Download `France`–`the`new`sick`man`of`Europe?

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Title:'France'–'the'new'sick'man'of'Europe?'
A'critical'macroeconomic'analysis'
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Submitted'by:'
David'Gölnitz'
Berlin'School'of'Economics'and'Law'
Department'Economics'and'Business'
MA'Political'Economy'of'European'Integration!
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Table&of&contents&
Table!of!contents!........................................................................................................................!2!
List!of!figures!...............................................................................................................................!2!
List!of!tables!.................................................................................................................................!3!
1.!Introduction!............................................................................................................................!5!
2.!Structural!characteristics!and!macroeconomic!performance!...........................!6!
3.!Theoretical!framework:!Macroeconomic!Policy!Regimes!................................!10!
3.1.!Literature!review!.......................................................................................................!11!
3.2.!Elements!of!a!functional!macroeconomic!policy!regime!.........................!12!
4.!France’s!Macroeconomic!Policy!Regime!..................................................................!14!
4.1.!Macroeconomic!performance!in!France!and!Germany!1999M2013!....!15!
4.2.!Monetary!policy!.........................................................................................................!16!
4.3.!Fiscal!policy!..................................................................................................................!18!
4.4.!Wage!policy!..................................................................................................................!21!
4.5.!Open!economy!............................................................................................................!23!
4.5.!Identifying!a!macroeconomic!policy!regime!.................................................!24!
5.!Explaining!the!open!flank!of!net!exports!.................................................................!25!
5.1.!Literature!review!.......................................................................................................!25!
5.2.!Export!performance!.................................................................................................!28!
5.2.1.!Price,!cost!and!nonMprice!competitiveness!............................................!31!
5.2.2.!!Geographical!orientation!..............................................................................!36!
5.3.!Summary!.......................................................................................................................!42!
6.!France!–!the!new!sick!man!of!Europe?!.....................................................................!43!
7.!Policy!implications!............................................................................................................!47!
8.!Conclusion!.............................................................................................................................!51!
Bibliography!..............................................................................................................................!53!
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List&of&figures&
!
Figure!1:!Real!GDP!growth!in!France!and!Germany,!1991M1999,!per!cent!.......!9!
Figure!2:!Employment*!growth!in!France!and!Germany,!1991M1999!.............!10!
Figure!3:!Real!GDP!growth!France!and!Germany!1999M2013,!per!cent!..........!15!
Figure!4!Sectoral!financial!balances!as!percentage!share!of!nominal!GDP!in!
France!1999M2013!........................................................................................................!18!
Figure!5!Sectoral!financial!balances!as!percentage!share!of!nominal!GDP!in!
Germany!1999M2013!...................................................................................................!19!
Figure!6!Sectoral!financial!balances!as!percentage!share!of!nominal!GDP!in!
Germany!1999M2013!...................................................................................................!20!
Figure!7!Cyclically!adjusted!budgetMbalance!as!percentage!of!potential!GDP,!
Stuctural!Government!Balance!and!Output!gaps!in!France!1998M2013!20!
Figure!8:!Net!exports!of!goods!and!services!as!share!of!GDP,!France!1999M
2013,!in!per!cent.!...........................................................................................................!28!
Figure!9:!France’s!exports!and!export!market!for!Chemicals!and!related!
products!1999M2013!....................................................................................................!28!
Figure!10!France’s!exports!and!export!market!for!Chemicals!and!related!
products!1999M2013!....................................................................................................!29!
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Figure!11:!France’s!exports!and!export!market!for!machinery!and!transport!
equipment!1999M2013!................................................................................................!29!
Figure!12:!Export!price!deflators!of!goods,!1999M2013,!national!currency!
(2005=100)!.....................................................................................................................!31!
Figure!13:!Nominal!unit!labour!costs!total!economy,!1999M2013,!national!
currency!(2005=100)!..................................................................................................!32!
Figure!14:!NonMprice!competitiveness!index!of!exports!1999M2011!of!
advances!countries!.......................................................................................................!34!
Figure!15:!Margin!rate!of!manufacturing!industry,!France,!1980M2011!.........!35!
Figure!16!Business!R&D!expenditure!as!share!of!GDP,!per!cent,!2000M2008,!
per!cent!..............................................................................................................................!35!
Figure!17:!IntraMeuro!area!exports!as!share!of!total!exports!of!Germany,!in!
per!cent!..............................................................................................................................!36!
