Written by Hilary Barnes
With Germany’s second quarter GDP up by 0.7% and France’s by 0.5% compared with the first quarter, the performance of the two largest Eurozone countries lifted the Eurozone GDP increase to 0.3%. A second similarity between the two is that if one takes the first half year, there is almost no increase from either the first or second halves of 2012 to the first half of this year.
Of course the second quarter recovery is encouraging, but, as many commentators have said, it must be confirmed in future quarters before anyone dances for joy.
Destatis, the German statistical office, said the good second quarter performance may have been the effect of a catch-up in demand and output following bad weather that held back activities in the first quarter.
If the same was true for France, INSEE[1], the French statistical office, did not mention it.
But this is where the similarities between Germany and France come to an end.
Germany’s GDP in volume terms has increased by almost 9% since 2009, when both France and Germany’s economy hit a low point; France’s first half GDP was only about 3% above the 2009 trough and unchanged from 2008.
Consumption in the second quarter increased in both Germany and France, but in Germany there was a smart increase in investment was well (although the detailed breakdown of the German figures will first appear on August 23). In France investment declined again, notably for non-financial enterprises, struggling with gross operating profits (as they appear in the national income statistics) of around 28% compared to 40% in Germany, and increased tax charges.
The most outstanding difference between the two countries concerns employment. Germany reported a further increase in employment, this time by 2,42,000 between the second quarters of this year and last. France’s employment declined by 29,700 in the second quarter, taking the fall since the same quarter last year to 1,18,000.
Unemployment in Germany, according to Eurostat – the European Union statistical office – is 5.5% in June while in France it was 10.9%. If France used the International Labour Force Survey figures to when reporting to Eurostat, as the other EU countries do, the French rate, which by this measure was 12.3 in the final quarter of 2012, would probably be about 13% by now.
It is not surprising, therefore, that France’s Finance Minister, Pierre Moscovivi, warned against making too much of the second quarter growth spurt.
The outlook for France does fall out in France’s favour, either, when one turns to the political scene.
Chancellor Angela Merkel can look forward with some confidence to a new term in office following the September Bundestag elections, although it is not clear with which other party or parties, her CDU-CSU[2] conservative groups will be able to form a majority coalition. She will in any event not face an economic situation that requires critical attention.
In France, on the other hand, economists and commentators are worried that slow progress in improving the competitiveness of the economy and the persistence of budget deficits that exceed the target levels laid down in agreements with the European Commission may at any time expose the country being made the object excessive “debt procedures” laid down for Eurozone countries.
This would mean in effect that France is told what measures it must implement by the Troika, the ECB, the EU Commission and the IMF – “the great disaster”, as Charles Wyplosz of the Geneva School of Graduate Studies described it recently.
Much also depends on how financial markets view the situation. If they lose confidence, France may see interest rates on sovereign debt spike suddenly, with the effect of a possible tapering of the US Fed’s quantitative easing measures on the bond market – an added complication.
France has done quite a lot by way of reforms, but mostly small steps (see a summary the inset in the article here France and Italy: The scale of the necessary adjustments will require real reforms and no longer marginal improvements from Natixis, the investment bank).
These reforms, however, have made little detectable progress in restoring competitiveness, which is being affected advesity by a high level of government spending (56% of GDP and likely by the end of this year to pass the Danish level, making France top of this particular league among industrial countries) which slows GDP growth; low corporate profit margins, which discourage investment, lead to low levels of productivity improvement and declining levels of product sophistication; high unit labour costs, that affect export market shares.
Natixis’ conclusion are no doubt open to argument, but they indicate that major shifts are necessary to get the economy inot better shape.
- In France, an 8.1% point fall in domestic demand to rebalance the current-account balance;
- For government spending to be adjusted in proportion to the loss of GDP since the start of the crisis, it would have to be reduced by 5.3%;
- A reduction in unit labour costs of 18% in France and 25% in Italy would be needed to bring industrial profit margins back to their 1998 level;
- A reduction in unit labour costs of 29% would be needed to bring the export market share back to its 1998 level.
Earlier this year the European Commission allowed France a two year extension for reducing the budget deficit to the maximum permitted by the Maastricht Treaty of 3.0% of GDP after the 2012 deficit, which was supposed to have been reduced to 3.7%, ran to 4.5%.
This year, according to its commitments to the EU Commission, the deficit is supposed to be reduced to 3.7%, but opposition budget specialists say the January-to-June budget figures suggest the deficit is likely to be about 4% of GDP, leaving the debt to GDP ratio is likely at about 94% of GDP.
Any measures to toughen up the austerity policies already in place, which in 2012-13 have a contractive effect on GDP growth of about 1.9% but should hopefully have a contractive effect of only about 1% in 2014, remains to be seen.
This should become clear when the government presents the 2014 Finance Bill in mid-September.
The other major task facing the government are reforms of the pension system, which is heading for a deficit of about €21bn (about 1% of current GDP) by 2020 and will only get worse if nothing is done now, but all options for reform are unpopular and may unleash strikes and street protests.
President François Hollande has no national elections on the calendar, but he and his government are already deeply unpopular and there are municipal elections in the spring and European Parliament elections June to think about. On present form, the Hollande’s Socialist Party stands to suffer serious set backs, which would be demoralising, but not necessarily have any other consequences.
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- Institut National de la Statistique et des Études Économiques
- Christian Democratic Union of Germany (CDU) and the Christian Social Union of Bavaria (CSU)
