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Structural Reforms – Be Careful What You Wish For!

Janssen, R., (2013), “Structural Reforms – Be Careful What You Wish For!”, Social Europe Journal, 20 Νοεμβρίου.

“Be bolder in tackling structural reforms”. It almost sounds like a line from the Star Trek television series but it is Commission President Barroso presenting the 2014 Annual Growth Survey (AGS) (see here).

This then is the key message coming from the new AGS: Reforms, reforms and more reforms. However, before continuing on this road, the Commission and member states would do well to consider what exactly it is that their structural reform policy is delivering, in particular in the domain of wages and collective bargaining systems.

The impact of structural reforms: Wages down

One key fact is that wage dynamics, in those member states that have been reforming the most, have simply collapsed. According to the Commission’s recently published autumn forecasts, workers in Spain have already been suffering a freeze in nominal pay for several years in a row, whereas nominal wages in Portugal and Ireland are expected to start falling and are already falling in Greece. Of course, this is exactly what economic policy-makers intended to achieve in the first place, to replace the missing instrument of a currency devaluation with a direct devaluation of wages.

However, under the pressure of the economic crisis, the pace of nominal wage increases has also seriously weakened in much of the rest of the Euro-area. In Italy, France, Belgium, Austria and the Netherlands, the Commission now puts wage increases at a mere (annual) increase of 1 to 1.5% in the 2013-2015 period.

Wage cuts and freezes in the periphery together with very moderate wage developments in much of the core combine to form a pattern by which average Euro-area nominal wage dynamics have come down to just 1.5% in 2013, with the Commission not expecting much of an acceleration of wage growth in 2014 and 2015 either. The ‘masters of structural deregulation’ will surely claim that such moderate wage developments across the majority of  Euro-area countries are still a good thing for all member states involved because, by definition, such wage dynamics (or the absence of them) would create jobs and improve competitive positions. Leaving aside the question whether wages can indeed perform such tricks (they cannot because competitiveness is about relative positions!), there is another fundamental problem that overall Euro area wage depression raises. Indeed, policy makers should not ignore the fact that there’s a strong link running from nominal wages over productivity developments to inflation.

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