be related either to the way reforms are designed (e.g., pension reforms that modify only gradually
the retirement age) or to the fact that the economic effects of reforms need time to materialize.16
Short-run costs from structural reforms could be associated to several factors: a temporary
reduction in economic activity (due, e.g., to resources shifting across sectors and firm
restructuring); direct negative budgetary impact from reforms (e.g., tax reforms); indirect
budgetary costs associated with the compensation of reform losers.
European countries are currently focused on reforms aimed at increasing growth and employment
in line with the goals of the Lisbon strategy and at making public finances sustainable. 17 The
objective of improving the growth potential is mainly pursued through reforms strengthening the
incentives for the supply of labour and human and physical capital (e.g., via reforms in product
and factor markets), innovation, and the contribution of the public sector to growth (e.g., tax
reforms, reforms in the educations sector, R&D,...). These reforms permit indirectly to improve
public finances in the medium-to-long run via a more favourable dynamics of government
revenues and increased resources to pay back the outstanding stock of public debt. Concerning the
goal of improving the sustainability of public finances in EU countries, there is agreement among
experts and policy-makers on reforms aimed at limiting the upward tendency in age-related
expenditures, increasing employment rates, and favouring a reduction in public debt.18 Among the
reforms having a major role in containing the dynamics of age-related expenditures, pension
reforms have a prominent role in the debate.19
15 In this vein, Alesina and Drazen (1991) show theoretically how governments may be induced to delay reforms
aimed at stabilizing public finances. See also Tabellni and Alesina (1990) for a model explaining the origin of a
deficit bias by governments on the basis of short-sighted politicians.
16 Available evidence shows that the timing of economic reforms on growth depends quite crucially on the specific
type of reform considered. Simulations based on a small scale econometric model contained in IMF (2004) show
that while product and labour market reforms take time to produce positive effects on output, financial market and
tax reforms have effects on output already in the short term. Kim (2003) calibrates a model of corporate sector
restructuring on Japanese data an shows that product market reforms boost output in the long-term but has short-term
costs. Econometric estimates in Salgado (2002) point to a U-shaped impact of labour and product market reforms on
productivity growth. Mendoza, Milesi-Ferretti and Asea (1997)) report that tax cuts can have significant positive
effects on output already in the short term.
17 See Economic Policy Committee, 2005, ‘Annual Report on Structural Reforms’ and European Commission,
2005, ‘Working together for growth and jobs. A new start for the Lisbon Strategy’, Commission Communication to
the European Council.
18 The Stockholm European Council of March 2001 agreed on a three-pronged strategy for ensuring public finance
sustainability: increasing employment rates, reducing public debts, reforming pension and health care systems.
19 See, e.g., Economic Policy Committee (2002) for an assessment of the impact of alternative hypothetical
parametric pension reforms in EU countries (concerning the calculation of pension benefits and the effective
retirement age) using simulations based on the national non-behavioural models used in EU countries’ national
administrations. Results indicate that a reduction in the indexation of pensions by 1/2 percentage point would
contribute to reduce pension expenditures projected for 2050 by a range between 0.5 and 2 % of GDP in systems
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