Structural reform in southern Europe
Some signs of improvement. Must try harder
CYPRUS is suffering a vicious recession as it struggles to adjust after a huge banking crisis. Despite its ailing economy a cab ride from the airport at Larnaca to Nicosia—a journey that takes around 40 minutes—costs 50. Such high fares, reflecting the power of the taxi trade, hinder the country's attempts to rekindle its tourist industry.
Reforms to tackle these kinds of uncompetitive markets are vital if the beleaguered countries of southern Europe are to be able to survive in the euro area. By making wages and prices more flexible, they allow countries like Spain and Portugal that have lost competitiveness to regain it even though they can no longer devalue against their euro-zone trading partners. They also hold out the promise of higher growth, which is vital if they are to shrug off heavy debt burdens. Four years after the euro crisis began with the first Greek bail-out, what has been achieved?
Assessing the scale and effectiveness of reforms is hard, not least since they tackle a multitude of sins. There are three main categories: enhancing competition, especially in services; promoting business activity rather than stifling it; and overhauling labour markets. In practice a determined effort to improve performance involves reforms across government. In Portugal, for example, 400 measures have been introduced in the past three years.
One gauge of progress in southern Europe is the World Bank's “Doing Business” survey. This annual study, covering over 180 economies, monitors regulation from the perspective of small and medium-sized companies. Its overall index has ten components, ranging from the ease of founding a company to how readily contracts can be enforced. Countries are ranked according to how light the burden of regulation is, as measured by the number of procedures involved and their cost. Other factors include how easily firms can access credit and how well they protect outside investors. A lack of regulation is not deemed a strength; rather the focus is on efficient regulation.
The findings suggest that progress has been made in southern Europe but that it has been patchy both between different countries and within them. Between mid-2009, before the euro crisis took hold, and mid-2013 Greece's rank improved from 109 to 72. Portugal has also gained ground, from 48 to 31. Advances by Italy and Spain have been less marked, and France has actually slipped down the rankings, from 31 to 38.
Even where progress has been made there is cause for concern. Greece may have improved its ranking the most, but that was from a desperately poor starting-point. Its current performance remains extremely disappointing within some crucial categories. It ranked 161st in the world as a place to register property easily, a handicap for a country urgently needing to encourage inward investment. Another concern is its 98th-place finish for the ease of enforcing contracts, a crucial condition for firms to flourish.
Such patchiness is widespread. The mountain that Matteo Renzi, Italy's new prime minister, must climb is clear from his country's performance. Its overall rank is dismal enough, at 65. But Italy is even farther down the league table for the tax burden on businesses; ease of getting construction permits; credit access; and enforcing contracts . Spain ranks particularly poorly as a place to start a business, at 142. That is a worry because research has established a strong link, unsurprisingly, between the regulatory ease of starting a business and how many are actually set up.
The World Bank's index does not include the impact on firms of employment regulations. But other evidence suggests similarly patchy progress on labour-market reforms in southern Europe. Despite overhauls in Portugal and Spain, southern Europe still suffers from bifurcated markets, in which the gap between “insiders” on cosy, permanent contracts and “outsiders” employed on a temporary basis is particularly pronounced. With so much yet to be done it is worrying that the pace of reform already seems to be slackening.
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