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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