Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005

future. They are also partial in the sense that they do not take explicit account of macroeconomic feedback
mechanisms.

56. The simulation exercises highlight the positive budgetary effects of coordinated structural reforms
in the euro area. But they have to be accompanied by an adequate monetary policy response to guarantee a
rapid adjustment of demand to the improved supply conditions. The budgetary gains would still depend on
the type of reform and their impact on employment and productivity. Efforts to improve supply conditions
are surely easier to co-ordinate or coordinated in any case, when it comes to single market initiatives, such
as the current drive to liberalise services across the European Union. Co-ordination is more difficult to
achieve for labour market reforms. In this domain, national policy initiatives by a single country could have
only a limited impact, especially in the short term and in the case of a large country. Indeed, in monetary
union, the strength of endogenous adjustment mechanism appear to be weaker the larger the country.
Moreover, if reforms were to be accompanied by an easing of fiscal policy, additional macroeconomic
gains would also appear very limited.

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