Dec 3, 2014 | 10:03 GMT

7 mins read

Brussels Gives France and Italy an Economic Reprieve

Brussels Gives France and Italy an Economic Reprieve

In the next three months, the center-left governments of French President Francois Hollande and Italian Prime Minister Matteo Renzi will pass controversial reforms while dealing with opposing pressure from unions, business groups and rising right-wing opposition parties. With no prospects of real economic growth or even a significant reduction in unemployment in the coming months, France and Italy's political situations will remain fragile.

When the European Commission decided on Nov. 28 to give France and Italy more time to meet their deficit reduction targets before incurring penalties, Paris and Rome sighed with relief. The new administration in Brussels is not interested in applying sanctions to the second- and third-largest economies in the eurozone and decided to wait until early March to assess whether or not Paris and Rome are doing enough to reduce their deficits. However, this extension does not mean France and Italy are off the hook; the commission understands that its credibility is at stake. The European Union is likely to show flexibility again next year, but social discontent will continue to challenge the stability of the French and Italian governments.

Hollande and his prime minister, Manuel Valls, spent 2014 trying to appease opposing interests. The French government passed a combination of spending cuts to please the European Union and tax breaks to satisfy business groups while resisting the application of labor market reforms that would have upset unions and left-wing members of the ruling Socialist Party. But Brussels is still pressuring France to reduce its deficit further. The unions are of the opinion that Paris went too far, while businessmen think it did too little.

Paris' next challenge is the so-called "Macron Law," a series of reforms designed by Economy Minister Manuel Macron. The plan would increase the number of Sundays that shops in the non-food sector are allowed to be open every year from five to 12 and deregulate closed professions such as notaries and pharmacists. It includes measures to boost competition in the public transportation sector and reforms to reduce bureaucracy in the Labor Court, which settles disputes between employees and employers. The Macron Law also has a proposal to sell between 5 billion and 10 billion euros' ($6.2 billion to $12.4 billion) worth of state-owned companies in the next 18 months. The plan will be presented Dec. 10 at the Council of Ministers, and it will be debated in the National Assembly in January and in the Senate in March. 

However, the General Confederation of Labor has criticized the bill and vowed to fight it. Meanwhile, employers' associations believe that the government reforms are still too soft. On Dec. 1, several business groups began a series of protests and events in Paris and other French cities to demand the deregulation of France's economy. Among their main concerns are new compulsory payments for employees working in difficult conditions such as night shifts, regulations that prevent companies from hiring part-time workers for less than 24 hours a week and new rules that force small and medium-sized enterprises to inform their workers before they negotiate the sale of a business to new owners.

Finally, the French government is dealing with an increasingly volatile political situation. Hollande's approval rating remains at a record low, and a sector of the Socialist Party has decided to abstain from recent parliamentary votes, constantly jeopardizing the Socialists' control of the National Assembly. This fragile political situation within the ruling party is unlikely to change, especially as Valls and Macron keep pushing for liberal measures. The economy minister has said repeatedly that he wants to introduce exemptions from France's 35-hour workweek rule, a proposal that creates strong opposition both among unions and left-wing Socialists.

The Situation in Italy

Renzi is dealing with similar problems. His Democratic Party is still the most popular political force in Italy, but the Italians are becoming increasingly upset with the country's stagnant economy. On Nov. 28, Italy's statistics office announced that the unemployment rate reached 13.2 percent in October, the highest level since the statistical series began in 1977. According to the EU Commission, Italy's economy will contract by 0.4 percent this year and will see negligible growth in 2015.

Since taking office in February, Renzi has struggled to make progress with his ambitious plan for reform. Two of his key proposals — a reform of labor laws and a new electoral law — are still in debate and will probably undergo numerous modifications before they are approved. In late November, Italy's lower house of parliament passed Renzi's Jobs Act, a series of reforms meant to make it easier for companies to hire and dismiss workers. However, the law will not be implemented until additional decrees and regulations are approved. The additional changes to the law will most likely tone it down, and the Jobs Act will probably not take effect until mid- to late 2015.

In the meantime, Rome will have to deal with strong opposition from unions, and there will be protests and strikes almost every day in Italy from Dec. 2 to Dec. 16. Italy's three main unions will hold different demonstrations against the Jobs Act and the 2015 budget, while smaller unions will also protest other sector-related issues. As with Hollande's proposals in France, Renzi's plans will continue to face resistance from left-wing sectors of the Democratic Party that think the prime minister is getting too close to center-right policies. However, Renzi also needs to preserve his alliance with the small New Center Right party, meaning that every step of the reform process will be marked by compromises that will slow legislation and make it subject to constant revisions. Thus, the main challenges for the survival of Renzi's government will not necessarily come from the streets, but from the Italian parliament.

The Threat from the Right

So far, the Italian government has benefited from the lack of a cohesive opposition. After its electoral success in the general elections of February 2013, the anti-system Five Star Movement lost popular support because of internal problems and a lack of clear direction. At the same time, former Prime Minister Silvio Berlusconi was expelled from Parliament and has struggled to keep his Forza Italia party under control. This was a boon for the right-wing Northern League, which is trying to become the voice of dissent in Italy.

Popular support for the Northern League went from 4 percent in May to roughly 12 percent in November. This is the result of a new leadership (Matteo Salvini became party leader in December 2013) and an attempt to broaden its electoral scope. The party was born as a secessionist force against the central government in Rome and the economic backwardness and corruption of the Italian south. Under Salvini's leadership, the party is rebranding itself, focusing on criticism of the European Union, immigration and high taxes. The League's traditional criticism of immigration, especially Muslim immigrants, is making it particularly popular among people who have been affected by the economic crisis.

The League's main challenge, however, is to become a popular force in Italy's south. Popular support for the party is still considerably higher in northern regions such as Lombardy and Venetia, while it remains very low in regions such as Calabria or Sicily. In the coming weeks and months, the League will try to change this situation by seeking alliances with politicians in southern Italy and could even rename itself to have a broader appeal, but the process is likely to be slow.

The most notable aspect of the rise of the Northern League is that, when popular support for the League, the Five Star Movement and Forza Italia is combined, roughly half of the Italian electorate supports political parties that, to different degrees, have Euroskeptic platforms. This does not mean that all the anti-euro forces will form an alliance, but it confirms that Euroskeptic rhetoric is very attractive in Italy. In the coming months, the League will consolidate its role as a political player in Italy, but it will have to decide whether to get closer to Forza Italia, with which it shared an alliance for a long time, or the Five Star Movement, a move that would reinforce the League's position as an anti-establishment party.

The situation is similar in France, where the far-right National Front and the center-right Union for a Popular Movement are currently the most popular parties, attracting roughly two-thirds of the electorate. The Union for a Popular Movement is still a pro-European party, but it has recently taken harder stances on issues such as immigration and the transference of national sovereignty to Brussels after feeling electoral pressure. Party leader Nicolas Sarkozy is also taking a more conservative stance on social issues such as gay marriage. He is echoing the demands of Catholic and ultra-conservative groups such as the Manif pour Tous, which recently held strong demonstrations against Hollande's government.

Between now and March, France and Italy are likely to pass some of the reforms on their agenda, and the European Union is unlikely to sanction Paris and Rome. France, Italy and the European Union are still confident that a combination of some reforms on France and Italy's part and some flexibility from the European Commission will allow the eurozone to muddle through its problems. However, conflicting pressures will probably weaken these reforms, which will also reduce their economic impact. Even if the Hollande and Renzi governments are not at stake at this point, they will continue to be weakened during the winter, something that will lead to additional problems in 2015.

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