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Chapter 4: Restoring Convergence between Member States in the EU and EMU
hysteresis effects (such as changes in to absorb shocks (especially lasting In that context, reforms at both the
family life and commitments) make it shocks) and limiting adverse socio-national and EU levels could contribute
difficult for some temporary workers to economic outcomes and cross-border to strengthening growth and conver-
return to their home country once the effects. Moreover, well-designed insur- gence (see, for instance, Coeuré (2014)
shock has waned. Hence, given that it ance mechanisms (such as automatic and Sapir and Wolff (2014)). In this
-
is usually younger, more dynamic work- fiscal stabilisers) have the potential to respect, this section focuses specifi
ers who move and become permanent make a significant contribution in terms cally on employment and social policies
61
residents ( ), in the long run the produc- of absorbing temporary asymmetric and discusses their contribution at the
tivity of the destination country would shocks, notably since the capacity may national and the EU level to strengthen-
be expected to increase (relative to the not always be available at the national ing long-term growth and better stabilis -
home country), thereby hindering the level (especially when the countries con - ing national economies.
process of convergence within the cur- cerned have limited access to financial
rency union. markets). 3.3.1. Strengthening
the contribution of national
3.2.3. Convergence also In these respects, it can be argued that systems
requires strengthened the effectiveness and sustainability
socioeconomic stability of adjustment mechanisms in E(M)U At the national level, labour market and
depends on the nature of the shock. In social protection reforms can strengthen
Strengthening the capacity to stabi- the case of a temporary demand shock, the resilience of Member States and
lise national economies and imple- automatic fiscal stabilisers (including reduce the risk of shocks causing diver-
ment appropriately designed structural unemployment benefits) can dampen gence, by a stronger contribution to
reforms is a necessary requirement to the fluctuations (around predetermined growth and to stabilisation in the face
ensure stronger employment and social trends) of economic activity (including of a temporary shock.
resilience, and upward socioeconomic real GDP). In case of a permanent sup-
convergence, across the EU. In the EMU ply shock, the growth trend itself will be Employment-friendly social
context, that central stabilisation capac- affected rendering automatic fiscal sta- policies and better prevention
ity is currently weak: this serves as an bilisers unsustainable in the long run. In of scarring effects
argument for a reinforcement of the euro this case, relative prices have to adjust
area fiscal stabilisation capacity. Further - or structural reforms have to be imple- The design of national systems is essen-
more, structural reforms could be incen- mented in order to strengthen employ- tial to support employment and pro-
tivised by a discretionary fiscal capacity ment and labour productivity. However, ductivity growth. In particular, national
at the euro area level (which could, for adjustment to the new equilibrium is employment and social protection sys-
instance, take the form of strengthened unlikely to occur immediately and nomi- tems should provide adequate protection
investment in cohesion funds). nal rigidities will impose an additional against social risks as well as support to
adjustment burden, including on the find a job, thus preventing long-lasting
Stabilisation is not only required in order labour market. When this also generates impacts of exclusion from the labour
to avoid labour market hysteresis effects, labour market hysteresis effects, addi- market and the long-term costs of
such as skill erosion following persistent tional actions may be needed to smooth shocks. They also support employment
unemployment spells (that may reduce the adjustment process (see, DeLong and growth, notably by providing support to
long-term growth potential), but also Summers (2012), Pissarides (2014)). human capital formation, and ensuring
because an economic downturn almost the right incentives to work and hire.
inevitably has social consequences since 3.3. The contribution
it tends to have its hardest impact on of employment and social Adequate protection against social risks
the most vulnerable groups (such as low policies to convergence includes protection for not only the active
skilled workers) with adverse impacts on in the EU (through unemployment, disability, hous -
social cohesion in the long run ( ). ing and exclusion benefits) and inactive
62
To what extent can reforms in labour population (through pensions and family
The previous analysis has suggested market and social institutions at
services), but also the whole population
that, in the face of nominal and real national and European level contribute through health benefits and services. In
rigidities, macro-economic shocks may to a strengthening of upward convergent line with the Active Inclusion Strategy
63
have a strong adverse impact on employ - growth across the EU and better stabili- ( ), adequate and minimum income
ment and social cohesion if adjustment sation of the European economy? support measures should be considered,
is left solely to market mechanisms, when necessary. Beyond their direct
with potentially adverse hysteresis and In recent years, there have been strong socioeconomic impact, if well designed,
cross-border effects. Structural employ- calls for such reforms and the previ- such services and benefits constitute an
ment and social reforms (combined with ous section argued that in a currency investment (see Chapter 1) and contrib-
other types of structural reforms) are union, when adjustment is left to market ute to the prevention of scarring effects.
key to strengthening countries’ capacity mechanisms, the adverse socioeconomic Employment and social protection
impact of temporary asymmetric shocks
61
( ) See, for instance, OECD (2014).
( ) Although it would have been beyond the are likely to be intensified (such as dis- ( ) Commission Recommendation of 3 October
63
62
scope of this chapter to focus also on tributional and hysteresis effects) — 2008 on the active inclusion of people
price stability, financial stability and fiscal risking lasting adverse effects on excluded from the labour market (notified
stability, possible interactions with labour under document number C(2008) 5737), OJ
markets have been briefly mentioned. long-term growth. L 307, 18.11.2008, pp. 11–14.
