A comeback by growth, impressive progress in terms of rebuilding external competitiveness despite the euro’s strength, marked improvement in the situation of public finances, structural reforms launched several years ago, even though the consensus about these reforms has recently been challenged: the foregoing justifies the revived interest enjoyed by the German economy. A comparison of economic performances on both sides of the Rhine, apart from the fact that it is intellectually interesting, is justified by the lessons it can lead to. Such a comparison illustrates, in particular, the conclusion that France’s weaknesses are accounted for by problems affecting supply to a far greater extent than any shortfall in demand. It suggests that the reforms that have been recently launched or — more modestly — announced should be continued. In its latest projections, released in December 2007, the OECD showed that Germany’s cyclical situation has noticeably improved. Whereas in the first years of the decade, France systematically outperformed Germany in terms of growth, up 2% per year versus 1% per year from 2000 to 2005, the opposite situation now prevails: GDP grew 3.1% in Germany versus 2.2% in France in 2006 and 2.6% versus 1.9% in 2007. The output gap, which dipped into negative territory in both countries in 2003, subsequently widened, climbing to -2.6 percentage points of GDP in 2005 in Germany and -0.6 percentage point in France. It is now nil in Germany and stands at -0.3 percentage point in France. In France, consumption has constantly grown at a robust pace: its annual increase has never dropped under 2% and actually came in at 2.5% at an annual average during the past seven years. It remained at zero or was slightly negative before picking up moderately in 2006, up to 1.1%, in Germany. Conversely, Germany’s foreign trade balance has markedly recovered. After posting a deficit of 1.8 percentage points of GDP in 2000, the current balance of payments posted a surplus of 4.9 percentage points in 2006 and circa 6 percentage points this year, to be compared with a deficit of 1.3 percentage points in France. The improvement in German performances, accordingly, cannot be accounted for by domestic demand as it has remained anaemic. In comparison with France, German domestic demand has not been very vigorous despite an upturn in the very last few years: it has grown 0.33% per year from 2002 to 2007 versus 2.2% in France. Nonetheless, the growth rate of imports in volume terms has come in at 6.6% per year versus 4.9% in France in the same period. The real difference has to be looked for in German exports, as their growth pace has noticeably accelerated in the last few years. Over the same period, their annual growth rate has exceeded 6.8% versus 3.1% in France. In 2005 and 2006, it climbed to 9.2% and 9.6%, respectively, versus 7.4 and 9.2% for global trade. In other words, Germany has gained market shares. This situation contrasts with the one prevailing in the second half of the 1990s, when German and French performances were relatively similar: 9.5% and 8.3% per year. This vigour of exports is bolstering activity. Foreign trade contributed 1.1 percentage points to growth in Germany in 2006 and 1.3% in 2007, while it cut French growth by 0.3 percentage point in both years (OECD estimates). The improvement has not been recorded exclusively in the trade of goods even though it accounts for most of it. Ex tourism, the balance in services posted a surplus of around 0.5 percentage point of GDP in France in the 1990s, it slipped into negative territory in 2004, down to -0.2 percentage point last year and -0.3 percentage point in 2007. In Germany, where conversely it used to post a deficit, which stood at 1 percentage point of GDP in the late 1990s and early 2000s, it is now virtually balanced. Tourism is the only item that enables France to maintain a surplus in its balance in services. Germany’s relative performance is explained by well-known structural factors: density of its fabric of exporting small and mid-sized companies and, to a smaller extent, favourable sector and geographical specialisation However, these structural elements are not the only factors that account for Germany’s performances. The extent to which Germany’s production facilities have reacted rapidly to developments has played a key role. On the basis of 1 January 1995 = 100, manufacturing output stood at 118.4 in France and 120.4 in Germany in early 2001. The uncoupling occurred later, with the index climbing to 144.2 in Germany but only 119.4 in France in September 2007. Moreover, productive investment is higher as a proportion of GDP in Germany, i.e. 10.4 percentage points versus 9.6 in France on average since 2000. With respect to unit wage costs, remarkable progress has been achieved, in particular because of significant wage restraint. The increase in real wages, calculated by