Opinion

France and Germany must both change economic strategy

A more balanced economic strategy in the two countries is crucial to help the peripheral countries solve their own predicaments and ensure the sustainability of the euro area.

By: Date: February 13, 2014 Topic: European Macroeconomics & Governance

This op-ed was published in French by Le Monde and in German by Handelsblatt.

The euro was first and foremost a Franco-German project, not only politically but also economically. Thanks to its stability culture, Germany had a strong currency. At times, when the dollar was weak, the D-mark was even too strong, penalizing German exporters in favor of their European competitors. Germany was therefore keen to have France and other EU countries peg their currencies to the D-mark. For its part, France was keen to also have a strong currency (a ‘franc fort’), but it lacked the necessary stability culture. The way to import it was to peg the franc to the D-mark, but politically it was difficult for France to surrender its monetary sovereignty to the Bundesbank. Monetary union was the way to give both countries what they wanted by transferring monetary sovereignty to a European central bank and give it a price stability mandate. And so the euro was born.

Unfortunately right before the creation of the euro, Germany suffered an unexpected shock. Reunification led to massive public expenditures and deficits, to which the Bundesbank reacted by tightening monetary policy to maintain price stability. Thus, when Germany joined the euro its currency was strongly overvalued. The early years of the euro were painful for the ‘sick man of Europe’: unemployment, which had traditionally been low (and always lower than in France), rose steadily, reaching a post-war high of more than 11 per cent (2 points higher than in France) in 2005; public deficits remained persistently above the 3 per cent limit between 2001 and 2005; and public debt reached a record of 68 per cent in 2005.

How did Germany turn the situation around? The short answer is structural adjustment and help from the peripheral euro area countries. The Hartz reforms significantly reduced labor costs and restored German competitiveness. At the same time expansion in the peripheral countries, fuelled partly by German capital flows in search of investment opportunities, helped absorb German output when domestic conditions were subdued. As a result, the German current account balance, which had been negative every year since reunification, turned positive in 2002 and reached more than 5 per cent in 2005, a level where it remained thereafter. Export-led growth transformed Germany into the ‘healthy woman of Europe’, which today enjoys near full employment and balanced budgets. Yet not all is well. The current situation of internal balance but external surplus suggests that Germany’s competitiveness adjustment has gone too far and is especially detrimental to the peripheral euro countries whose turn it is now to restore their competitiveness. Unfortunately adjustment is difficult in a situation where demand is depressed not only at home but also in the rest of the euro area.

Germany alone however cannot rescue the peripheral countries. France, the area’s second largest member, must also do its part. But the country is itself in difficult situation. At the start of the euro, France and Germany had identical unemployment rates, per capita incomes (in purchasing value) and debt-to-GDP ratios. Today the unemployment rate in France is two times higher than in Germany, its per capita income is 15 per cent lower but its debt-to-GDP is 15 per cent higher. Such divergence between the two countries is bad for France and for its capacity to work with Germany to repair the euro project.

Why have France and Germany diverged so much? The simple answer is that they have adopted different economic strategies. Germany has become an extremely open economy, with exports (goods and services) now accounting for more than 50 per cent of GDP, a figure even higher than in small open economies like Sweden or Switzerland. Its economic policy is dominated by its large manufacturing where employers and workers collaborate closely to foster export competitiveness. One way to ensure that the manufacturing sector remains competitive is to squeeze costs in the non-traded sector, where wages have been kept relatively low. By contrast, France has remained a relatively closed economy, with exports now accounting for barely 27 per cent of GDP, a figure even lower than in Italy. Here economic policy is dominated by the interests of public workers and large private firms closely linked to the state, which implies large public expenditure. One way such expenditures (currently equal to 57 per cent of GDP in France compared to only 45 in Germany) largely in favor of the non-traded sector is to tax the traded sector. No wonder the country is losing export competitiveness.

France and Germany must both change their economic strategy. Germany must reduce its over-reliance on exports and expand both its non-traded (service) activities and its internal demand. France must reduce its over-reliance on publically-financed internal demand and tax less its economy, especially in the traded sector. A more balanced economic strategy in the two countries is crucial to help the peripheral countries solve their own predicaments and ensure the sustainability of the euro area.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Read about event More on this topic
 

Upcoming Event

Sep
1
12:30

The EU recovery fund - state of play and outlook

Bruegel Annual Meetings, Day 1- In this session we will discuss the EU recovery fund, its state of play and outlook.

Speakers: Nadia Calviño, Karolina Ekholm and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Sep
2
10:00

Conversation on the recovery programmes

Bruegel Annual Meetings, Day 2- In this session, we discuss the recovery programmes.

Speakers: Maria Demertzis, Mehreen Khan and Tadeusz Kościński Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
2
15:45

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: European Macroeconomics & Governance Location: Academy Palace
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis and Alicia García-Herrero Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
10:15

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article More on this topic
 

Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
Load more posts