Figure!18:!IntraMeuro!area!exports!as!share!of!total!exports!of!France,!per!
cent!......................................................................................................................................!37!
Figure!19:!Balance!of!trade!of!industrial!products!with!the!world,!France!
1999M2013,!in!dollar!....................................................................................................!40!
Figure!20:!Balance!of!trade!of!industrial!products!with!the!euro!area,!France!
1999M2013,!in!dollar!....................................................................................................!40!
Figure!21:!Balance!of!trade!of!industrial!products!with!the!world!of!France,!
excluding!Germany!.......................................................................................................!41!
Figure!22:!Balance!of!trade!of!industrial!products!with!the!euro!are!of!
France,!excluding!Germany!......................................................................................!42!
Figure!23:!Real!GDP!growth!major!industrial!countries!and!EAM12,!1999M
2014,!per!cent!.................................................................................................................!45!
Figure!24:!Unemployment!rates*!major!industrial!countries!and!EAM12,!
1999M2014,!per!cent!....................................................................................................!45!
Figure!25:!Gross!fixed!capital!formation!as!share!of!nominal!GDP!of!major!
industrial!countries!and!EAM12,!1999M2013,!per!cent!..................................!46!
Figure!26:!DebtMGDP!ratio!of!major!industrial!countries!and!EAM12,!1999M
2013,!per!cent!.................................................................................................................!46!
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List&of&tables&
!
Table!1:!Labour!market!and!welfare!state!institutions!of!France!in!
comparison!to!EUM12!and!Germany!(1960M1999)!.............................................!7!
Table!2:!Macroeconomic!performance!in!France!and!Germany,!average!
values!1999M2007!and!2008M2013!........................................................................!16!
Table!3:!Key!macroeconomic!variables!of!monetary!policy!in!France!and!
Germany,!average!values!1999M2007!and!2008M2013!.................................!17!
Table!4:!Key!macroeconomic!variables!of!wage!policy!in!France!and!
Germany,!1999M2007!and!2008M2013!.................................................................!22!
Table!5:!Key!macroeconomic!variables!open!economy!in!France!and!
Germany,!1999M2007!and!2008M2013!.................................................................!23!
Table!6:!Export!performance!of!industrial!products,!France!and!Germany,!
annual!growth!rates!1999M2007!and!2008M2013,!per!cent!........................!30!
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Table!7:!French!import!demand!for!industrial!goods,!annual!growth!rates,!
per!cent!..............................................................................................................................!31!
Table!8:!Gross!domestic!R&D!expenditure!as!share!of!GDP!per!cent,!1995M
2008!....................................................................................................................................!35!
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1.&Introduction&
!
In! 2007! France! was! dubbed! as! the! new! sick! man! of! Europe! by! the!
investment! bank! Morgan! Stanley,! due! to! France’s! lack! of! competitiveness!
and!poor!performance!in!terms!of!GDP!growth,!exports,!unemployment!and!
public! finances! (Morgan! Stanley! 2007).! In! 2012,! the! former! CEO! of! EADS!
and! then! government’s! Commissioner! for! Investment! submitted! a! report!
concerned! with! the! competitiveness! of! the! French! economy.! The! report!
attests!France!a!lack!of!competitiveness!that!threatens!jobs,!the!standard!of!
living!and!social!security.!This!lack!of!competitiveness!would!be!most!visible!
in! the! decline! of! value! added! in! industry,! the! loss! of! market! shares! of!
industrial! products! in! global! markets! and! a! negative! balance! of! goods! and!
services.! Accordingly,! this! problematic! requires! structural! reforms! (Gallois!
2012).!!
Historically,!the!phrase!‘sick!man!of!Europe’!can!be!traced!back!to!a!
misquotation! of! Tsar! Nicholas! I! of! Russia! in! the! New! York! Times! in! 1860,!
referring!to!the!Ottoman!Empire.!The!Tsar!described!the!Empire!as!the!sick!
man!upon!the!Bosporus,!since!it!has!fallen!into!a!state!of!disrepair!due!to!the!
growing! influence! of! the! European! powers! M! a! state! that! is! associated! with!
decay,!weakness,!and!infirmity.!In!the!course!of!the!last!150!years,!the!title!
of!the!sick!man!has!been!passed!around!the!globe!(China!and!DR!Congo).!!In!
Europe,! the! term! was! applied! to! almost! every! major! country! since! the!
