Structural Reforms for the End of Fiscal Policy
The push for austerity came in the same package with structural reforms, or measures that the European Commission saw as adequate to “address impediments to the fundamental drivers of growth by unshackling labor, product and service markets to foster job creation, investment, and productivity ... and to enhance an economy’s competitiveness, growth potential and adjustment capacity.”18 Increasing competition in product and labor markets, with a bow to innovation, had been a critical aspect of the EU Lisbon Agenda, but structural reform gained even greater importance when it became obvious that austerity ended up increasing, rather than decreasing, public debt levels and, with them, the sought- after investor confidence.19
With fiscal policy essentially outlawed, structural reforms became the only growth agenda. Consequently, they became embedded in the main coercive devices of the EU: bailouts, ECB threats of discontinuing sovereign bond market interventions, “excessive deficit procedures” and exposure to name- and-shame processes within the so-called European Semester (de la Porte and Heins 2016).
The rationale for structural reforms has been that increased competition in labor and product markets would reduce the macroeconomic imbalances between the periphery and the core of the EU because these reforms would trigger a “real devaluation” of peripheral economies chock-full of institutional rigidities, thus shrinking their competitiveness gap (Blyth 2013; Armingeon and Baccaro 2012). By increasing external aggregate demand, internal devaluation acts as an external demand-side stimulus. Moreover, echoing rational expectation theory, it was argued that such reforms would also boost expectations about future growth prospects, while stimulating current demand through wealth effects (Eggertson et al. 2014). As a research team headed by the IMF chief economist made clear (Blanchard, Jaumotte, and Loungani 2014), internal devaluation was in fact mostly about wage cuts, a point reinforced in the case of Spain by star economist Jordi Gall (2010).
