Insights
Dispelling Myths About the Costs of Reform
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Insight Article
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November 27, 2024
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Dispelling Myths About the Costs of Reform
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November 27, 2024
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Dispelling Myths About the Costs of Reform
Dispelling Myths About the Costs of Reform |
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Governance reforms are bearing fruit in the periphery
Times are good in Southern Europe.
Countries in Europe’s so-called periphery are growing faster than their northern counterparts, have more political stability and are implementing superior reform programs. The governance improvements in Cyprus, Italy, and Greece, in particular, are upending some long-held myths about the pitfalls of reform.
Myth #1: Fiscal consolidation is bad for growth
Consider Cyprus’ recent growth and fiscal performance. Government debt to GDP peaked at around 114% in 2021 and is forecast to fall to 71% by year end—a precipitous drop. A broad measure of the government’s fiscal balance has been an approximately 3% of GDP surplus in each of the past three years through to 2024. Surely, growth suffered during such a period of sharp fiscal consolidation? Not so fast. Real GDP growth has averaged around 4%.
Cyprus continues to make its business environment attractive for the private sector. Massive investment has come into the country, boosting growth and allowing government involvement to shrink as a share of the overall economy. And best of all, this foreign investment is diversified by source and industry. Therefore, Cyprus’ growth looks sustainable and you won’t hear any complaints about austerity in Nicosia today.
Myth #2: Good governance is bad politics
Over in Rome, Prime Minister Giorgia Meloni is adeptly winning the political game and governing well. Her government has already outlasted the average government tenure of two years in modern Italy. And she has done it by governing as a centrist. Her rivals on both the left and right look disorganized, incompetent and opportunistic.
Two key policies got Meloni here. First, she cut illegal immigration by 65% by negotiating bilateral deals with North African countries. There was a financial cost to these policies, to be sure, but so far the political benefits far outweigh them. Second, she cut taxes for parts of the population. Italy is not out of the woods in terms of fiscal vulnerability, so Meloni will have to tread carefully here. But smart trade-offs on policy will likely continue to be rewarded with high popularity. At 44%, Meloni’s approval rating is high by Italian standards.
Myth #3: Reforms can’t overcome culture
A Financial Times headline nicely summed up a surprising development in Greece: “Grumbling Greek Cabbies Drive Towards Tax Compliant Future.” Greek society has long been notorious for tax evasion—some believe this was a contributing factor to Greece’s debt crisis last decade. So, tax compliance is a big change. It reflects Prime Minister Kyriakos Mitsotakis’ digital savvy—linking thousands of different systems used by small business to one central tax office was a big task. But more importantly, the reason the reform will likely stick is because Mitsotakis intends to distribute the government revenue windfall back to the population via tax cuts. That is how you build trust and overcome cultural obstacles. The cabbies might be grumbling but society at large is cheering.
Bottom line: Done well, governance reforms are consistent with strong growth, political stability and a more trusting and compliant society. Greece, Italy, and Cyprus are proving this.