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back to index backEUROtalk June,  2005


Waiting for the fruits of reform

Within the euro area, there is a growing sense that the fruits of economic reforms are taking too long to materialize. Calls are mounting for pro-active economic policies to encourage a quick and sustainable rise in domestic demand.

Waiting is never enjoyable – be it at the doctor or the supermarket checkout. It is made even less pleasant if doubts arise as to whether you will ultimately get what you're waiting for. This feeling is common in many countries in the euro area, as they hope that their reforms will succeed. They have been battling for years; in a host of countries tax reforms have been implemented, store hours relaxed and labor markets deregulated.

And what is their reward for all this? An economy that has managed to grow by just a bit more than 11/2 % a year for the past three years and is still failing to gain real momentum in the first half of this year; an EMU deficit that leaves almost no fiscal leeway; and employment gains that are only visible under a microscope.

More and more economists are calling for an end to simply waiting for results from the structural reforms, and for moves to back them up with active economic policies. Demands for substantial interest rate cuts to prop up ailing demand are intensifying. But the idea that private consumption or investment demand can be boosted by continuing to push down already low interest rates or incurring yet more public debt is questionable.

In the face of all this, it is easy to forget that, in some countries, it is not domestic demand but exports that are the Achilles' heel of the economy. In southern Europe, for instance, there is a clear need for greater competitiveness.

Governments are attempting to counter this; Italy is facilitating the setting up of new companies and bundling R&D activities, in an effort to salvage its shrinking market share. In Spain, there is a shift towards greater wage differentiation, although wages are still rising too sharply – to some extent the result of price indexing. France, the land of the 35-hour week, has cut overtime bonuses.

The economies are thus heading in the right direction, but they still have a long way to go. Consequently – and as a result of exogenous shocks from oil prices and euro appreciation – success remains limited.

And to those who are still waiting: If it weren't for the reforms, the economic situation in the euro area would certainly be much worse. So: Continue to push ahead with reforms, and pick up the pace if possible.


Source: Dresdner Bank Economy and Markets” newsletter - GAI


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