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Progress on Eurozone structural reforms

    The Eurozone crisis has given the EU a near impossible task: to identify a common interest among a set of increasingly heterogeneous nation states. Consequently, the economic union that the EU so desperately tries to promote is fragmenting: the UK electorate has called for an EU referendum and German taxpayers are no longer willing to underwrite Greek bonds without guarantee of debt repayment. Though a majority of the 28 member states share the belief that structural reform is necessary, the implementation and nature of these reforms has been hugely divisive. Angela Merkel fervently argues for market liberalising measures along with rapid deficit reduction. She has faced some opposition, most notably from Greece’s Syriza party before they begrudgingly agreed to a strict reform package. Amid the ‘Grexit’ coverage that has engulfed the media you would be forgiven for feeling pessimistic about economic progress in Europe. However, one must not overlook the promising, albeit modest, recovery that is underway in other parts of the continent.


    Mariano Rajoy, the Spanish Prime Minister, has led his country into a number of economic reforms that have sought to encourage enterprise and revitalize the labour market: corporate income tax has been lowered from 30% to 28% and is projected to be lowered even further to 25% by 2016 and the severance pay of dismissed workers has been reduced. As the fourth largest economy in the Eurozone the revival of Spain’s economy is particularly important. They appear to be yielding some positive results: the government’s promise to ease the process of registering new companies has been realized: the entry rate of small firms in the retail sectors, from 9.4% to 11.7% between 2010 and 2013. In addition, the length of insolvency proceedings has also been substantially reduced from an average of more than 2.5 years to just one year. However, it is important to put the Spanish recovery into perspective, not all of the statistics are quite so favorable: the budget deficit was 5.8% of GDP last year and it is forecasted to be 4.5% this year and unemployment is still alarmingly high at 22.5% in June, only exceeded by Greece. The Spanish economy may be growing fast, but it still has a long way to go.


    As the world’s focus was on Greece, no country looked on quite so intently as the country burdened with the second highest debt in the Eurozone, Italy. The Italian Prime Minister, Matteo Renzi, has introduced increased access to credit for small firms, a cut in regional tax on company turnover, fiscal incentives for employers in a new labour reform and €80 monthly cuts to the tax bill of lower-paid workers. Labour markets are becoming more flexible and energy prices have fallen. Moreover, the cost of borrowing is close to the cost of borrowing in Germany, the strongest economy in the Eurozone, which is indicative of investors’ faith in the repayment of Italian debt. But, like Spain, there are some worrying underlying factors: the Italian debt to GDP ratio currently stands at 132.1% and it is projected that it will continue to grow. If it fails to trim its deficit to the European Commission’s standards then it must increase VAT by €16 billion euros next year. A measure that could deter much needed consumption and shrink the economy by 0.7%.


    Emmanuel Macron, the French Economy Minister, has forced a strict package of economic reforms through parliament without a vote after failing to convince it of the merits of market deregulation. The eponymous ‘Macron Law’ aims to liberalise the notoriously well protected French economy to quell France’s ballooning budget deficit and unemployment. The reform package has made it easier to lay-off employees, liberalised Sunday trading, put measures in place to accelerate labour tribunal hearings and limit redundancy payout. These reforms are a huge deviation from the status quo. Previously, Hollande has depended almost exclusively on tax increases to clear the budget deficit: the overall tax take has risen from 44% of GDP in 2011 to 47% in 2014 which cramped growth even more. Refreshingly, the ruling socialist government is now pushing ‘business-friendly’ politics to kick start job creation and economic growth. Broadly speaking, the pressure on the public finances is easing and the economy looks on track to shrink its deficit to below 3% of GDP by 2017.

    Though a cheaper euro, lower oil prices and lower interest rates have stirred the European economy, structural reforms promoting market liberalisation are also beginning to give traction to Europe’s recovery. Greece’s future may be uncertain but many other economies are starting to show real promise. At least in part, these gradual improvements must be the result of policy changes; although the returns to policies will take years to be seen. Nevertheless, if the Eurozone is to travel further along the road to recovery, then further and deeper structural reforms are necessary. 

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