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Structural Reforms in the EU and Political Myopia in Economic Policies

  • Alho, Kari E.O.
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    The paper considers economic reforms in the EU using an economic-political model which captures the possible myopia in economic policies, and analyses reforms in taxation, the welfare state, and in the labour and product markets. We show that high taxes and an extensive welfare state are likely to be the case under myopia as compared to the social optimum. We also consider the interaction between the reform activity and the Stability and Growth Pact, which hampers reforms in tax policies, but is conducive to reforming the wel-fare state, the product and labour markets, although the magnitude of these impacts is not marked under the actual tightness of the Pact. We also find that economic and political considerations tend to favour the emphasis to be put on reforming the goods market, instead of the labour market, which has also broadly speaking been the case in reality in the EU. Econometric evidence presented in the paper also supports these results. Coordination of re-forms in the EU is most important in the case of the product market, but not in other fields.

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    Paper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 1050.

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    Length: 30 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:rif:dpaper:1050
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    1. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, edition 2, number 9780199210695, March.
    2. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
    3. Hatzius, Jan, 2000. "Foreign direct investment and factor demand elasticities," European Economic Review, Elsevier, vol. 44(1), pages 117-143, January.
    4. Alho, Kari, 2002. "The Equilibrium Rate of Unemployment and Policies to Lower It: The Case of Finland," Discussion Papers 839, The Research Institute of the Finnish Economy.
    5. Bentolila, Samuel & Saint-Paul, Gilles, 2000. "Will EMU Increase Eurosclerosis?," CEPR Discussion Papers 2423, C.E.P.R. Discussion Papers.
    6. Lars Calmfors & Asa Johansson, 2006. "Nominal Wage Flexibility, Wage Indexation and Monetary Union," Economic Journal, Royal Economic Society, vol. 116(508), pages 283-308, 01.
    7. Roel M. W. J. Beetsma & Xavier Debrun, 2003. "Reconciling Stability and Growth; Smart Pacts and Structural Reforms," IMF Working Papers 03/174, International Monetary Fund.
    8. Sébastien Jean & Giuseppe Nicoletti, 2002. "Product Market Regulation and Wage Premia in Europe and North America: An Empirical Investigation," OECD Economics Department Working Papers 318, OECD Publishing.
    9. Peter Hoeller & Claude Giorno, 2006. "Nothing Ventured, Nothing Gained: The Long-Run Fiscal Reward of Structural Reforms," OECD Economics Department Working Papers 493, OECD Publishing.
    10. Alho, Kari & Erkkilä, Mika & Kotilainen, Markku, . "The Economics and Policies of Integration - a Finnish Perspective," ETLA A, The Research Institute of the Finnish Economy, number 22.
    11. Kotilainen, Markku, . "Economic Shocks, Progressiveness of Taxation, and Indexation of Taxes and Public Expenditure in EMU," Discussion Papers 1011, The Research Institute of the Finnish Economy.
    12. Marco Buti, 2006. "Will the new stability and growth pact succeed? An economic and political perspective," European Economy - Economic Papers 241, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    13. Bovenberg, A Lans & de Mooij, Ruud A & Graafland, Johan J, 1998. "Tax Reform and the Dutch Labour Market: An Applied General Equilibrium Approach," CEPR Discussion Papers 1983, C.E.P.R. Discussion Papers.
    14. Sibert, Anne, 1999. "Monetary Integration and Economic Reform," Economic Journal, Royal Economic Society, vol. 109(452), pages 78-92, January.
    15. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
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