Terzi, Α. (2015) “Is the ECB sacrificing reforms on the altar of inflation? – QE and its impact on structural reform efforts“, Bruegel Institute, 13 March.
Roughly one month ago, Mario Draghi announced that the European Central Bank (ECB) would activate a large programme of sovereign bonds purchases (QE), in an effort to re-anchor euro area inflation expectations to the 2% target. In the run up to that decision one of the main naysayer arguments was that, by doing so, the ECB was reducing pressure on governments to engage in painful, but necessary, structural reforms (German Council of Economic Experts, 2014). At the time, the argument was dismissed on the grounds that the ECB’s mandate is to control inflation, not foster reform efforts. The question however remains as to whether QE will slow down reform efforts in the coming months and therefore, in boosting short-term demand, risks inadvertently shrinking long-term supply.
In order to explore the determinants of reform efforts in advanced economies, and in the euro area more specifically, I analysed a highly balanced panel dataset of the OECD’s reform responsiveness rate[1], an indicator of whether wide-ranging reform packages were adopted. The data is available for all 34 OECD members, with biannual frequency, for the time span 2007-2014. The technical results are illustrated in Table 1 (at the bottom).
The main findings can be summarised as follows:
- Countries under an IMF programme significantly step up structural reform efforts. This should come as no surprise, given the carrot-and-stick structure of IMF lending, involving frequent reviews that need to be approved in order to access the Fund’s payment tranches[2].
- Countries with a high unemployment rate tend to implement significantly more reforms. This result is in line with what Williamson (1993) calls the “crisis hypothesis”: the public perception of a crisis is needed to create the conditions under which it is politically possible to undertake extensive policy reforms. As we see in Figure 1 (below), the relationship does not seem to be dictated by the programme countries.
Relevant posts:
- Muellbauer, J. (2014) “Combatting Eurozone deflation: QE for the people“, VoxEU Organisation, 23 December.
- Durden, T. (2014) “The Eurozone’s QE Problem“, ΘZeroHedge, 19 November.
- Gros, D. (2014) “Fighting Deflation: Would QE work in the euro area?“, Economic Policy, CEPS Commentaries, 09 October.