The second dimension relates to ongoing efforts of the Euro area to implement structural reforms in the labour and good markets. These reforms aim to make these markets more flexible, strengthening the Euro area’s competitiveness and its resilience to shocks. Several such reforms have been already implemented and many more are to come.
Subsidizing this loss from tax revenue generally will not help unless the tax leaves all marginal allocation decisions unchanged. Even then, subsidies may distort the subsidized firm’s behavior leading to excessively high costs of production. Because of the problem created by economies of scale, rates must be guided by a set of principles that are broader than marginal cost pricing.