France might do better in the circumstance to follow the lead set by Italy and other members of Europe’s beleaguered periphery. These governments, now convinced that the old ways cannot work but also fretful about the effects of austerity alone, have begun to take more fundamental, concrete steps to induce growth even as they have reined in their budgets. Following the pattern of German reforms, set some years ago under then Chancellor Gerhard Schröder, these nations have begun the difficult task of reversing those past policies that hindered growth by rendering their labor markets inflexible.
The reforms relax rules on hiring and firing, pensions, hours, terms of contracts, and collective bargaining, all of which in the past have reduced efficiency and productivity by interfering with companies’ abilities to secure the best employees and cope with the vicissitudes of the economic cycle. The progress they have made, given the vested political interests in those old labor rules, is remarkable. Clearly the crisis has acted as a powerful lever. The last two times Italy tried to relax its restrictive labor laws, in 1999 and again in 2002, the Red Brigade murdered the leading lights of reform. This time not even all the unions opposed the reform. Spain, too, seemingly against the odds, has moved similar legislation, as have Portugal and even Greece.
Labor law is not the only area inviting such structural reform. Relying on International Monetary Fund (IMF) research, these countries are also considering relief for what the IMF calls “excess product market regulation.” Calling attention to the less-than-well-thought-out rules across the entire European Union (EU), this research shows how restrictions on product design, overzealous licensing and limits on the location, size and nature of facilities have made for inefficient uses of both physical and financial capital as well as labor. The IMF’s conclusion, that those nations with the fewest such strictures have income levels 5 percent above others, has impressed, and these nations are now considering reforms in these areas.
France has not even begun to talk about such fundamental reform, in labor markets or elsewhere. In this latest effort, the government refused even to consider a relaxation in the country’s strict 35-hour work week. If it had proposed something substantive and concrete, as Italy, Spain, and others have, Hollande’s popularity might not have improved, but doubtless the rating agencies would have taken note. They might still have downgraded France, but they might have kept the country off watch for another downgrade. More fundamentally still, such measures would have offered France, as they have Italy, Spain, and these other economies, a way to pursue growth even as the authorities also implement needed budget discipline.
France, instead of its cosmetic gestures, needs an alternative to both the fiscal profligacy of the past and the vicious cycle that emerges from austerity alone.
Milton Ezrati is senior economist and market strategist for Lord, Abbett & Co. and an affiliate of the Center for the Study of Human Capital at the State of University of New York at Buffalo. His latest book, Thirty Tomorrows, on demographics and globalization, will come out next year from Thomas Dunne Books of St. Martin’s Press.
Image: Flickr/Alcino.
