A Convergence Code for the Euro Area

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In recent years, we have seen a lot of efforts in the fiscal area. However, reforms for the general business environment have fallen short. Can benchmarks like the European Commission's country specific recommendations or the proposals of the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) improve the implementation of structural reforms? How could a 'convergence code‘ look like? Would it be a paper tiger or an efficient policy tool?

Ongoing structural reforms are essential to promote growth and raise productivity. However, their implementation is often painful, as the adjustment phase sometimes entails losers. Consequently, politicians refrain from pursuing substantial structural reforms unless a severe crisis pushed for it really hardly. As a matter of fact, we have seen most reforms in those countries that are most affected by the economic downturn, like Greece and Spain. Other members of the European Economic and Monetary Union (EMU), including Germany, were more reluctant in implementing reforms.

There is no silver bullet to improve reform implementation

Benchmarking is one element of the economic toolbox to enhance reforms. A convergence code targeting appropriate indicators could therefore help. But there are more instruments. Following a recent EU legislation, national productivity boards will be set up in all member states. Furthermore, the dialogue with national parliaments and stakeholders has been improved in recent years. Three factors seem to be crucial for the success of structural reforms:

  • Sequencing
  • Packaging
  • National ownership

Given the election cycles, reforms should be started as early as possible. Furthermore, most reforms have to be packaged with other measures to compensate possible losers in the transition phase. Finally, reforms that are well explained to the public and widely accepted are more successful.

Convergence will take time

These issues were discussed in July 2017 during a high-level workshop of the BDI and the Konrad Adenauer Stiftung in Brussels. Emmanuell Maincent (European Commission), Pierre Beynet (OECD) and Bryan Hayes (Member of the European Parliament) exchanged their experiences with policy makers and stakeholders. All participants concluded that further convergence in the EMU will be a long-term process. Instruments like benchmarks or a convergence code might prove helpful for that purpose.