Adjustment in Really Hard Times: The Structural Reform Agenda in Southern Europe

This paper assesses the prospects for structural reform in Italy and Spain. The insistence of the European Union institutions on austerity measures in the Eurozone periphery has been accompanied by demands for structural reforms of the labour market and deregulation of some product markets. Although austerity measures are deeply unpopular, political leaders have been more willing to embrace painful deficit reduction than deregulatory reforms. This paper argues that the reason for this is that structural reforms face concerted opposition, given that the existing regulatory arrangements are protective of well-organized social interests. The mainstream political parties, weakened by partisan dealignment and limited grassroots support, rely heavily on these anti-reform coalitions to mobilize electoral support. Fiscal measures, instead, are less targeted in their impact and are less risky for elected politicians. The implication of this is that growth-friendly measures are less likely to be taken, and that the periphery countries will be locked into austerity for some time to come.