Strengthening the Euro Area: The Role of National Structural Reforms in Building Resilience

Abstract

The creation of the euro area two decades ago played a central role in boosting European integration, but cross-country differences in economic resilience—an economy’s ability to withstand and adjust to shocks—persist. This reflects in part the lack of independent nominal exchange rates and monetary policy at the national level and the consequent greater reliance on other mechanisms to adjust to shocks and mitigate their human and social costs. Union-wide architectural changes can help foster greater international risk sharing and soften the effects of shocks. However, because reforms at the center cannot insure against all shocks—especially country-specific shocks—national policies have a vital role to play. This Staff Discussion Note investigates whether and how growth- enhancing national structural reforms of labor and product market regulations, as well as corporate insolvency regimes, can enhance euro area member states’ resilience to shocks, helping safeguard people’s income and living standards.