In countries that made such changes, the labour market is now more responsive to growth,30 and the improved economic conditions have led to gains in employment.31 But alongside structural policies, different layers of protection are necessary to ensure that countries can stabilise their economies during crises.
Without appropriate backstops at the euro area level, individual countries in a monetary union can be exposed to self-fulfilling dynamics in sovereign debt markets. Such overshooting can aggravate adverse debt dynamics in downturns, inducing procyclicality in national fiscal policies, as we saw in 2011-12.