France and Italy: Can austerity be avoided? - Natixis

Patrick Artus, Research Analyst at Natixis, notes that several political parties in France and Italy are criticising austerity and believe that these two countries can solve their problems through expansion policies instead of austerity policies.

Key Quotes

“Can France and Italy now avoid austerity?

• We would first like to point out that kick-starting demand is ineffective in both countries as long as production capacity is unable to meet an increase in demand;
• We also want to point out that pulling out of the euro and devaluing in reality would lead to drastic austerity, due to the increase in the weight of debt and the rise in interest rates;
• We see that France and Italy have a major competitiveness problem against Spain, which has the same level of product sophistication as France and Italy. Either this competitiveness problem is corrected (by a slowdown in wages or corporate tax cuts) and there will actually be austerity; or it is not corrected, and the disappearance of industry will continue;
• Tax competition is increasingly fierce in Europe and worldwide; and maintaining a far higher tax burden than in other countries, in particular on companies and capital income, to finance government spending (for example social welfare) which is also higher, is increasingly detrimental.”

“So it seems very dangerous or even irresponsible to kick-start demand, pull out of the euro and devalue, refrain from correcting the shortfall in competitiveness and plan an increase in public spending and therefore in the tax burden in France and Italy.”