drawing on the GDP deflator, a pertinent method from the viewpoint of companies, has experienced a radical change. From 1992 to 1995, it averaged 3.6% per year in Germany versus 2.8% in France. From 1996 to 2000, it averaged 2.7% in France and 1.1% in Germany, despite an acceleration at the end of the cycle. Since 2001, it has averaged 1.65% per year in France but –0.33% in Germany. In the 1990s, labour productivity gains and labour unit costs trended in a quite similar manner in both countries: 1.25% per year for productivity gains in France and 1.5 in Germany, respectively, from 1992 to 1999 and 1.33 and 1.13 for labour unit costs. Since then, there has been a noteworthy divergence, mostly because of the growing gap in wage costs, as productivity gains have remained similar: 0.9% per year in France versus 1.1% in Germany although France fell back at the end of the period, with 1.76% and 2.76% recorded in 2005 and 2006 in Germany versus 0.32% and 1.37% in France. Unit wage costs have grown 2% per year in France versus 0.3% in Germany, and the differential has increased at the end of the period: -2.3% in 2005 and -1.73% in 2006 in Germany. Lastly, Germany has used outsourcing to a far greater extent, as is shown by changes in the ratio between imports of intermediate goods and GDP. Whereas it was virtually identical in the two countries in the late 1990, around 6.6%, the ratio stood at 8.93% in Germany in 2006 versus 7.14 in France. The developments mentioned above influence competitiveness as measured by drawing on the real trade-weighted exchange rate. On the basis of January 1995 = 100, this rate stood at 94.5 in Germany and 97.8 in France in 1999. After falling to 85.5 and 90.5, respectively, in early 2002 because of the impact of the euro’s depreciation, the real trade-weighted exchange rate now stands at 91.58 in Germany and 97.5 in France, showing that Germany has better protected its price-competitiveness than France. The constraints weighing on productive facilities France and Germany have renewed with a sustained pace of job creation. The unemployment rate had dropped from around 10% in both countries in 2000 to 8% in France and 8.8% in Germany in the previous quarter. Although the joblessness rate remains high, companies report a lack of labour: 8% in France in Q3 2007 and 7% in Germany, as well as equipment bottlenecks: 14% in France and 17% in Germany. The situation is not significantly differently, in fact the opposite is true, from the one witnessed in France in the wake of the introduction of the 35-hour working week: the indicator of labour scarcity surged from 4 to 17 from 1999 to late 2000 while it rose from 3 to 6 in Germany. The financial situation of companies German companies have enjoyed, in stark contrast to their French counterparts, a pronounced improvement in their financial situation in the last few years. For instance, the profit rate, i.e the ratio between gross operating profit and added value, has remained virtually flat around 30.5% in France while it has significantly risen in Germany, up from 36.3% in 2000 to 41.1% last year. At the same time, free cash flow dropped from 83.8% in 2000 to 60% in 2006 in France, while it increased in Germany, up over the same period from 58.8% to 93.2%.
Public finances The situation with respect to general government accounts deteriorated in both countries in the early 2000s. In Germany, the surplus of 1.3 percentage points of GDP in 2000 was replaced by a deficit of 4 percentage points in 2003. At the same time, the French deficit worsened from 1.5 percentage points to 4.1 percentage points of GDP. In 2007, Germany’s public finances are expected to break even, after posting a deficit of 1.6 percentage points of GDP in 2006, while French public finances are simply expected to see the deficit inch down from 2.6 percentage points in 2006 to 2.5 percentage points according to the OECD’s estimates. From 2003 to 2007, the structural balance, calculated by eliminating the effects of the cycle of activity, improved from -3.3 percentage points in Germany to -0.1 percentage point. The progress recorded in France has been noticeably less significant, i.e. down from -4.1% to -2.3% according to the OECD. The German fiscal consolidation drive has been all the more remarkable as it has been achieved in a period during which growth remained anaemic until recently and the country is carrying out ambitious structural reforms. The progress achieved in Germany has come at a price. For instance, since 2000, GDI has grown by a mere 0.7% per year in real terms versus 2.5% in France. The sluggishness of income in Germany has not been offset by increased borrowing. The household debt ratio has decreased since 2000. It has dropped, according to the OECD, from 112.2% of gross disposable income to 102.7% between 2000 and 2006 while it rose by 15.1 percentage points of GDI in France, up to 67.4% in 2006.