Buffers from market pressures do indeed slow down reforms. This was vividly illustrated last August when Rome backtracked on tax reform commitments a few days after the European Central Bank started buying Italian bonds. However, austerity and reform are not always complementary. Germany implemented reforms under Gerhard Schröder (but without austerity) in the 2000s, and then austerity under the Merkel-Steinmeier coalition (but without reforms). Governments under extreme pressure may have no choice but to do everything at once, but when political capital is scarce, prioritising fiscal consolidation is usually at the expense of reforms.
Governments also need to show their citizens that effort pays. If, after a few quarters of fiscal adjustment and painful reform, the situation and outlook are only worse than they were before, reform-minded coalitions may wane or lose power. Risks are compounded by simultaneous retrenchment in several countries at once. Southern Europe plus France, which is also in need of budgetary adjustment and structural reform, accounts for more than half of the eurozone’s GDP. Keeping pressure on it will only be a credible strategy if accompanied by an effective growth programme for the entire eurozone. Read more