1970s.! However,! the! meaning! shifted! from! rather! geoMpolitical! issues! to!
economics.! Now! it! is! known! as! a! term! referring! to! poor! economic!
performance!caused!by!institutional!sclerosis,!i.e.!rigid!labour!markets!and!
generous!welfare!state!institutions.!!
When! Germany! was! coined! the! ‘sick! man! of! Europe’! in! 1999,! this!
phrase! was! supposed! to! talk! down! the! soMcalled! Modell& Deutschland& that!
was!inferior!to!the!AngloMSaxon!model!of!capitalism,!due!its!sclerotic!labour!
market! and! generous! welfare! state,! that! was! visible! in! the! weak! economic!
development!and!rising!unemployment!after!the!unification.!However,!there!
have! been! both! theoretical! and! empirical! doubts! concerning! the! negative!
impact! of! labour! market! and! welfare! state! institutions! on! growth! and!
!
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employment! (Hein/Truger! 2005;! Horn! 2007).! Nonetheless,! the! German!
reforms!of!the!‘agenda!2010’!are!often!seen!as!blueprint.!
Therefore,! in! contrast! to! this! institutional! sclerosis! view! this! paper!
aims!at!examining!the!French!economy!from!a!macroeconomic!perspective.!
The! guiding! question! therefore! simply! is! whether! France! is! the! new! sick!
man! of! Europe.! Furthermore,! the! paper! aims! to! bring! the! problem! of! the!
trade!deficit!into!focus.!
The! paper! is! structured! as! follows.! Initially,! the! paper! examines! the!
consistency! of! the! institutional! sclerosis! view! with! regard! to! France.!
Consequently,!the!postMKeynesian!concept!of!macroeconomic!policy!regime!
is!outlined!in!section!3.!Section!4!summarizes!the!economic!development!of!
France! and! identifies! the! French! macroeconomic! policy! regime! for! the!
period! of! 1999M2013.! Section! 5! critically! assesses! the! French! export!
performance.!In!section!6,!the!question!of!whether!France!is!new!sick!man!
of!Europe!is!discussed!against!the!background!of!the!French!macroeconomic!
policy! mix! and! the! export! performance.! Section! 7! briefly! discusses! policy!
implications.! Finally,! section! 8! summarizes! the! findings! and! concludes! the!
analysis.!!
!
2.&Structural&characteristics&and&macroeconomic&
performance&&
!
Theoretically,! this! institutional! sclerosis! view! refers! to! a! complete! and!
perfect!neoclassical!labour!market.!In!this!view!unemployment!arises!from!
market!imperfections!that!impede!the!proper!functioning!of!market!forces.!
Institutions! of! collective! bargaining,! labour! market! regulation! and! the!
welfare! state! constitute! market! imperfections! and! thus! the! cause! of! rising!
unemployment.!From!this!theoretical!point!of!view,!unemployment!can!only!
be! reduced! by! abolishing! of! these! imperfections! of! the! labour! market,! i.e.!
structural! reforms! that! aim! at! decentralizing! the! collective! bargaining,!
deregulating! the! labour! market! and! dismantling! the! welfare! state.!
Alternative! macroeconomic! explanations! are! usually! neglected! and! often!
!
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dismissed!as!attempts!to!prevent!the!urgently!needed!process!of!structural!
reforms!(Hein/Truger!2005).!
When!Germany!was!coined!the!‘sick!man!of!Europe’,!this!phrase!was!
supposed!to!talk!down!the!soMcalled!Modell&Deutschland&that!was!inferior!to!
the! AngloMSaxon! model! of! capitalism,! due! its! sclerotic! labour! market! and!
generous!welfare!state,!that!was!visible!in!the!weak!economic!development!
and! rising! unemployment! after! the! reunification.! Hein! and! Truger! (2005)!
challenged! this! institutional! sclerosis! view! for! Germany! by! comparing!
institutional! variables! (index! of! employment! protection,! benefit!
replacement! rate,! benefit! duration,! union! density,! bargaining! coordination!
and!tax!wedge)!of!Germany!to!EU!and!OECD!averages,!while!also!offering!a!
macroeconomic! explanation! for! the! weak! economic! development! in!
Germany.!This!serves!a!framework!for!the!analysis!of!France.!
!
Table' 1:' Labour' market' and' welfare' state' institutions' of' France' in' comparison' to' EUK12' and'
Germany'(1960K1999)'
Period
1960;1964
1965;1969
1970;1974
1975;1979
1980;1984
1985;1989
1990;1994
1995;1999
Indicators+for+France
Employment.
