CAMBRIDGE – It seems that austerity is out of fashion in the eurozone – at least for the moment. The European Commission has given Spain, France, and the Netherlands more time to comply with the European Union’s 3%-of-GDP deficit ceiling. Even German government officials now concede that something more than fiscal belt-tightening is needed to revive the economies of the eurozone periphery.
According to the Commission, that “something more” is structural reform: easing of firing restrictions and other labor-markets regulations, liberalization of closed professions, and removal of controls on markets for goods and services.
But this is merely old wine in a new bottle. From the outset of the eurozone crisis, the “troika” (the Commission, the International Monetary Fund, and the European Central Bank) insisted on such structural reforms as part of any financial-assistance package. Greece, Spain, and the others were told all along that these reforms were needed to spur productivity and competitiveness and help revive growth.
After three years, Greece’s experience is telling. As a new IMF report acknowledges, structural reforms there have failed to produce the intended effects, partly because they ran up against political and implementation difficulties, and partly because their potential to increase growth in the short run was overstated. Nor have Spain’s labor-market reforms worked as expected.