Committee for a Responsible Federal Budget

France and Spain Begin to Tackle Deficit Woes

Jun 17, 2010

In the aftermath of the Greek financial crisis, leaders of European nations like France and Spain are taking steps to stabilize their economies and reassure lenders that their governments are getting their fiscal houses in order. The New York Times reports that the French and Spanish government announced plans Wednesday to reduce their national fiscal deficits to more sustainable levels and to take more basic steps to improve their economic performances. Both countries had entered the global economic and financial crisis over the past few years with very little "fiscal space", so that they had very little fiscal room for maneuver to take countercyclical measures. With signs of global recovery starting to appear, it became all the more important for these countries (and others) to exit from fiscal stimulus in an orderly way before worried markets forced a solution - as they did in Greece. At the same time, taking steps to improve the fiscal path down the road by tackling other basic weaknesses in their economies will improve growth prospects.   

France will raise its minimum retirement age to 62 from 60 by 2018, a move that has garnered criticism from labor unions (and no doubt others) but is meant to help put French pension spending more in line with the government's fiscal resources. (France faces population aging pressures similar to those in the United States within the next decade.) Spain, with similar aging issues but also with its own outsized real estate boom in the past decade and related financial sector loan issues, has seen dramatic increases in borrowing costs this week (an increase of 0.7 percentage points in yield from last month alone). Faced with a downgrade by credit ratings agencies, the government took measures responding to new concerns that it could soon need to tap into the IMF’s European ‘rescue fund’ to finance its obligations. Based on proposals by the Spanish Prime Minister’s economic advisors, labor market reforms were enacted in an attempt to jumpstart the nation’s economy by reducing severance pay for fired contractual employees. The move is meant to save the government money and also reduce the recently growing reliance on temporary contracts that has increased Spain’s unemployment rate to more than 20%.

Other EU countries are taking considerable measures as well to put their fiscal policies on sustainable paths and to undertake reform  of economic weak spots. Plus, as in the United States, the EU banking sector will be subjected to stress tests by the financial authorities to determine what the vulnerable spots in the financial sector are.

Despite some criticisms these policies have encountered, there appears to be a general consensus that they are necessary for the overall, sustained fiscal health of the EU countries. Moreover, it is crucial that most of these countries acted before the nervous markets transformed a manageable situation into a crisis - like what happened in Greece. And it is true that, besides ultimately lowering federal deficits, an increased retirement age helps national economies in other indirect ways too: it would provide more experienced labor in the workforce for longer, more capital, a greater ability to save individually for retirement, and more income tax revenue for the government. These are remarkable steps for France and Spain, where labor rights are even more protected, and more of a ‘sacred cow,’ than they are in the US—and if they can consider fiscally responsible reforms, we should be able to do the same here.