Benefit.replacement. Benefit.duration
protection
rate
Union.density
0.37
0.55
0.97
1.26
1.30
1.31
1.42
1.40
19.74
20.02
21.74
20.98
17.06
12.32
10.26
9.90
48.15
51.78
52.48
56.11
62.46
58.90
58.21
57.88
0.28
0.25
0.20
0.19
0.32
0.47
0.50
0.51
Period
1960;1964
1965;1969
1970;1974
1975;1979
1980;1984
1985;1989
1990;1994
1995;1999
French+indicators+minus+average+indicators+for+EU612
Employment.
Benefit.replacement. Benefit.duration
protection
rate
;0.59
19.87
;0.01
;0.54
17.68
;0.08
;0.32
15.53
;0.18
;0.15
14.70
;0.21
;0.16
17.65
;0.12
;0.15
10.48
;0.01
0.02
8.06
;0.01
0.20
7.37
;0.02
Period
1960;1964
1965;1969
1970;1974
1975;1979
1980;1984
1985;1989
1990;1994
1995;1999
French+indicators+minus+indicators+for+Germany
Employment.
Benefit.replacement. Benefit.duration
protection
rate
;0.08
5.45
;0.29
;0.25
9.91
;0.32
;0.57
12.78
;0.38
;0.39
16.56
;0.43
;0.35
23.64
;0.30
;0.32
21.15
;0.13
;0.08
20.81
;0.11
0.10
21.54
;0.09
Union.density
;14.60
;15.28
;17.54
;23.22
;26.15
;27.10
;27.62
;27.18
Union.density
;14.10
;12.40
;10.78
;14.16
;17.82
;21.12
;20.71
;17.48
Bargaining.
coordination
2
2
2
2
2
2
2
2
Tax wedge
Bargaining.
coordination
;0.27
;0.24
;0.31
;0.30
;0.20
;0.14
;0.37
;0.80
Tax wedge
Bargaining.
coordination
;0.50
;0.50
;0.50
;0.50
;0.50
;0.50
;0.50
;0.50
Tax wedge
54.88
56.47
57.91
60.52
63.63
66.43
66.61
68.03
14.40
12.25
10.69
14.66
14.95
13.97
13.57
14.25
12.04
13.68
11.26
12.21
13.89
15.97
14.38
14.17
!
Notes:'An'exact'definition'and'a'documentation'of'the'origin'of'the'data'is'given'by'Nickell'et'al.'
and' Baker' et' al.' (2002).' Index' of' employment' protection' legislation' (0K2):' 0' =' low,' 2' =' high.'
Benefit'replacement'rate'before'taxes'as'percentage'of'previous'income'before'taxes.'Average'
values'for'two'income'levels'(100%'and'67%'of'average'income)'and'three'family'typs'(single,'
family' with' one' earner,' family' with' two' earners),' based' on' OECD' Data.' Index' of' benefit'
duration:'weighed'arithmetic'mean'of'benefit'replacement'ratios'after'2K5'years'in'proportion'
to' first' year' of' benefit' replacement' ratio.' Based' on' OECD' Data.' Index' of' trade' union' density:'
employed' union' members' as' percentage' of' total' employed.' Index' of' wage' bargaining'
!
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coordination' (1K3):' 1' 0' low,' 3' =' high).' Based' on' OECD' data.' Tax' wedge:' Total' average' labour'
tax'burden'(payroll'taxes,'social'contributions,'labour'income'tax,'consumption'tax).'20'OECD'
countries:' Australia,' Austria,' Belgium,' Canada,' Denmark,' Finland,' France,' Germany,' Ireland,'
Italy,'Japan,'Netherlands,'New'Zealand,'Norway,'Portugal,'Spain,'Sweden,'Switzerland,'United'
Kingdom.'Sources:'Baker'et'al.'and'Nickell'et'al.,'author’s'calculation.''
!
In!table!1,!one!can!see!the!labour!market!and!welfare!state!institutions!that!
are! considered! to! be! market! imperfections! and! thus! causes! of!
unemployment!according!neoclassical!labour!market!theory:!
•! Employment! protection! legislation! is! seen! as! cost! factor! leading! to!
lower! labour! demand! because! of! the! cost! of! dismissals,! which!
prevents!firms!from!hiring.!
•! The! benefit! replacement! rate! constitutes! a! reservation! wage! set! by!
the!welfare!state.!It!is!seen!to!reduce!the!incentive!to!take!up!work.!
