Italy appears to have joined the ranks of European nations calling for an end to austerity with its new prime minister, Enrico Letta, insisting that his country has “done its bit” as far as fiscal consolidation goes and the emphasis should now shift toward implementing “growth policies.”
French president François Hollande agrees, saying, after meeting with Letta in Paris, that “Europe has to do the maximum it can for growth.”
The French and Italian leaders’ concept of “growth” is different from the European Commission’s and Germany’s, though.
Limits
European Commission president José Manuel Barroso recognizes that austerity has “reached its limits” and urges “proper measures for growth,” if combined with what he describes 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 believes it is a “misconception” to consider the two at odds and stressed the importance of structural market reforms to improve the competitiveness of Mediterranean Europe.
Some austerity
There has been some fiscal consolidation in France and Italy, yet Irish economist Constantin Gurdgiev points out 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, revenue also went up to almost half of economic output. Only in Italy has it actually led to deficit reduction.
Reforms
Other growth measures recommended by the European Commission and 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 would 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 and it can take up to 200 days to complete the necessary licensing requirements.
Legally mandated pay and vacation days make 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 reforms introduced by Italy’s former prime minister, Mario Monti, would have made it easier for firms to hire and fire workers, but they 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 failed.
Both France’s and Italy’s governments own or finance entire industries in electricity, postal services, railways and telecommunications. There has been no effort to sell stock or privatize companies.