France, Italy Seek Different “Growth” Than Germany

When European leaders speak of “growth,” they can mean very different things.

French president François Hollande greets Italy's prime minister Enrico Letta in Paris, May 1
French president François Hollande greets Italy’s prime minister Enrico Letta in Paris, May 1 (Elysée)

Italy appears to have joined the ranks of European nations calling for an end to austerity with its new prime minister, Enrico Letta, insisting earlier this week that his country had “done its bit” as far as fiscal consolidation was concerned and the emphasis should shift toward implementing “growth policies.”

French president François Hollande agreed, saying, after meeting Letta in Paris on Wednesday, “Europe has to do the maximum it can for growth.”

The French and Italian leaders’ concept of “growth” may be different from the European Commission’s and Germany’s.

European Commission president José Manuel Barroso admitted last month that austerity had “reached its limits” and urged “proper measures for growth,” if combined with what he described as an “indispensable correction in public finances.”

German chancellor Angela Merkel similarly told a news conference in Berlin this week, “Solid public finances are a precondition for growth.” She argued that it was a “misconception” to consider the two at odds and stressed the importance of structural market reforms to improve the competitiveness of Mediterranean Europe.

There has been some fiscal consolidation in France and Italy yet Irish economist Constantin Gurdgiev pointed out on Thursday that government spending relative to gross domestic product has grown in both countries throughout the continent’s sovereign debt crisis. French public spending rose 3.4 percentage points; Italy’s 2.7 during the same period.

Since “austerity” has meant mostly tax increases in these countries, revenue also increased to almost half of economic output. Only in Italy has it actually led to deficit reduction.

Other growth measures advised by the European Commission, or Germany, have hardly been pursued. Whereas Greece, Ireland and Portugal are forced to liberalize their economies in exchange for international financial aid, France and Italy have been able to largely avoid making economic adjustments that should improve their growth prospects.

In both countries, businesses and labor are more heavily regulated than in Germany. Corporate taxes are higher. In Italy, it costs more than the average annual income to start a business while it can take up to two hundred days to complete the necessary licensing requirements. Legally mandated pay and vacation days make especially French workers more expensive than many of their European counterparts, even if they are less flexible and less productive. Italy is among few countries where labor costs have continued to rise during the crisis.

Labor market reforms introduced by Italy’s former prime minister Mario Monti that would have made it easier for firms to hire and fire workers were initially delayed, then watered down under pressure from Letta’s left-wing party and its trade union allies. Monti’s attempts to lift professional restrictions on lawyers, pharmacists and taxi drivers also largely failed.

Both France’s and Italy’s governments still own or finance entire industries in electricity, postal services, railways and telecommunications. There has been no effort to sell stock or privatize companies since the European sovereign debt crises began.

When French and Italian leaders urge more room for “growth” measures, what they probably want is further respite from the eurozone’s strict debt and deficits limits — which they have repeatedly violated in recent years — to avoid deep budget cuts.

Liberal economic reforms, just as important a part of “austerity” as far as Germany is concerned, are unlikely to be enacted, given political and popular opposition. France’s left is ideologically set against liberalization. In Italy, right-wing criticism of “German” policy is more populist but the result is the same: a government unwilling to enact the sort of reforms that would make their economies, indeed, more like Germany’s — and grow.

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