Second,! it! reduces! the! incentives! of! trade! unions! to! bargain!
responsibly,! which! in! turn! would! raise! wages! and! therefore!
unemployment.!The!duration!of!the!benefits!of!course!has!an!impact!
on!the!incentives.!
•! High! union! density! and! coordinated! and/or! centralized! wage!
bargaining! lead! to! high! unemployment! via! excessive! wages! and!
inadequate!wage!structure.!
•! The! tax! wedge! consists! of! payroll! taxes,! labour! income! taxes,! social!
security! contributions! and! consumption.! The! higher! the! tax! wedge!
the! lower! the! net! wage! and! thus! the! lower! the! incentive! to! work.!
Furthermore! it! is! seen! to! reduce! employers’! and! trade! unions’!
inclination! to! accept! wage! moderation,! which! in! turn! is! believed! to!
raise! wages! above! the! clearing! level! and! therefore! unemployment!
(Hein/Truger!2005).!
!
The!‘institutional!sclerosis’!in!France!was!more!or!less!stable!throughout!the!
1990s.!Compared!to!the!EUM12!there!was!some!convergence!with!respect!to!
the! benefit! replacement! rate.! The! duration! of! benefits! and! employment!
protection!deviated!only!slightly.!However,!collective!bargaining!and!union!
density! were! considerably! lower.! The! tax! wedge! was! significantly! higher.!
For! the! second! half! of! the! 1990s,! the! French! indicators! in! comparison! to!
!
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Germany!were!significantly!higher!in!terms!of!the!benefit!replacement!rate!
and! the! tax! wedge.! Employment! protection! and! benefit! duration! deviated!
only! slightly,! whereas! wage! coordination! and! union! density! were!
considerably! lower.1!Hence,! throughout! the! 1990s! when! Germany! was!
coined! the! new! sick! man! of! Europe! France! was! even! more! sclerotic.!
Following!the!rationale!of!institutional!sclerosis!view,!this!would!have!led!to!
lower! growth! and! employment.! However,! both! growth! and! employment!
developed! better! in! France! at! least! in! the! second! half! of! the! 1990s,! which!
implies! at! least! ambiguity! with! regard! to! the! institutional! sclerosis! view!
(figures!1!&!2).!!
Figure'1:'Real'GDP'growth'in'France'and'Germany,'1991K1999,'per'cent'
104
103
102
101
100
99
98
97
96
1991
1992
1993
1994
France
1995
1996
1997
1998
1999
Germany
!
Source:'European'Commission'(2014),'author’s'calculation.'
!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1!It!is!important!to!note!that!the!French!government!used!frequently!the!legal!extension!of!
sectoral!or!company!agreements!of!national!champions!(Eurofound!2011).!
!
9!
Figure'2:'Employment*'growth'in'France'and'Germany,'1991K1999'
104
103
102
101
100
99
98
97
96
1991
1992
1993
1994
France
1995
1996
1997
1998
1999
Germany
!
Source:'European'Commission'(2014).'*Expressed'in'total'hours'worked.'
In! contrast! to! the! institutional! sclerosis! view,! Hein! and! Truger! (2005)!
argue!that!country!specific!factors!and!macroeconomic!variables!have!to!be!
taken!into!account,!in!order!to!explain!differences!in!economic!development.!
With! regard! to! Germany’s! slump! after! the! unification,! they! offer! a!
macroeconomic! story! pointing! to! the! ill! designed! and! restrictive!
macroeconomic! policy! mix.! Aforementioned,! it! does! not! seem! to! be!
consistent!that!France!has!not!been!the!sick!man!of!Europe!throughout!the!
1990s.! Thus,! the! deliberation! that! a! country’s! economic! performance! is!
mainly! influenced! by! its! macroeconomic! policies! is! meant! to! serve! as! the!
guiding!framework!in!this!paper.!
!
!
3.&Theoretical&framework:&Macroeconomic&Policy&Regimes&
!
The!concept!of!macroeconomic!policy!regimes!essentially!contains!the!idea!
that! for! the! explanation! of! comparative! macroeconomic! performances! the!
macroeconomic!policy!mix!as!a!whole!is!important.!Moreover,!the!concept!of!
macroeconomic! policy! regimes! follows! the! idea! that! there! is! a! functional!
MPR! consisting! of! monetary,! fiscal! and! wage! policy! that! serves! as! a!
benchmark! and! is! able! to! deliver! sustainable! growth! and! full! employment.!
