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Mrs. Esther Perez Ruiz and Mr. Uffe Mikkelsen
This paper investigates the asymmetries in trade spillovers from sector-specific technology shocks in China to selected euro area countries. We use a Ricardian-gravity trade model to estimate sectoral competitiveness in individual euro area countries. Simulations on the impact of productivity shocks in Chinese textiles and machinery suggest that the required adjustment in wages, prices, and factor re-allocation is widely heterogenous across euro area countries on accounts of their different specialization patterns. This raises the question of the distribution of gains and losses from external trade shocks.
Miss Catriona Purfield and Mr. Christoph B. Rosenberg
The paper traces the Baltics’ adjustment strategy during the 2008-09 global financial crisis. The abrupt end to the externally-financed domestic demand boom triggered a severe output collapse, bringing per capita income levels back to 2005/06 levels. In response to this shock, the Baltics undertook an internal devaluation that relied on unprecedented fiscal and nominal wage adjustment, steps to preserve financial sector stability as well as complementary efforts to facilitate voluntary private debt restructuring. One-and-half years on, the strategy is making good progress but not yet complete. Confidence in the exchange rate was maintained, the banking system was supported by its parent banks, external imbalances and inflation have largely disappeared, competitiveness is improving, and fiscal deficits are gradually being brought back towards pre-crisis levels. However, amid record levels of unemployment, further reforms are needed to foster a return to more balanced growth, fiscal sustainability, and a healthier banking system.
International Monetary Fund. European Dept.
This Selected Issues paper explores the links between wage policies, non-wage cost developments, and competitiveness. A series of program-era policies helped to partially reverse this trend, including labor market policies that cushioned the effect of the crisis on employment and brought unit labor costs broadly in line with trading partners. However, the resulting more competitive wage structure only partly translated into price adjustments due to product market rigidities (with firms retaining some profit margin) and rising non-wage cost factors (e.g., taxes and financing costs). This incomplete internal devaluation and subsequent low productivity gains reinforce the view that Greece has further to go to address its external imbalances. However, labor policy reversals following program exit in August 2018 threaten this objective. The paper shows that Greece must preserve its labor cost competitiveness while increasing efforts to facilitate price adjustment in product markets and reduce non-wage costs.
International Monetary Fund. European Dept.
This Selected Issues paper presents a preliminary assessment of recent labor market reforms in Spain, where the 2012 labor market reforms are making a difference. Wage moderation is contributing to a visible recovery in headline employment growth, and the reforms have made the labor market more resilient to shocks. Some evidence exists that the contribution of temporary contracts to employment growth has started to decrease. However, the reliance on temporary workers remains strong overall, and further structural reforms will be required to reduce the still very high level of long-term, structural unemployment.
International Monetary Fund
This paper reviews economic developments in the Republic of Belarus during 1994–96. After several years of efforts at structural reform and stabilization during which little progress was made, following presidential elections in mid-1994, the authorities adopted a wide-ranging adjustment program aimed at reducing inflation, increasing the market orientation of the economy, and creating the conditions for a resumption of economic growth. The reform program was reinforced in the first half of 1995, and key macroeconomic data for 1995 show that the program has had some success.
International Monetary Fund. European Dept.
This paper discusses Greece’s Fourth Review Under the Extended Arrangement under the Extended Fund Facility, and Request for Waivers of Applicability and Modification of Performance Criterion. The economy is rebalancing, but it continues to do so through recession, not productivity-enhancing structural reform. Domestic demand continues to fall albeit at a moderating pace, and import compression has resulted in a further shrinking of the current account deficit. The large output gap and high unemployment rate are exerting downward pressure on wages, and the competitiveness gap in unit labor cost terms has narrowed further. Product prices are also easing. Sentiment indicators have improved, but the political crisis has had a dampening effect.
Mrs. Esther Perez Ruiz and Mr. Uffe Mikkelsen

industries whose production value is higher at international prices. The economy-wide nominal wage reductions needed to regain competitiveness are estimated at 0.9 percent in the euro area for a shock in textiles. Wage declines are more marked in textile exporting countries, reaching 1 ½ on average in Portugal, Italy, Spain and Greece, against only 0.4 percent in Germany. If the productivity shock occurs in machinery, euro area nominal wages decline by 1.3 percent relative to baseline. The burden of adjustment now falls on Germany, Austria and France where wage losses

International Monetary Fund. European Dept.

procyclical or, in the case of real wage growth (not shown), acyclical in downturns. In other words, wages are overall downward rigid, consistent with the sector-level results. Before and after the reform . The downward rigidity of wages is driven by the pre-reform period. Allowing slope coefficients to differ pre and post-reform suggest that the change in wage dynamics after the reforms if statistically significant. After the reform, nominal wages decline in response to negative employment growth instead of staying constant as before and they even decline following

International Monetary Fund. European Dept.

payment with productivity. The reforms were adopted in a staggered approach over 2011–13, though with delays (see Annex 1 ). 8 Reforms aimed at increasing labor market decentralization and flexibility. As a result, sectoral/occupational agreements declined, while firm-level agreements became more prominent. This allowed businesses to also adjust through prices (instead of just volume, i.e. layoffs), reducing economy-wide wage costs (following the decline in public wages). Private sector nominal wages declined by 20 percent from 2009 to 2015 while the ULC-adjusted real

Miss Catriona Purfield and Mr. Christoph B. Rosenberg

wages declined, further denting private consumption. Exports . The collapse of global trade severely impacted the Baltics because some of their primary trading partners—the Nordic countries and Russia—had also been disproportionally hard hit by the crisis. The Baltics’s REERs appreciated as many trading partners’ currencies depreciated sharply against the euro. While the decline of exports was steep (some 27 percent between Q3 2008 and Q3 2009), their overall contribution to the drop in GDP was less than domestic demand. Figure 3. Output Declines in the World