WSJ: What France Can Learn From Italy

What France Can Learn From Italy

Rome could teach Paris a few things about how to push ahead with difficult but necessary reforms.


By KLAUS F. ZIMMERMAN
April 8, 2015
The Wall Street Journal


For all the attention that’s been paid to Greece and its debtor negotiations lately, the coming battles over Europe’s troubled economy will be won not in Athens but mainly in Paris and Rome. France accounts for almost 22% of eurozone gross domestic product; Italy, more than 16%. Together, these two countries contribute more than 20 times Greece’s portion of eurozone GDP. If the eurozone is to escape its current stagnation, France and Italy must restart their economic engines once again.

The European economy has been given a lift in recent months by a weak euro and low oil prices. Regional elections in France and Spain have reduced concerns about populist parties derailing economic reforms. Politicians now have the breathing space to do the right things economically.

However, based on experience from the euro’s original launch at the turn of the century, there is reason for concern that such opportunities might be wasted. Back then, low interest rates induced some eurozone countries to go slow on structural reforms, relying instead on a monetary boost to the economy from the compression of sovereign-bond yield spreads. It would be most unfortunate if that experience were to repeat itself.

The real surprise now is that it is Italy, not France, that seems to have understood this. In February, Prime Minister Matteo Renzi’s government approved two decrees enacting the core of the labor-market reform. One improves the rules for firing employees on a permanent contract, giving them a right to severance pay but removing the previous right to court-ordered reinstatement. This caps the cost of firing a worker, which should make employers more willing to hire than they were when each new employee could become an employee for life. The government also has reduced the time a worker can receive unemployment benefits, to 18 months from 2017 onwards.

Coupled with tax incentives introduced last year for companies that hire on regular as opposed to part-time contracts, it is now more enticing to hire in Italy than it has been in years. On top of that, another recent law introduced administrative and judicial reforms intended to speed up decision making and reduce uncertainty that otherwise impacts investors and the economy as a whole.

In contrast, things in France are progressing much more tentatively. Paris continues to miss its budget-deficit targets, testing the European Commission’s flexibility. France’s prime minister, Manuel Valls, and its economy minister, Emmanuel Macron, have worked hard to convince the French Parliament of the merits of their reform package, known as the “Macron law.” The plan would relax Sunday work restrictions, liberalize long-distance bus transportation, simplify employment tribunals and lay-off procedures, and deregulate white-collar professions such as notaries. These are the types of measures other European governments undertook years ago.

Limited in scope though this proposal was, the Valls government was nevertheless forced to resort to a rare constitutional provision to get it through the National Assembly on Feb. 19. The Senate must still vote on the legislation and the outcome there is uncertain—the main political parties are still considering whether they should lend their support. It’s unclear, for instance, whether Nicolas Sarkozy’s center-right UMP party, which gained the upper hand in the regional elections last month, will choose to push reforms now or wait until the national elections in 2017.

There is no time to waste. The Italian government has shown the way by creating the legislative framework for overcoming the two-tier labor market, while the French government is still dabbling with reforms that are only slightly more than symbolic. Paris still shies away from other essential steps, such as making its rigid 35-hour work-week regime more flexible, either through simply prolonging the work week again to pre-2000 levels or introducing more exceptions to the rule. This is a touchy topic in French politics and society.

The French measures signal that more may still be to come, but don’t yet deal with the crux of what it takes to get the economy growing again. Tackling problems such as France’s relatively high minimum wage and rigid employment protection, thereby releasing pressures that bear on the labor market, would bring the goal of economic growth and lower unemployment closer.


It remains to be seen whether the measures required to make Italy’s labor market more flexible take proper shape in reality. But for now, at least, Italy has a head start on France. In the spirit of true European competition, French politicians should now resolve that when it comes to reform they don’t want to fall behind. Cross-border policy competition used to be regular practice in the European Union and the true engine of progress in decades past. One can only hope that it resurfaces as soon as possible.

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