May 29, 2013
The Commission has today released its country-specific recommendations on economic policy. Below, we highlight the most important suggestions made to some of the key eurozone countries.
- According to the European Commission, Spain should “improve the efficiency and quality of public expenditure at all levels of government”. Clearly, this is easier said than done, given the well-known problems the Spanish government is having in trying to rein in regional spending.
- The European Commission also seems to suggest that the 2012 labour market reform – one of the flagship measures adopted by Mariano Rajoy’s government – may need tweaks. In particular, Spain should reform its active labour market policies.
- Spain should also push ahead with the liberalisation of closed professions and improve the business environment in general – for instance by cutting the amount of paperwork, a notorious issue in the country.
- Spain should “further limit the application of VAT rates”. This might be controversial, as the Spanish government has said several times it is opposed to further VAT hikes.
- According to the Commission, the reform of Spain’s pension system should be finalised by the end of the year.
The recommendations for France include quite a few suggestions which may be hard to digest for François Hollande’s socialist government.
- France should do more to cut labour costs, in particular by reducing social security contributions for employers.
- The European Commission says France should adopt new measures by the end of the year to “bring its pension system into balance in a sustainable manner no later than 2020.” The Commission suggests various ways of doing this, including “adapting indexation rules” (remove/reform the link between inflation and pensions increases, in plain English) and raise the retirement age. This is unlikely to go down well in Paris.
- France should improve the business environment and help its firms become more competitive;
- France’s unemployment benefit system should be “urgently” reformed, so that it is sustainable but also “provides adequate incentives to return to work”.
- France should do more to tackle labour market segmentation, and remove “unjustified restrictions in the access to and exercise of professional services.”
As we noted several times, Mario Monti’s technocratic government did a good job in cutting Italy’s deficit – less so in implementing structural reforms. Here is what the European Commission would like Italy to do:
- Make sure that the reforms initiated by Monti’s government are properly implemented (some of them require enacting legislation).
- Push ahead with labour market reform. Wages should be better aligned to productivity, and more should be done to bring young people and women into work.
- The tax burden should move from labour and capital to consumption, property and the environment. Sure enough, this is going to be controversial, given that the new Italian government is trying to avoid a VAT increase scheduled by its predecessor for 1 July 2013 and is also considering scrapping a property tax on first homes.
- Continue with liberalisation of the services market and opening up of closed professions – which seems to be an issue affecting all the Mediterranean eurozone countries.
- Needless to say, all this has to happen without breaching the EU’s deficit limit of 3% of GDP and in parallel to a reduction of Italy’s gigantic public debt (forecast to be over 132% of GDP in 2014).
- As we have previously warned, the Commission flags up the risk of the heavily indebted corporate sector and how this in closely intertwined with the fate of shaky banks.
- Of the largest domestic banks the Commission warns, “Their dependence on the state for capital is a substantial threat to the economy” and that “Further recapitalisations are foreseen in the stability programme”. The Commission does not give an estimate of the recap needs but it’s clear there is concern that it could impact the Slovenian economic situation. To this end it also called for an independent review of the Slovenian banking sector.
- Government growth forecasts are seen to be overly optimistic, particularly next year’s, this could be further hampered by the banking sector.
- Significant push needed on cutting wages and increasing productivity, true in most places but especially on Slovenia when costs have been on a rapid rise in recent years.
- Need to push on with privatisations and come up with a clear policy framework to do so. More structure needed, particularly if investors are to be convinced.
- “Further reform efforts are required to improve the sustainability of pension expenditure in the long-term, including through aligning the statutory retirement age with gains in life expectancy and by further restricting early retirement.” – numerous concerns expressed about long term liabilities of the state.
- “Germany should do more to open up their services sector by removing unjustified restrictions and barriers to entry, thereby leading to lower price levels, making services more affordable for lower income groups.” – particularly calls for the opening up of public procurement, professional services and retail services.
- “Sustain conditions that enable wage growth to support domestic demand.” – although it sounds innocuous this could be very controversial in Germany. It essentially seems to endorse the calls for Germany to spend more and allow inflation to help rebalance the eurozone. Germans fear of inflation is well known but they also fear a decrease in the competitiveness.
Some press reports were (perhaps a bit hurriedly, given how the EU works) suggesting that Belgium could today become the first eurozone country to face sanctions for missing its deficit targets. But EU Economic and Monetary Affairs Commissioner Olli Rehn just told journalists in Brussels that “it would be neither fair or legally sound to apply fines retroactively”, so Elio Di Rupo & co. have been let off the hook for now. These are the key recommendations:
- Transpose the ‘balanced budget rule’ enshrined in the fiscal treaty into national law;
- Step up efforts to “close the gap between the effective and statutory retirement age”. In other words, the European Commission thinks there are too many early retirements in Belgium at the moment. On pensions, Belgium should also “accelerate the adoption of a decision to link the statutory retirement age to life expectancy” – which could mean further retirement age increases in future;
- Less taxes on labour and better alignment of wages to productivity to restore competitiveness;
- Remove barriers in the services sector.
So, for all the talk of this being the ‘end of austerity’ or ‘austerity in retreat’, is much really changing? Sure, there is some tinkering with timelines for deficit reduction (Spain, France and others have been given more time to cut public deficit), but ultimately the eurozone is still going along the same policy path – just slightly more slowly. Cases in point are the countries above, since the clear themes running through all of them are the need for structural reform, welfare reform, fiscal consolidation and liberalising the economy. These are things which have long been advocated and are clearly necessary. The question remains whether they can all be done at the same time by a group of countries which are closely interlinked, and many of which are currently in recession.Open Europe blog team