The trap in France and Italy: Fiscal deficits to offset the effects of structural problems at a time when potential growth is declining

France and Italy have common structural problems: low labour force skills, low modernisation of corporate capital, weakened cost competitiveness, hence deindustrialisation, high inequality and structural unemployment, low productivity gains, and transfer of jobs to low-paid service jobs. This has led to lar ge fiscal deficits, because it is necessary to finance large redistributive policies and support the lowest incomes, at a time when tax revenues are weakened by the low level of productivity gains and hence potential growth. This combination of a large public spending requirement and weakened potential growth has structurally led to a fiscal solvency problem in France and Italy.