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Macroeconomic Policy Advice and the Article IV Consultations: A European Union Case Study

Macroeconomic Policy Advice and the Article IV Consultations: A European Union Case Study

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This paper raises questions as to whether the IMF’s policy advice has contributed to the ongoing economic problems in Europe.
This paper raises questions as to whether the IMF’s policy advice has contributed to the ongoing economic problems in Europe.

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Published by: Center for Economic and Policy Research on Jan 28, 2013
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Following three years of rapid growth, the Czech economy was expected to slow sharply in 2009 (p.
3). In the 2008 Article IV consultation, IMF staff noted that “with low government debt and limited
macroeconomic imbalances, there would be room for a discretionary fiscal stimulus under a more
adverse scenario” (p. 4). But “over the medium term, the momentum of reforms will need to be
restored to address long-term challenges and raise potential growth” (p. 4). The report mentioned

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improving work incentives through reforms of the labor market and the tax-benefit system, but did
not provide specifics (p. 4). Monetary policy was viewed as being on the right track. “With inflation
likely to fall below the CNB’s target of 3 percent…, scope exists for further easing” (p. 17). IMF
staff agreed with the new inflation target of 2 percent in 2010, noting it aligns with the ECB’s

inflation target, and would help the Czech Republic meet the Maastricht criteria for euro adoption
(p. 19).

The 2010 Article IV consultation focused on “the urgency of fiscal adjustment” highlighted by the
crisis (p. 4). The report states: “During the years of rapid economic growth the opportunity for more
fundamental fiscal consolidation was missed” (p. 4). Moving forward, “fiscal consolidation… should
focus on both expenditure and revenue measures.” But IMF staff noted “international experience
suggests that expenditure-based fiscal consolidations tend to be more durable” (p. 5). Specific
recommended expenditure measures were: “reorganizing public institutions and positions would
help reduce the overall wage bill;” “introducing means-testing for social benefits,” and “improve
efficiency of public services.” Revenue measures included “eliminating tax exemptions and
loopholes” (p. 5). IMF staff stressed that “rationalizing mandatory expenditures and the generous
welfare system is unavoidable” (p. 5). The staff recommended pension reforms that would “better
link contributions to benefits and further increas[e] the effective retirement age;” “a tightening of
the criteria for disability pensions,” and “moving to a fully funded second-pillar private pension
scheme” (p. 5, 33). The staff found that “fundamental health care reforms are equally important” (p.
5) and recommended “reduc[ing] the broad coverage of publicly provided and insured services and
allow greater scope for private sector provision of health services;” and introduc[ing] voluntary

insurance, personal health accounts, and choices in health benefits plans to ensure long-term
financial sustainability of the health care system” (p. 6).

The staff predicted that “the adverse effects of the crisis are likely to be long lasting,” and argued
that “swift implementation of growth-enhancing structural reforms becomes critical” (p. 6).
Specifically, “promoting work incentives through changes to the tax-benefit system, improving labor
market flexibility and the quality of education, and further reducing barriers to business entry and
exit” (p. 6). Finally, a shift in monetary policy was recommended. “The easing cycle of monetary
policy seems to have come to an end. The supportive monetary policy stance… should shift to
tightening as the recovery gathers momentum” (p. 4).

By 2011, IMF staff noted that “the Czech economy ha[d] rebounded from the downturn owing to
its strong fundamentals and the global recovery, but faces a number of policy challenges” (p. 18).
Therefore, the IMF argued that “wide-ranging structural reforms are needed to buttress growth” (p.
19). Specific structural reforms should focus on “increasing labor participation and labor market
flexibility; enhancing efficiency in higher education, R&D, and the public sector; and further
improving the business climate” (p. 19). Moreover, “staff urged the authorities to identify and put in
place a credible package of medium-term consolidation measures… In staff’s view, rationalizing
entitlements and the generous welfare state is unavoidable to ensure durability of fiscal adjustment”
(p. 11). The consultation report reiterated the consolidation measures proposed in the previous

consultation. In terms of monetary policy, IMF staff recommended “maintaining accommodative
monetary policy until the negative output gap narrows” (p. 1). but warned “a rise in inflation
expectations or a rapid improvement in labor markets would warrant earlier action” (p. 19).

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