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21 Feb 2013
Forex Flash: Eurozone remains optimistic despite reform challenges – Goldman Sachs
According to the Economics Research Team at Goldman Sachs, “Our analysis has highlighted the potential medium-term benefits of successful structural reform. Implementing such reform may be politically challenging, notwithstanding its economic benefits. However, our results suggest that, somewhat paradoxically, the present context gives the Euro area periphery as good a window of opportunity as previous episodes of success to undertake structural reforms and support the real exchange rate adjustments that are still needed. The climate of economic and political difficulty reinforces the need for reform and creates the pressure to undertake difficult changes.”
That being said, while the expected boost to growth can be substantial, there are nuances in terms of which reforms are more likely to pay off higher and faster. The pending reforms in many DMs are not the kind of low hanging fruit that achieves quick or easy results. Reforms in product and labor markets of the type the Euro area requires will not come easy, and if they do, their benefits are likely to build up gradually.
“Our analysis suggests that structural reforms are generally most likely to be successful when countries have both a set of institutional factors that help support the implementation of reforms and strong economic pressures to make difficult changes. On that basis, the conditions for reform in the Euro area look relatively good. Based on past experience, despite – and perhaps because of – the difficult starting point, we think these structural reforms have a reasonable chance of success.” they add.
That being said, while the expected boost to growth can be substantial, there are nuances in terms of which reforms are more likely to pay off higher and faster. The pending reforms in many DMs are not the kind of low hanging fruit that achieves quick or easy results. Reforms in product and labor markets of the type the Euro area requires will not come easy, and if they do, their benefits are likely to build up gradually.
“Our analysis suggests that structural reforms are generally most likely to be successful when countries have both a set of institutional factors that help support the implementation of reforms and strong economic pressures to make difficult changes. On that basis, the conditions for reform in the Euro area look relatively good. Based on past experience, despite – and perhaps because of – the difficult starting point, we think these structural reforms have a reasonable chance of success.” they add.