What is the appropriate role of structural reforms in E(M)U deepening?

Can flexibility-enhancing “structural” reforms at the national level substitute institutional reforms at the EU level, or are they rather complementary? In this article, we first look at more broadly defined structural reforms of both institutions and product and factor markets through the lens of economic theory – and also review empirical evidence. In particular, we discuss if and how reforms depend on macroeconomic conditions and policies. We then analyze the role that reforms play for the proper functioning of Economic and Monetary Union (EMU) and for fostering the well-being of EU citizens. In a nutshell, there is no one-size policy framework that fits all. The optimal set of structural policies for an economy depends on the quality of its institutions as well as its factor endowment, level of development and/or geographical location. We argue for extending the structural reform paradigm beyond “defensive” (flexibility-enhancing) toward “upgrading” (productivity-enhancing) instruments. Design, packaging, timing and sequencing will make or break such reforms. In general, reform ownership based on broad consensus is essential at the national level. EU involvement, however, would only be justified in the case of cross-border spillovers.