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This paper studies the role of wage moderation and labour and product market regulation for employment creation. To this end, labour demand estimates are presented for the five largest euro area countries at the aggregate level and for three macro sectors: manufacturing, construction and services. Estimates are carried out for individual countries as well as for the pooled group of countries. This paper shows that labour cost moderation generally helps employment creation, notwithstanding the fact that elasticities of employment to labour costs vary across the countries and sectors analysed. It also shows that some key institutional/structural variables add to the explanation of labour demand developments. In particular, in some countries and sectors, our results point to a negative link between employment growth, the unemployment benefit replacement rate and product market regulation.

The euro area has been particularly vulnerable to the shocks resulting from the pandemic and the war – contributing strongly to record-high inflation. This required a fast and decisive monetary policy reaction. The future monetary policy course will depend also on how these shocks, along with the fiscal and structural policies response, will affect the economic and inflation outlook.

This paper provides empirical evidence that supports the view that the quality of institutions is an important determinant of long-term growth in European countries. It shows that an initial high government debt level coupled with institutional quality below the EU average tends to be associated with particularly poor longterm real growth performance. Interestingly, the detrimental effect of high debt levels on long-term growth seems cushioned by the presence of very sound institutions. The paper offers some evidence that sound institutions may be particularly important for long-term growth in countries in which the exchange rate tool is no longer available and less so in countries with flexible exchange rate regimes. The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusions of additional control variables.

This paper shows that initial cross-country institutional differences can explain to a substantial extent the relative GDP performance of European countries since 1995, after controlling for the initial level of GDP per capita and government debt. It shows that improving the quality of institutions could lead to significantly higher per capita GDP. It also shows that an initial government debt level above a threshold (e.g. 60-70%) coupled with institutional quality below the EU average tends to be associated with particularly poor subsequent real growth performance during this period. Interestingly, the detrimental effect of high debt levels seems cushioned by the presence of very sound institutions. This might be because good institutions help to alleviate the debt problem in various ways, e.g. by ensuring sufficient fiscal consolidation in the longer-run, allowing for better use of government expenditures and promoting sustainable growth, social fairness and more efficient tax administration. The results are confirmed across a large sample of countries, also including OECD countries outside Europe. The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusion of additional control variables. Overall, the results tend to support the call for structural reforms in general and reforms enhancing the efficiency of public administration and regulation, the rule of law and the fight against rent-seeking and corruption in particular.

We review the determinants of the discretionary fiscal policy action of governments in the euro area and in other advanced economies during the past 20 years. This is done by estimating fiscal reaction functions using dynamic panel techniques and country-by-country estimates. The results suggest that, on average, discretionary fiscal policy did not deliver economic stabilisation: during good economic times (positive output gaps) it has been on average pro-cyclical both in the euro area and in the other regions. However, the loosening bias during good times has been countered by the presence of efficient public institutions, higher long term interest rates and higher debt-to-GDP ratios. Overall, as a result of various counterbalancing forces, fiscal activism has not been a major feature of policy making in the euro area, nor in other advanced economies during the past 20 years.