The growth impact of structural reforms

The financial and sovereign debt crises have highlighted the need for structural reform. Unemployment rates have risen to dramatic heights in many countries and the duration and depth of the crisis weigh on long-term growth prospects. Low growth could also hamper debt sustainability and have forced more consolidation measures in vulnerable Member States, which have further reduced growth. All this has provided an impetus to carry out reforms to boost growth ñ country-specific recommendations in the European Semester aim to increase competition and reduce labour market rigidities in Member States. This article presents a quantitative model-based assessment of the potential impact of structural reforms in selected core and vulnerable periphery Member States. Using structural indicators of labour and product markets, scenarios in which part of the gap vis-‡-vis best performance is closed show large potential gains in output and employment, raising GDP by 1.5 % to 6 % after five years and in the case of Greece by up to 15 % after ten years. Crucially, while competitiveness gains are smaller under simultaneous reforms, higher demand effects help to support growth in trading partners. GDP spillovers are positive, with growth effects in Member States mutually bolstering each other.