The Macroeconomics of Europe 2020 Reform Strategy and the Potential Effects on the Italian Economy

This paper studies the potential effects on the Italian economy of various reform packages in the spirit of the Europe 2020 strategy. Using the European Commission’s model QUEST III with R&D calibrated to match important features of the Italian economy, we provide a quantitative assessment of the possible effects in terms of growth, employment, sustainability of public finances and external imbalances of several knowledge-oriented, labor and product market reforms. We observe that labor market reforms are likely to bring about sizable long-run gains in output and employment and that most of these gains accrue to low skilled workers, while real wages tend to increase especially for high skilled workers. Some interventions are likely to have some transitional costs as they give rise to a temporary decline in consumption and/or employment, but the simultaneous implementation of all reforms may tend to mitigate these effects already in the medium run. As a result of higher growth, in the no costly reform scenarios, the public debt-to-GDP ratio declines substantially. However, the analysis shows that non-budget neutral structural reforms may have considerable side effects on the external imbalances.