Each "Nobel" Heart has two Chambers - Who conducts the Beat?
France and Germany are the largest economies within the European Union and have also proven to be the leading partners determining nowadays European political decision making. But will they be able to sustain a cooperative leadership beyond the necessity of economic competition? Prof. Stefan Collignon provides new perspectives.
During the peak of the global financial and economic crisis and the subsequent erosion of national economies on the European continent a chimera called “Merkozy” has taken control over the European Union. Merkozy has been discovered by the media and could be identified as the symbiotic appearance of the former French president Nicholas Sarkozy and the German chancellor Angela Merkel. After centuries of passed antagonism between the Franconians and the Teutonic tribes, the Franco-German relation and partnership that has been developed is one of the essential components of the current status European Union. The Peace Nobel Price might be seen as the highest possible reward for the achievements of the EU. However, besides the political cooperation both leading countries are still competitors on the European and global markets. Whereas the public often seems to adopt the hegemonic tendencies implied by the recent year’s German policy applied within the EU viewing France as the junior partner of a superior German economy, taking a closer look on the numbers might draw a different picture. The study “Economic growth and competitiveness: A Franco-German tale” published by Stefan Collignon for the German Bertelsmann Foundation provides important implications for the future of French-German relationship and possible conflict lines within the European Union.
Collignon’s investigation is motivated by exposing the true strengths and weaknesses of both the French and the German economy and to identify the mutual dependencies as well as resulting tasks to be solved for both countries. The recent election of Francois Hollande as new French president has implied potential ideological conflict lines between the two economic chambers of the European heart. By comparing both country’s economic growth and employment, competitiveness and public finances Collignon provides a structured fundament for questioning if economic competition and very different benefit patterns within the common monetary union might soon challenge the inner stability of 2012’s winner of the Nobel Peace Prize.
During the last years in the eyes of the public France has constantly been perceived as a fading “Grand Nation” suffering from the heavy weight of overloaded social systems and a constant decline in economic power. Germany in contrast seems to be rather immune against the global economic downturn even utilizing the crisis as source for new growth. Collignon takes a look into the numbers and shows that since years largely not Germany but France is using its resources more effective by displaying higher growth rates in productivity. For 50 years French productivity growth has exceeded the German side by 0.5%. The German Schröder government lowered unit labour costs, which on the one hand enabled the creation of more than two million new jobs but on the other hand also constrains the development of productivity since a low wage level usually does not promote productivity of the workforce. While lowered labour unit costs helped Germany to sustain competitiveness France lost this continuously.
In consequence France has lost its competitive advantage over Germany after the Schröder reforms have been put into effect. The downward trend of the French trade balance has settled itself more than one decade nowadays showing a deficit of c. 5% of the French GDP. Meanwhile Germany had reached a trade balance surplus of 8% dampened to a range of 4-6% in the aftermath of the crisis. A common feature of both countries is export to their EU neighbours – depending on the economic sector – accounts for close to or more than 50% of the total. Though Germany could compensate its gradually outdated product portfolio by consequently targeting emerging market, which French failed to accomplish, Collignon underlines that the German advantage in competitiveness being a source for attracting emerging market’s demand is beginning to fade again. However, Germany was able to gain 24 billion euro in market share only within the EU whereas France lost a total market share of 93 billion within the union. By taking a closer look Collignon exhibits that France has lost competitiveness basically within each of the countries important industrial sectors.
As France could not prevent its unit labour costs from continuously sustaining over the European equilibrium level since 2006, the public discussion regularly asks if a devaluation of the euro against the US dollar might be an effective instrument to boost French exports again. Collignon applies an empirical test on this proposal, which often utilised in context of debates around the value of the monetary union. It turns out that in case of a real depreciation of the euro the German exports would profit much more than the French and on the other hand an appreciation of the euro would hit the French economy far harder than the German exports.
In addition to the difficulties within the economic production in consequence of the crisis the French deficit in public spending has intensified dramatically. Nevertheless, also the European priest of austerity – called Germany – experienced dramatic increases in public household deficits due to substantial stimulation programmes causing an even higher relative increase in public spending than in France and actually representing the officially refused Keynesianism at its best.
