ETLA Discussion Papers, The Research Institute of the Finnish Economy (ETLA) 1050
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 welfare 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 reforms in the EU is most important in the case of the product market, but not in other fields.