DP6875 Defying the 'Juncker Curse’: Can Reformist Governments Be Re-elected?

Author(s): Pietro Biroli , Marco Buti , Alessandro Antonio Turrini , Paul Van Den Noord

Publication Date: June 2008

Keyword(s): Economic and Monetary Union , electoral cycle , financial markets , structural reforms

JEL(s): E61 , H30 , H60 , H70

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6875.asp.asp

European policy makers, notably in the euro area, seem to take for granted that the electorate will punish them for bold reform in product and labour markets. This may explain why progress in the euro area has been comparatively limited. This paper posits and, using a dataset for 21 OECD countries, shows that this fear of electoral backlashes is unfounded, provided that financial markets work well. The mechanisms involved are relatively straightforward: well functioning financial markets "bring forward" future yields of structural reform to the present, thus permitting to overcome possible short-run costs. As a result, the electorate tend to reward, not punish, reformist governments. This has important implications for the design of structural reform packages, with financial market reforms being an essential ingredient beside product and labour market reforms.