With France and Italy—the eurozone’s second and third biggest economies—either stagnating or contracting, to achieve a convincing recovery will require policymakers to press home their attack on three fronts: structural reform to increase economic flexibility, fiscal easing to stimulate activity, and monetary expansion to support credit growth. On all three fronts they face determined opposition.
- Structural reform: On Sunday President Francois Hollande’s ruling Socialist Party lost control of the Senate to France’s center-right Union for Popular Movement (UMP) party, a development which will only complicate the implementation of reform plans already facing staunch resistance from strikers in the transport, manufacturing and service sectors. Meanwhile Italy’s three most powerful trade unions agreed on Monday to form a united front in opposition to Prime Minster Matteo Renzi’s proposed Jobs Act. Worse, Renzi has failed to win over the left wing of his own party, which accuses him of slavish obedience to Berlin’s policy diktat. Although the party’s senior leadership pledged its support for the bill this week, a possible showdown in the Senate on October 7 could still see key reform proposals significantly watered down.
- Fiscal policy: In recent days both France and Italy have revised their deficit reduction targets. Yesterday French Finance Minister Michel Sapin rejected austerity, saying Paris will not bring its deficit below 3% of GDP until 2017, two years later than it earlier targeted. The Italian government this week also pushed back the date when it expects to balance its books, postponing its target by a year. The two governments face an uphill struggle in selling their delayed targets in Brussels and Berlin, however. The recent appointment of France’s former finance minister, Pierre Moscovici, as Europe’s economics and financial affairs commissioner with the key role of approving national budgets had raised hopes that France and Italy would be given greater flexibility in meeting fiscal targets.
But in a surprise move this week Commission President Jean-Claude Juncker curbed Moscovici’s powers, appointing hawkish Latvian commissioner Valdis Dombrovskis to oversee and sign off Moscovici’s budget approvals. The move was widely seen as aimed at placating opinion in Berlin, where Chancellor Angela Merkel is uneasily watching the rise in popularity of anti-European political part, anti-euro party (AfD). Although AfD is still small, the threat of losing voters to Germany’s Euro-skeptic right will only encourage the chancellor to take a tough line with France and Italy over fiscal policy, especially in the absence of significant progress on structural reform.
