At the 2015 forum on Central banking organized by the ECB, Mario Draghi started his inaugural speech pointing out that structural reforms are mentioned in about one third of all ECB Executive Board speeches since the single currency’s inception. The last few years, a lot has been achieved already, and these reforms have been subject to such heated debates that the term “structural reforms” may even have become “toxic”! Reforms were often criticized as imposed by the Troika and lacking national ownership in programme countries, as well as criticized for focusing solely on reducing labor costs in order to achieve internal devaluations [1]. Yet, the ECB director stressed once again the need for more structural reforms to strengthen prosperity and stability in the euro area, but remained deliberately vague as to which reforms to implement.

Two main reasons were put forward to justify the need for structural reforms. First, as O. Blanchard and J. Galí discussed, the recession in European countries seem not only to have lowered output but may also have had permanent negative effects on potential output. Structural reforms should then aim at permanently increasing efficiency of the supply-side of the economy in order to unleash the growth potential of the area and to increase the resilience to future shocks.

The second reason is that structural reforms could help reduce the divergence across Euro area members, which challenges greatly the efficiency of a single monetary policy. This divergence was translated, before the crisis, in strong inflation differentials. Indeed, while the introduction of the euro should have fostered a real convergence as capital flew towards so-called “catching-up” economies, these capital flows were mainly allocated in the less innovative nontradable sectors, which allowed some firms to extract excessive rents, distorted capital allocation, and fueled strong price increases (see S. Piton, forthcoming). The divergence now takes the form of strong heterogeneities in how economies reacted to the financial crisis, and through strong differentials in unemployment rates across countries. Structural reforms coordinated at the European level should then help reduce heterogeneities across countries and foster a real convergence of the economies.

Two kinds of reforms were discussed by the participants: reforms of the labor markets and reforms of product and service markets. Concerning labor markets, T. Boeri stressed on the growing divergence in their outcomes across Europe. He argued that half of the variation in unemployment rates comes from differences in country-specific labor market institutions and the other half from different exposures to shocks –stemming from differences in financial disequilibria accumulated before the crisis. The current approach of the European Commission in programme countries, focusing on reducing the costs of dismissals and encouraging downward wage adjustments, had strong negative effects in a recessionary and deleveraging context. Instead of “negative conditionality” –deregulating labor markets at a country-level– T. Boeri made a series of propositions towards a “positive conditionality” –the creation of supranational institutions to complement and enhance national institutions.

Discussions also focused on product market reforms –increasing competitiveness in services sectors mainly– which appeared to be easier to implement and supported at a national-level. However, their impact on the reallocation of factors of production across sectors are ambiguous (see S. Piton, forthcoming), and a few authors already showed that they have contractionary effects, especially in a context of recession and at least in the short term (see in particular L. Vogel, 2014). Finally, further research on the political economy of implementing both types of reforms –reforms of the labor and of product markets– at the same time is needed, since Blanchard and Giavazzi showed, in their seminal paper of 2001, that a fine-tuned programme could allow to benefit from the gains of their interactions.

Structural reforms are not in the ECB mandate. However, O. Blanchard and J. Gali argued that the relationship between inflation and unemployment have deteriorated in the last decade, which have major implications for monetary policy. In the context of an unemployment “hysteresis”, a monetary policy with a single inflation objective could have toxic effects. S. Fisher therefore emphasized that “Central bankers should think about structural reforms only in terms of what is the expected growth rate of the economy”. However, “Central bank governors,” Mr Draghi said, “should be quite clear about policies, or lack of policies, that hamper their mandates, that make their mandates more difficult or impossible.” The main message of the forum is to encourage discussions at national and supranational level to define a clear set of reforms to implement.

However, discussions should not only focus on how to facilitate factor reallocations, but also question the ways to ensure that factors reallocate in innovating sectors. Without innovations, and relying on growth only in labor-intensive sectors such as the construction or real-estate sectors, countries could only benefit from short episodes of growth and would still have to rely on external financing (see T. Grjebine, 2015.) But as pointed out by C. Pissarides, productivity growth and innovation can also have unequal effects. Policy action would then be needed to give incentives so that growth benefits to all sections of the economy.

Focusing only and separately on those two kinds of reforms –reforms of the labor and product markets– could thus easily become “toxic”. It might even reinforce the real divergence of economies in the Euro area. To really unleash the potential growth in European countries, further work should focus on how countries could coordinate to revive and finance investments in the most innovative sectors of our economies.