Irony of politics
It looks like a warning against the trust in stereotypes: Whereas in Germany the “Agenda 2010” imposing the relevant measures for reformation of the labour market and restoration of competitiveness has been introduced by the social democratic government under Gerhard Schröder, also in France the new socialist president Holland will probably become the one to be remembered for introducing significant steps of economic liberalisation. In both cases the reduction of unemployment and maintenance of economic power within the European Union can be seen as driving forces for instant change in economic policy. In the mid 2000s Schröder could imply its reforms rather unchallenged by the former French president Chirac. Hollande nowadays is confronted with a local superpower, which has significantly grown its self awareness and got used to a French junior Partner not intending to pursue major changes in economic policy and therefore not to endanger the current intra-European trade balance making Germany one of the most important profiteers of its neighbours balance deficits. Being aware of its slowly declining competitiveness on the one hand but feeling pressure to continue welfare presents to the voter in order to keep current majorities in the Bundestag, the German government did not hesitate to imply its scepticism about a revision of mindset within the French leadership by accepting a cooling-down of the bilateral relationship.
The Monetary Union: “Nobel” integrator or splitter?
Collignon has empirically shown that a depreciation of the euro would be most helpful to the German economy and less supportive to France. Also other member states of the Euro zone, which cannot attract foreign markets either by competitive prices or product portfolio matching the needs of emerging regions, can be seen as likely to experience difficulties in making use of a devalued currency as long as they are significantly depending on intra-European trade and cannot improve attractiveness to the markets in Asia ans Southern America. As long as the European governments will focus on optimization of economic competitiveness and not adopt nationalist tendencies promoting foreclosure from the EU’s markets the euro provides a stable shell for connecting the national economies to international demand. However, the German trade balance surplus largely mirrored by deficits of other EU members bears the potential for political conflicts. Collignon expects a natural regulation of that specific problem: Capital streams rushing into German euro investments, especially since uncertainties in Southern Europe increased, are likely to be invested in non immobile goods and therefore might cause a property bubble weakening Germany’s competitive advantage. The resulting increase of German demand for supply of other EU members would heal the current imbalances of member states’ accounts.
The European Fiscal Union: A true capstone?
Some of the problems of the European monetary Union are often being ascribed to the non-existence of a European fiscal union. Since both Germany and France have always violated the Maastricht stability criteria in a similar manner and to a certain extent show comparable patterns of public investments and debt development after the crisis, one could expect that their economic development should show similar patterns also. However, as Collignon underlines the superior competitiveness of the German economy allowed for a quick and effective regional utilisation of governmental stimulus packages. Because of the lacking competitiveness in France the same programmes could not successfully be translated into an upturn of the national economy. Besides these practical examples for potential problems one must not ignore the political reality a fiscal union would currently be confronted with: A hegemonic Germany preaching austerity for others urgently seeking for sources of growth while itself enjoying the fruits of Keynesianism might be the first stumbling block for a political union aiming to be belted not by economic subjection but cooperation in addressing other continents’ markets.
Whereas Collignon suggests waiting for a market based normalization of the current German trade balance surplus her urges France to take effective measures for acceleration of growth. This shall be reached by a package of subsidies for investments in equipment and real estate and restoring competitiveness by lowering unit labour costs through pushing productivity and moderately restraining wages. An accurate orchestration of those measures would allow France to catch up with the German economic hegemony and thereby rebalance the European heart beat. Meanwhile a continued "Collignon-style" analysis of intra-EU bi- and multilateral shall be pursued in order to establish further empirical knowledge and fundaments for setting rational targets against political opportunism.
The Study "Economic growth and competitiveness: A Franco-German tale" by Stefan Collignon can be found under: http://www.bertelsmann-stiftung.de/cps/rde/xbcr/SID-612D50CC-22B7E445/bst/xcms_bst_dms_36629_36631_2.pdf