227
hysteresis effects (such as changes in to absorb shocks (especially lasting In that context, reforms at both the
family life and commitments) make it shocks) and limiting adverse socio-national and EU levels could contribute
difficult for some temporary workers to economic outcomes and cross-border to strengthening growth and conver-
return to their home country once the effects. Moreover, well-designed insur- gence (see, for instance, Coeuré (2014)
shock has waned. Hence, given that it ance mechanisms (such as automatic and Sapir and Wolff (2014)). In this
-
is usually younger, more dynamic work- fiscal stabilisers) have the potential to respect, this section focuses specifi
ers who move and become permanent make a significant contribution in terms cally on employment and social policies
61
residents ( ), in the long run the produc- of absorbing temporary asymmetric and discusses their contribution at the
tivity of the destination country would shocks, notably since the capacity may national and the EU level to strengthen-
be expected to increase (relative to the not always be available at the national ing long-term growth and better stabilis -
home country), thereby hindering the level (especially when the countries con - ing national economies.
process of convergence within the cur- cerned have limited access to financial
rency union. markets). 3.3.1. Strengthening
the contribution of national
3.2.3. Convergence also In these respects, it can be argued that systems
requires strengthened the effectiveness and sustainability
socioeconomic stability of adjustment mechanisms in E(M)U At the national level, labour market and
depends on the nature of the shock. In social protection reforms can strengthen
Strengthening the capacity to stabi- the case of a temporary demand shock, the resilience of Member States and
lise national economies and imple- automatic fiscal stabilisers (including reduce the risk of shocks causing diver-
ment appropriately designed structural unemployment benefits) can dampen gence, by a stronger contribution to
reforms is a necessary requirement to the fluctuations (around predetermined growth and to stabilisation in the face
ensure stronger employment and social trends) of economic activity (including of a temporary shock.
resilience, and upward socioeconomic real GDP). In case of a permanent sup-
convergence, across the EU. In the EMU ply shock, the growth trend itself will be Employment-friendly social
context, that central stabilisation capac- affected rendering automatic fiscal sta- policies and better prevention
ity is currently weak: this serves as an bilisers unsustainable in the long run. In of scarring effects
argument for a reinforcement of the euro this case, relative prices have to adjust
area fiscal stabilisation capacity. Further - or structural reforms have to be imple- The design of national systems is essen-
more, structural reforms could be incen- mented in order to strengthen employ- tial to support employment and pro-
tivised by a discretionary fiscal capacity ment and labour productivity. However, ductivity growth. In particular, national
at the euro area level (which could, for adjustment to the new equilibrium is employment and social protection sys-
instance, take the form of strengthened unlikely to occur immediately and nomi- tems should provide adequate protection
investment in cohesion funds). nal rigidities will impose an additional against social risks as well as support to
adjustment burden, including on the find a job, thus preventing long-lasting
Stabilisation is not only required in order labour market. When this also generates impacts of exclusion from the labour
to avoid labour market hysteresis effects, labour market hysteresis effects, addi- market and the long-term costs of
such as skill erosion following persistent tional actions may be needed to smooth shocks. They also support employment
unemployment spells (that may reduce the adjustment process (see, DeLong and growth, notably by providing support to
long-term growth potential), but also Summers (2012), Pissarides (2014)). human capital formation, and ensuring
because an economic downturn almost the right incentives to work and hire.
inevitably has social consequences since 3.3. The contribution
it tends to have its hardest impact on of employment and social Adequate protection against social risks
the most vulnerable groups (such as low policies to convergence includes protection for not only the active
skilled workers) with adverse impacts on in the EU (through unemployment, disability, hous -
social cohesion in the long run ( ). ing and exclusion benefits) and inactive
62
To what extent can reforms in labour population (through pensions and family
The previous analysis has suggested market and social institutions at
services), but also the whole population
that, in the face of nominal and real national and European level contribute through health benefits and services. In
rigidities, macro-economic shocks may to a strengthening of upward convergent line with the Active Inclusion Strategy
63
have a strong adverse impact on employ - growth across the EU and better stabili- ( ), adequate and minimum income
ment and social cohesion if adjustment sation of the European economy? support measures should be considered,
is left solely to market mechanisms, when necessary. Beyond their direct
with potentially adverse hysteresis and In recent years, there have been strong socioeconomic impact, if well designed,
cross-border effects. Structural employ- calls for such reforms and the previ- such services and benefits constitute an
ment and social reforms (combined with ous section argued that in a currency investment (see Chapter 1) and contrib-
other types of structural reforms) are union, when adjustment is left to market ute to the prevention of scarring effects.
key to strengthening countries’ capacity mechanisms, the adverse socioeconomic Employment and social protection
impact of temporary asymmetric shocks
61
( ) See, for instance, OECD (2014).
( ) Although it would have been beyond the are likely to be intensified (such as dis- ( ) Commission Recommendation of 3 October
63
62
scope of this chapter to focus also on tributional and hysteresis effects) — 2008 on the active inclusion of people
price stability, financial stability and fiscal risking lasting adverse effects on excluded from the labour market (notified
stability, possible interactions with labour under document number C(2008) 5737), OJ
markets have been briefly mentioned. long-term growth. L 307, 18.11.2008, pp. 11–14.
227
