Unwilling to Reform, France, Italy Miss Budget Targets

Slow to structurally overhaul their economies, France and Italy continue to miss their fiscal targets.

French president François Hollande speaks with Italian prime minister Matteo Renzi in Paris, March 15
French president François Hollande speaks with Italian prime minister Matteo Renzi in Paris, March 15 (Palazzo Chigi)

France and Italy on Wednesday announced separately that they would fail to meet their budget targets before 2017 in a setback for the austerity and economic liberalization agenda of Europe’s largest economy, Germany.

In a statement accompanying its draft budget, the French government said the pace of deficit reduction had been “adapted” to economic circumstances. “No further efforts will be demanded of the French,” it said, “because, while the government accepts budgetary seriousness to put the country back on track, it rejects austerity.”

The French economy expanded just .2 percent last year after zero growth in 2012, the year Socialist Party leader François Hollande was elected president. The national statistics agency forecast .7 percent growth for 2014 this summer while the government had based its fiscal plans on 1 percent growth.

As a result of higher borrowing, the French national debt topped €2 trillion earlier this year, close to the size of France’s annual economic output.

Previously, France had promised its European partners to bring its shortfall below the 3 percent treaty limit by next year, a deadline that had already been extended from 2013.

Italy, the third largest economy in the eurozone after Germany and France, also had to revise its growth forecasts downward. It expects a contraction of .3 percent this year.

Pier Carlo Padoan, the finance minister, said on Tuesday he expected a third straight year of recession in 2014. While Italy will honor its pledge to keep its deficit below 3 percent of economic output, bringing the budget into balance in structural terms would be delayed by a year until 2017, he said.

The announcements are a setback for Germany which has insisted on fiscal discipline throughout the European sovereign debt crisis. “We are not at the point where we can say the crisis is fully behind us,” Chancellor Angela Merkel told a business conference in Berlin. “Therefore, it is now important for everyone to fulfill their commitments and obligations in a credible way.”

It doesn’t look like France and Italy will. They have made little haste with implementing the sort of structural economic reforms Germany and the European Commission recommend.

Despite what the French government describes as an “unprecedented” €50 billion in spending reductions between now and 2017, public-sector spending will still rise .2 percent over the same period and account for more than half of gross domestic product. The French state will still employ one in five workers and own or partially own entire industries, including electricity, postal services, railways and telecommunications. There has been no effort to sell stock or privatize companies in France, nor has there been in Italy.

Despite repeated admonitions from Berlin and Brussels, France has made virtually no effort to reduce its labor costs even if, at €34 per hour, they far exceed the European average of €23. They are particularly burdensome because nonwage costs, including high social contributions for employers, make up a third of the average salary.

France’s 34.4 percent corporate tax rate is also more than twice as high as Germany’s 15.8 percent rate.

Italy is among few countries where labor costs have continued to rise during the crisis and it costs more than the average annual income to start a business there.

Prime Minister Matteo Renzi, a social democrat, has faced down opposition from within his coalition over labor reforms that aim to close the divide between full-time workers who are almost impossible to lay off and mostly younger workers on insecure contracts. But those changes only apply to new hires and will do little to open up closed professions, such as lawyers, notaries, pharmacists and taxi drivers, that are making it extremely difficult for many young Italians to start a career.

Italy’s budget outlook is somewhat more sustainable than France’s, thanks in no small part to the austerity policies of one of Renzi’s predecessors, Mario Monti. He cut public-sector pay and subsidies to local governments, raised property and sales taxes and increased the retirement age. But even he failed to thoroughly liberalize the Italian economy.

In France, pension reforms enacted under Hollande’s conservative predecessor, Nicolas Sarkozy, were even rolled back.

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