Eurozone budget: Member states should be responsible for structural reforms in Europe, but targeted incentives may foster convergence and competitiveness

Researchers from EconPol Europe say a system of national convergence roadmaps will achieve a faster implementation of structural reforms for economic convergence in Europe than the country-specific recommendations made by the European Commission in the context of the European Semester.

In an EconPol policy brief released today, economists Mathias Dolls, Clemens Fuest, Carla Krolage, Florian Neumeier and Daniel Stöhlker examine the rationale and potential adverse effects of providing financial incentives for structural reforms. They propose a framework where Member States agree on convergence targets laid out in ‘convergence roadmaps’ which may be financially supported under certain circumstances.

National convergence roadmaps, they say, reflect the fact that ensuring progress towards convergence targets is primarily a responsibility of the individual member states, not of the EU or European institutions and bodies like the European Commission and the Eurogroup. A key goal of their proposal is to strengthen national ownership of structural reforms that help governments to achieve economic convergence targets and to strengthen competitiveness.

The European Commission’s proposed Reform Support Programme comprises a financial support instrument for incentivising reforms, a technical support instrument and a convergence facility to support structural reforms in non-euro area member states. The French-German proposal on the architecture of a Eurozone budget, issued in November 2018, supports the idea of incentivizing reform implementation in euro area member states.

“Our proposal is driven by the overarching principle that the responsibility for making satisfying progress with respect to structural reforms and economic convergence needs to be rebalanced between the member states and the European Union,” they say. “The countries themselves are asked to propose concrete reform initiatives that they think are best suited to reach those targets and align with national political preferences and economic circumstances at the same time.”

“In our view, the key rationale for incentivising structural reforms is that some beneficial reforms with positive spill-over effects to other member states and the EU as a whole may not be implemented without incentives. We think that it is essential to provide financial incentives in a targeted and efficient way, focusing on those structural reforms that have the highest potential to foster economic convergence in Europe. Financial support should be conditional on the potential for positive spillovers across country borders, continuous implementation of the reform package and the achievement of convergence targets.”

Read the full policy brief: http://www.econpol.eu/publications/policy_brief_14

For further information on the proposals, contact Mathias Dolls at dolls@ifo.de.