Time to strike

Eurozone recovery may dampen reform drive

Governments are slowing reform across the Eurozone. Brighter economic prospects and loose monetary policy seem to lessen the urgency for tough political choices. Yet the opposite is true: better times should make reform easier and less costly.

The pause in the Eurozone crisis is a not-to-be-missed opportunity for the region's governments. During the 2010-2013 saga they were required to liberalise their economies in a recession whilst simultaneously reining in their fiscal deficits. The European Central Bank's reticence in bringing down bond yields didn't help.

2015 is different. The ECB's new-found conviction to print money and buy government bonds has turbocharged the zone's recovery, as has the low oil price. The central bank expects growth of 1.5 per cent and 1.9 per cent over the next two years, up roughly half a percentage point over its own December forecasts. For once, both the economy and monetary policy could help reform.

Austerity is also on the wane, albeit in a haphazard way. Lisbon's fiscal deficit should fall to around or below 3 per cent of GDP, though mostly due to the recovery. Spain may just miss its 4.2 per cent target. France has secured an extra two years to bring its deficit below 3 per cent of GDP. Yet the fiscal stance is still rigid when unemployment across the zone is twice the rate in the UK or the US, and investment half the average between 1996 and 2000, according to the European Commission. With borrowing costs near or below zero, governments should be investing more while slowly cutting wasteful spending.

Reforms, meanwhile, could move to the back burner. Portugal's reforms have stopped since it left its bailout last year. Spain's scandal-ridden government crows about its competitiveness, but shies away from deeper labour or tax reform. France is struggling even to liberalise Sunday trading. The outlier is Italy, whose brash Prime Minister Matteo Renzi relishes a fight with the country's unions. Across the zone, tough choices on writing down debt and pushing ahead with fiscal union have been deferred.

Politicians have reason to relax. With the economy growing, there is little chance that markets will turn on them again. Meanwhile populations are sick of austerity and support for the euro project is low. Elections are looming in Spain, France, Portugal and probably Italy, and populist parties are on the rise. Yet if the Eurozone's revival proves short-lived, governments may come to regret the missed opportunity they had in 2015 to truly reform.