countries increased substantially; the crisis itself but also the reforms implemented helped to correct most of these cases. Although a large proportion of this correction has been a direct consequence of the depth of the crisis and the resulting drop in domestic demand, external balances also improved thanks to gains in competitiveness as a result of the liberalisation of the both the labour market and the market of goods and services. These gains should increase further as the reforms and liberalisation gradually take effect.1

Just before the crisis erupted, most periphery countries (with the exception of Italy) had current account deficits of around 10% of GDP. Between 2008 and 2013 these current account balances returned to surpluses, driven by lower imports but also by strong exports. This month's Dossier analyses the measures which, thanks to their impact on competitiveness, should continue to boost exports and help to reduce imports. In particular, we will focus on those affecting both labour and the goods and services market.

The measures implemented in the area of labour have attempted to fine-tune the labour force and wages to economic conditions throughout the cycle. Amongs them, an important one has been the reduction in the cost of severance pay in Greece, Spain and especially Portugal. Nonetheless, in spite of this reduction, the cost in Spain is still much higher than the average for Europe, Greece and Portugal: totalling 14.3 weeks' wages for the fair dismissal of workers with five years' service compared with 13.0 weeks for Greek employees and the much more limited 8.6 weeks in Portugal, according to the Doing Business report produced by the World Bank.

Among the different reforms affecting workers' wages there have been important changes in collective bargaining procedures, encouraging more decentralised negotiations where company-level agreements take priority over other agreements at the sector or province level. This kind of measure, which increases companies' internal flexibility and helps them to adjust wages more accurately to their level of productivity, should improve countries' competitiveness in the medium term. Spain and Greece have made considerable progress in this respect. For example, in 2011 Greece suspended «legacy contracts» which meant any negotiation had to start from the level of the most favourable contract achieved by similar workers. That same year Greece also started to allow new contracts to be signed with representative groups of workers for firms with no trade union representation. The advances made by Portugal in this area have been less significant, however. The reason is that, although collective agreements at a sector level can be suspended in favour of a new agreement at a company level, the original signatories must accept that the sector agreement be suspended. This condition has limited the number of suspensions and consequently new agreements at a company level.2 Nonetheless, overall Portugal has carried out significant labour reforms. In addition to the aforementioned reduction in dismissal costs it has also made working time more flexible, strengthened active employment policies via training courses and by encouraging apprenticeships in companies and has also reduced unemployment subsidies. That's why Portugal is one of the periphery countries whose labour market efficiency has improved the most according to the index produced by the World Economic Forum (see the first graph, vertical axis).

On the other hand, according to the same index, Italy is the peripheral country with the worst performance in terms of improving its labour market efficiency. The main reason is that it had not implemented any significant labour measures until very recently. However, in December 2014 an important labour measure was announced that has come into force in 2015 and aims to attack the problem of the duality of the labour market. Another important measure in this labour reform is a new kind of contract for newly recruited employees that has an increasing severance payment. Also of interest is the fact that employees who have been dismissed no longer have to be reinstated should a tribunal rule against the company.3 We can therefore expect significant improvement in the World Economic Forum's efficiency index for the country once these recently implemented policies take effect.

Regarding reforms of the goods and services market, most measures have focused on reducing administrative costs and also on improving competition in industries that are crucial for the overall performance of the economy. Portugal, Spain and Greece in particular have made considerable progress in simplifying the administrative procedures required to start a new business. In 2011 Portugal launched a «Zero Authorisation» initiative which has simplified online licensing at a state level. Although the European Commission still believes the Portuguese economy needs to make local administrative procedures even easier, according to the Doing Business index produced by the World Bank the country has made important improvements in this respect: in the Starting a Business subindex it has gone from 90.22 points in 2010 to 96.28 in 2016.4 Spain's improvement in this subindex has been even greater although there is still a great deal of room for improvement: it has gone from 68.88 points to 86.30 (see the second graph).

Lastly, numerous measures have also been implemented to increase the degree of competition in certain relevant sectors. However, according to a recent report produced by the OECD there is still a long way to go.5 In particular, the report stresses that Portugal must continue to increase competition in network industries as well as in some professional services, while Spain needs to do the same with its large number of professions requiring membership of a professional body. On the other hand, the effects of Italy's extensive deregulation of professional services carried out between 2011 and 2013 are still not clear (see the first graph, horizontal axis). And although Greece has substantially reduced barriers to competition in numerous industries and professions, it should be noted that it was one of the countries with the most regulations for professional services in the EU and its progress in this area therefore needs to be monitored.

In short, there has been considerable liberalisation in the labour market and the goods and services markets in the periphery countries and the measures implemented have made the labour market more flexible and have reduced barriers to competition in a range of sectors. Nevertheless, in spite of these efforts, the dual nature of these countries' labour markets still needs to be tackled by taking more definitive action. In the area of market reforms, increasing the degree of competition in numerous services and liberal professions also seems to be an aspect which all periphery countries should strengthen further. The good data being reported for economic activity in a large part of the euro area is no reason for us to slacken the reformist agenda which the years of crisis had forced us to undertake.

Clàudia Canals

Macroeconomics Unit, Strategic Planning and Research Department, CaixaBank

1. Ireland forms part of the group of countries that have substantially corrected their external imbalance and carried out significant reforms. However, these reforms have focused on the financial and public sector and not on the labour or goods and services markets as these markets are already much more liberalised in Ireland. That is why this Dossier article will not look at the case of Ireland.

2. Up to May 2015 no agreement had been suspended (see «Post-Programme Surveillance Report», Portugal Spring 2015, European Commission, 2015).

3. See «Labour reform in Italy: a big step forward», IM03/2015.

4. When distance to frontier is measured, each economy is classified within a group of similar economies and the economy in the group with the best characteristics in each aspect is given a rating of 100. When Portugal goes from 90.22 to 96.28, this means it is approaching the best country in the Starting a Business sub-index.

5. See «Economic Policy Reforms 2015. Going for growth», OECD, 2015.

Clàudia Canals, CaixaBank Research
Clàudia Canals