For the first time, the Eurogroup has drawn up a plan of action to make Greece’s debt with official lenders sustainable in the long term……..
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Intesa Sanpaolo – Research Department For professional investors and advisers only
Spain, Italy and France have all implemented labour market reforms in recent years, and the latter two countries have also reduced welfare contributions and taxes from high levels. In Italy, following the reforms, the elasticity of employment with respect to GDP has been very high. In Spain it already was even before the reform. In France, it has been low so far.
In Greece, the risk of another very tense summer seems to have been averted.
The formal approval of the new tranche of funding has been postponed to the Eurogroup of 24 May, and remains subordinated to the legislative approval of a “safeguard mechanism” assuring the automatic implementation of corrective fiscal measures “as soon as there is objective evidence of a failure to meet the annual primary surplus targets in the programme (3.5% in the medium term)”. However, the political agreement to allow the unblocking of the payment has been reached – and inevitably so, given the migrant crisis, which is politically more relevant for all the countries and which sees Greece in the frontline, as the referendum on the UK’s membership of the European Union looms menacingly on the horizon. The most important development is that on this occasion the Eurogroup has discussed a set of proposals aimed at ensuring that servicing Greece’s debt will remain sustainable in the long-term, and has put an action plan in writing. A progressive sequence of interventions is provided for: (i) optimisation of debt management under the programme in the near term; (ii) a period of grace on interest payments, and longer repayment terms for the capital share, on condition of the ESM programme being successfully completed; (iii) in the longer term, “the Eurogroup stands ready […] to further assess […] the need for possible additional debt measures”. While cancellation of a part of the debt is still being left out of the range of viable technical options, the measures envisaged are potentially decisive. This is the first time this topic is officially and tangibly taken on by the Eurogroup, and on this occasion a very near date has been set (24 May) for the submission of a technical report on specific measures, to be prepared by the EWG (Euro Working Group). According to The Financial Times, a confidential ESM report lists a number of options, including a five-year postponement of maturities, a ceiling on interest set at 2% of GDP, a 1% ceiling on repayments up to 2050, and the possibility of repaying the most expensive portion of debt with the IMF by resorting to ESM loans.
This week, a controversial and troubled labour market reform was approved in France.
The reform follows actions geared to reducing taxes and welfare contributions (CICE and Solidarity Pact) introduced respectively in 2013 and 2015, which are worth around 20 billion euros a year. Spain had made its labour market reform in 2012, reducing the protection against layoffs of workers on permanent contracts, cutting the scope of unemployment benefits, slackening wage indexation, and introducing decentralisation in contract negotiations. Italy implemented its reform between 2014 and 2015, in this case as well accompanied by tax and contribution cuts, which probably explain at least half of the positive effects on employment. Employment growth has been surprisingly strong in Italy in the past two years compared to the trend of GDP, posting positive changes since 2014, despite the fact that economic activity growth was first slightly negative, and then only slightly positive. In Spain, during the recovery of 2014-15, employment resumed growing at a lag of one quarter compared to GDP, and subsequently marched in step with the latter. In both countries, therefore, reforms seemed to have encouraged businesses to hire. However, while in Italy the government’s action seems to have succeeded in increasing the share of permanent contract employment, in Spain, in the past year, 344k out of 541k newly hired individuals were given temporary contracts. Furthermore even during the contraction phase, before the reform, Spanish employment levels showed very high elasticity with respect to GDP. In France, by contrast, the response of employment has been modest, and there are no great expectations of the reform of 2016, significantly watered down by negotiations in the past few months, proving any more effective.
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