Matteo Renzi and François Hollande may be struggling to deliver structural reform but they can at least see the need for it.
In his first speech to parliament as Italian prime minister, back in February, Mr Renzi accurately labelled Italy “a rusty country, a country bogged down, chained by stifling bureaucracy, rules, regulations and codes”. This week the French president removed the leftwing Arnaud Montebourg as economy minister, replacing him with Emmanuel Macron, Mr Hollande’s own former chief economic adviser and a well-known champion of deregulation.
There is no doubt that rationalising regulation would help growth in many EU economies in the medium term. France presently comes a poor 38th out of a total of 189 countries in the World Bank’s Doing Business rankings on business climates. Italy is 65th, the second-lowest EU country after Greece and lower than such exemplars of world-class administration as Kazakhstan and Belarus.
Italy’s judicial system, for example, is choked with self-serving, growth-stifling bureaucracy. The World Bank reckons it takes nearly 1,200 days to make an enforcement claim under an Italian contract against the rich-country average of 529 days. In France, due in part to the country’s notorious notary profession, it takes 50 days and eight separate procedures to register a property, again about twice the rich country average.
Messrs Renzi and Hollande have identified the problems, but their attempts to push through reform have made little headway against special interests and inertia.
Unlike Greece and Spain – also economies in serious need of structural reform – France and Italy avoided having to turn to the International Monetary Fund for help during the eurozone sovereign debt crisis. But that also meant that the IMF was not available to play its traditional role as a political cover for reform-minded politicians. (A lack of reform impetus is evident in many emerging markets for the same reason.) Without that excuse, Mr Renzi and Mr Hollande have to expend their own political capital on pushing opponents aside, and Mr Hollande in particular has a deficiency of that particular commodity.
Still, a case for structural re-form, skilfully made, could appeal not only to an abstract notion of efficiency but also to those who lose out from the current system.
For example, France and Italy – also Spain – are notorious for their two-tier labour markets, a core of relatively well-paid full-time workers protected by employment legislation and a periphery of insecure, often temporary, low-wage jobs. The issue is not to destroy all labour market protection or worker representation: it is to orient it in a way that creates as many secure and high-wage jobs as possible, not just for a privileged elite. Similarly, the stifling effect of the Italian judicial system and of French notaries are not victimless crimes: the companies whose operations they complicate should be the most effective supporters of reform.
Apart from the increasingly urgent need for the European Central Bank to support growth with looser monetary policy, and an easing of the EU’s self-destructive fiscal rules – the proximate cause of the ructions in the French cabinet – there are no straightforward answers to getting economies to grow in the near term. Yet a problem with so many EU economies is not just that they are operating so far below capacity but that their capacity is so much lower than it could be.
Mr Renzi and Mr Hollande need all the luck and support they can get. Overcoming entrenched interests to reform an industry or a profession is one of the toughest things a politician can do, and they will need both skilful domestic political management and backing from outside to achieve it.