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Correcting current account imbalances:
The role of labour market settings
Alessandro Turrini
European Commission, DG ECFIN
1
Recommendations in labour market
field linked to imbalances
EU semester (AGS story line)
Programme countries
MIP (?)
2
Rationale
Durable correction of current account imbalances
requires adjustment in relative prices; no nominal
exchange rate adjustment within monetary unions
There are limits to market-based adjustment
– Relative wages respond to relative unemployment, not
to current accounts
– Downward adjustment could be slow, and
unemployment protracted
Externalities (good functioning of monetary union is
common concern)
3
Surveillance issues
Identification of potentially harmful
developments
Average %change in ULC based REER 1999-2007
-2
-1
0
1
2
IRL
ESP
ITA
GRC
PRT
NLD
FRA
BEL
FIN
SVN
AUT
DEU
-1
0
1
Average change in current account / GDP 1999-2007
2
4
Surveillance issues
Identification and implementation of policy
response
– to affect labour cost levels (e.g., « fiscal
devaluation »)
Fiscal implications
Calibration of response
– to enhance labour market response (wage
setting reforms)
Role of governments vs. social partners
Effect on outcomes not obvious to assess
Surveillance issues
Are country experiences easily exportable?
Nominal compensation per employee dynamics before
and after the crisis (average annual growth, %)
35,0
30,0
2008Q2-2009Q2
25,0
2009Q3-2010Q4
20,0
2011Q1
2006Q1-2007Q4
15,0
10,0
5,0
0,0
-5,0BG
PL
LT LV ES EE
SI SK CY EL MT HU PT CZ DK
FI NL BE AT -17
EA
IT LU FR SE DE UK
IE EU
-10,0
6
-15,0
Wrapping up
Structural aspects matter for the working of monetary
unions, including concerning labour market institutions
Externalities at play
– « fiscal devaluations »
– Improved market response
Surveillance and policy implementation issues not minor
Reform action intensified after the crisis
7