Europe's reform drive risks running out of steam

PARIS Thu Mar 29, 2012 9:59am BST

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PARIS (Reuters) - European leaders are caught between former White House chief of staff Rahm Emanuel's injunction "You never want a serious crisis to go to waste" and Luxembourg Prime Minister Jean-Claude Juncker's admission that "We all know what to do. We just don't know how to get re-elected after we've done it."

Signs of reform fatigue are growing in euro zone countries as bond market pressure for a radical budget and economic overhaul has eased slightly. While several governments have pushed through changes in pension, employment and welfare systems that would have been unthinkable before the currency area's debt crisis, the reform push is losing momentum in the face of political resistance.

Italy's unelected prime minister, Mario Monti, made a veiled threat to quit this week for the first time in an attempt to force through a shake-up of labour laws intended to make it easier for companies to fire workers. Monti warned Italians that his team of reforming technocrats might not stay in office until a 2013 election if trade unions and politicians picked his plan apart.

"If the country, through its labour organisations and political parties, does not feel ready for what we consider a good job, we would certainly not seek to keep going just to reach a particular date," he said.

An opinion poll by the ISPO agency published on Sunday showed two-thirds of Italians have a negative view of the reform agreed by the cabinet last week, and Monti's own approval rating fell sharply as a result.

Significantly, Monti chose to put the legislation through parliament as an ordinary bill, which will take months of deliberation and possible amendment, rather than forcing it through by decree as he has done with pensions reform.

Other moves to liberalise professions and boost competition have been watered down by powerful interest groups such as taxi drivers and lawyers.

At the same time, Spanish voters denied conservative Prime Minister Mariano Rajoy the outright victory he had sought in the southern region of Anadalucia as a mandate to pursue bolder fiscal and structural reforms.

Rajoy's centre-right People's Party won the biggest score in the historic Socialist bastion, but a combination of the Socialists and the hard left won more seats and may be able to govern the region in opposition to Madrid.

LIMITS TO REFORM

Rajoy pushed through a substantial labour market reform in his first weeks in office, making it cheaper for companies to lay off workers and decentralising wage bargaining to reduce trade union power.

The Spanish leader faces the first general strike since November 2010 against that reform and deeper austerity on Thursday, a day before he presents a tough 2012 budget in the midst of a recession.

But there are limits to his government's reformist agenda and some of the most intractable problems in Spain involve the prerogatives of the autonomous regions, which have expanded continuously since the end of fascist rule in the mid-1970s.

"The structure of the country is not being reformed - the regional system, the size of the public administration, the tax and spending powers given to the regions," said Jose Maria de Areilza, a law professor at the IE business school.

"Everyone wants to keep up with the Catalans," he said, referring to the wealthy autonomous northeastern region.

Reforms also face resistance from the lobbying power of entrenched interests such as energy companies and banks, which had long captured their regulators, he said.

Two years into the euro zone's sovereign debt crisis, a new treaty to strengthen fiscal discipline, a flood of cheap European Central Bank lending to banks and a deal to avert a chaotic Greek bankruptcy have cooled panic on financial markets.

Italian and Spanish bond yields have fallen back from near unsustainable levels reached late last year and demand for euro zone government debt has been generally strong at auctions.

With the sense of emergency easing, the appetite for painful reforms that hurt protected workers and pensioners or incumbent companies while promising uncertain long-term benefits for the economy has waned in several countries.

Germany, often held up as a model which reaped a boost to growth from unpopular labour market and unemployment benefit reforms enacted in the early 2000s, shows little zeal for liberalising reforms at home now.

In some euro zone states, such as Belgium, the Netherlands and Austria, structural reforms require months of tortuous negotiations in complex coalition governments.

In others, such as France, the momentum was never very strong in the first place.

The striking feature of the French presidential campaign now in full swing is that while the mainstream candidates all pay lip service to cutting the budget deficit and balancing the budget, few are advocating bold structural reforms.

The candidates talk more about preserving old rust belt jobs at risk than promoting new growth sectors.

Conservative President Nicolas Sarkozy has introduced legislation to shift part of the burden of funding the welfare system from payroll taxes to VAT sales tax to reduce unit labour costs. His Socialist opponent, Francois Hollande, says he will reverse this change if elected.

Sarkozy has also promised to shake up unemployment benefits to force recipients to undergo mandatory retraining and accept the first job they are offered or lose payments. The left has accused him of unfairly blaming the unemployed for the lack of work and training.

The Thomas More Institute, a pro-market think-tank, gave Sarkozy 9.5 out of 20 marks for reforms carried out in his five year term, saying 47.4 percent of the measures announced had been implemented, 8.7 percent had been watered down and the rest were either incomplete or abandoned.

He won highest marks for a 2010 pension reform raising the minimum retirement age to 62 from 60 and increasing the number of contribution years required for a full pension. Hollande has said he would change the law to allow those who began work at 18 or earlier to retire at 60.

The pension reform set off weeks of strikes and protests and Sarkozy may pay a high political price. Hollande says he would introduce structural reforms through negotiation with unions and employers rather than imposing them top-down.

In Greece, opinion polls suggest fringe parties opposed to the draconian austerity and reform programme imposed by international lenders will make a strong showing in an early general election likely on May 6.

Some surveys suggest that hard left and far right groups, boosted by anger at pay and job cuts, may even prevent the two mainstream parties winning enough votes to govern in coalition.

PROSPERITY GAINS?

A report by the Organisation for Economic Cooperation and Development, an intergovernmental think-tank, called this week for Europe to give new momentum to economic reforms.

The list included politically sensitive measures such as increasing competition in services and product markets, more privatisation of state assets, removing barriers to foreign ownership, streamlining planning regulation, reducing job protection and lowering minimum wage costs.

It partly overlaps with proposals to strengthen the European Union's single market, to which leaders have paid lip service but which still face resistance to liberalising energy networks or allowing freer cross-border competition in services.

"Long-term growth projections for the euro area in the absence of reform are dismal and subject to downside risks given past poor performance, a trend decline in investment rates and low innovation. An ambitious package of structural reforms, however, could transform the outlook and generate large gains in productivity and boost growth significantly," the report said.

The OECD says such reforms, which are part of the Greek, Irish and Portuguese bailout programmes, could stimulate growth across the continent at little cost to the public purse, even in surplus countries such as Germany.

The recommendations came with a seductive table showing the potential gains in economic output from implementing a broad reform package over a decade, ranging from five percent or less in Slovakia, Ireland and the Netherlands, where many such measures have already been applied, to 15 percent or more in Italy, Spain, France, Austria, Greece and Belgium.

However, the authors acknowledged that in the short term, such reforms may cost jobs and lower incomes.

(editing by Janet McBride)

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