The eurozone economy is making a steady recovery across the board. However, a broader perspective on the recovery reveals that divergences have widened between the major euro countries: between France and Germany on the one hand and between Italy and Spain on the other. If nothing is done to curb these divergences over the next few years, the future of the monetary union may be jeopardised. Much is therefore at stake in France and in Italy, with regard to the forthcoming elections. The incoming governments in both countries will carry the responsibility of implementing the necessary reforms.

For the past few years, the divergence in the unemployment rate has widened constantly between France and Germany. Having been at very similar levels in 2007, the gap in unemployment rates is currently wide. In Germany, the rate has fallen steadily and recently dipped below 4%, whereas in France, unemployment has remained at close to 10% since the recession following the 2008 crisis (chart 1). The lack of growth has to be blamed as the major cause of the high unemployment rate in France compared to Germany. Over the same period however, domestic demand has remained almost identical in both countries. The divergence in the growth rate observed - and therefore also the difference in unemployment rates - results from the difference in net external trade contributions to growth (see chart 2).

The contrast is even more disconcerting between Italy and Spain, both major countries that used to be (and sometimes are still) considered as part of the same periphery. Prior to the 2008 crisis, competitiveness in both countries was deteriorating steadily. Since the crisis however, Spain has managed to turn the situation around spectacularly and, unlike Italy, has been improving its productivity and its competitiveness. Similarly, in this case, the growth differential is due to the diverging net external trade contributions. As a result, even though since 2007 both domestic demands have followed a similar trend, the Italian GDP is currently still 7% below the level observed ten years ago, whereas Spain's is 2% higher.

CHART 1


CHART 2

Against this backdrop, it has to be a priority, for Italy and for France, to avoid diverging further in terms of external trade performances. Nonetheless, the reforms needed are not necessarily the same in both countries. On the one hand in Italy, chronic low productivity gains (including in the industrial sector) and the constant deterioration of unit labour costs need to be tackled. On the other hand, France needs mostly to address its non-price competitiveness, which requires a multitude of measures in addition to simply reducing the cost of labour, as it has been the case over the past few years.

Knowing whether the required reforms will effectively be implemented is the main issue at stake in the elections in France ahead of the summer and perhaps in the autumn in Italy.

In France, the results of the first round of voting indicate a large majority for the newly-elected president's party La Republique En Marche. Commanding a strong majority should enable the government to make progress among the issues considered as priorities by Emmanuel Macron, including a more flexible labour market and an improvement in measures to enable the unemployed to re-join the labour market.

In Italy, where the economic situation is considerably more disconcerting, political outlook is more uncertain. Last year's rejection of the referendum which called to revise the powers of the Senate and review its electoral system, has led to an unbalanced voting system: while enjoying the same legislative power, the lower house and the Senate electoral systems are different. If left unchanged, this will make the formation of a stable government coalition very complicated after the next elections to be held by next spring. Discussions to change the lower house electoral system have begun and depending on their outcome, the parliament could be dissolved before next spring and snap elections organized in autumn. However, the return to a purely proportional electoral system, including a minimum representation threshold of 5%, would not definitely solve the problems associated with unstable government. According to the latest polls, the only coalitions which currently appear possible are either highly conjectural (M5S with Lega Nord) or fragile (Forza Italia and PD).