!
10!
The!actual!economic!policy!outcomes!of!a!certain!country!in!a!certain!period!
of!time!are!then!assessed!against!the!background!of!the!functional!MPR.!In!
this! paper,! the! conceptualization! of! the! functional! macroeconomic! policy!
regime! will! be! in! PostMKeynesian! fashion.! But! what! qualifies! a! functional!
MPR! to! be! postMKeynesian?! In! the! postMKeynesian! approach! the!
development! of! aggregate! demand! determines! growth! and! employment! in!
both! the! short! and! the! long! run.! Private! investment! that! is! an! important!
driver!of!economic!activity!is!affected!by!the!interest!rates!set!by!monetary!
policy!and!profit!expectations!of!firms.!Fiscal!policy!plays!a!central!role!for!
the!determination!of!aggregate!demand!in!both!the!short!and!the!long!run.!
In! contrast! to! the! institutional! sclerosis! view,! postMKeynesians! argue! that!
the!labor!market!is!a!derived!market,!because!wage!setting!does!not!effect!
employment! directly.! Employment! is! determined! by! the! interaction! of!
financial! markets! through! the! interest! rates! and! goods! market! where! total!
output! is! determined.! Wages! act! as! a! nominal! anchor! preventing! the!
economy!from!developing!inflation!or!deflation!(Truger/Hein!2005).!
!
!
3.1.&Literature&review&
!
Within!the!postMKeynesian!research!program!there!is!only!a!limited!variety!
of! approaches! towards! macroeconomic! policy! regimes.! The! term! regime!
refers! generally! to! the! rationale! that! the! analysis! of! macroeconomic!
performance! of! a! certain! country! has! to! take! into! account! not! only! one!
policy! area! but! rather! the! interaction! all! elements! determining! a! regime.!
Conceptually,! the! different! authors! share! the! dominance! of! the!
macroeconomic! policy! areas! monetary,! fiscal,! and! wage! policy!
(Heine/Herr/Kaiser! 2006,! Hein/Truger! 2009).! Herr! and! Karandziska!
(2011)!add!the!structure!of!the!financial!system!and!foreign!economic!policy!
as! further! elements.! Based! on! Heine,! Herr! and! Kaiser! (2006),! Herr! and!
Kazandziska!(2011)!developed!a!definition!that!stresses!the!embeddedness!
of! the! interaction! between! the! policy! areas! within! an! institutional!
framework,! which! can! partly! be! actively! shaped! by! policy! makers.! In!
!
11!
contrast,!Hein!and!Truger!(2009!and!2014)!also!emphasize!the!importance!
of! the! interaction! of! various! macroeconomic! policies,! however! the! actual!
macroeconomic!policy!regime!is!not!understood!as!the!outcome!of!a!certain!
strategic! choice! based! in! macroeconomic! institutions.! Actual! MPRs! are!
identified! by! data! based! examination! of! key! macroeconomic! variables,!
which!are!in!turn!discussed!against!a!functional!postMKeynesian!MPR.!
!
3.2.&Elements&of&a&functional&macroeconomic&policy&regime&&
!
Each! macroeconomic! policy! regime! consists! of! the! following! policy! areas:!
monetary,! fiscal! wage! and! the! open! economy,! which! require! careful!
coordination.!This!section!outlines!the!elements!and!their!policy!implication!
from!a!postMKeynesian!perspective.!!
With! respect! to! the! policy! implication,! postMKeynesians! downgrade!
the! weight! of! monetary! policy! in! managing! real! economic! activity.! Central!
banks!should!abstain!from!fineMtuning!unemployment!in!the!short!run!and!
inflation!in!the!long!run.!This!is!due!to!asymmetric!effectiveness!of!interest!
rates! policies! with! regard! to! achieving! two! macroeconomic! goals.! For!
instance,! raising! the! base! interest! rate,! in! order! to! achieve! a! certain! price!
level! will! ultimately! lead! to! higher! credit! rates! that! harm! investment! and!
thus! growth.! On! the! other! hand,! in! deflationary! circumstances! monetary!
policy!is,!due!to!the!zero!lower!bound,!ineffective.!Accordingly,!central!banks!
should! focus! on! maintaining! low! real! interest! rates! in! credit! and! financial!
markets,! that! are! slightly! positive! and! below! the! longMterm! rate! of! labor!
productivity!or!longMterm!real!GDP!growth,!in!order!to!stimulate!investment!
and!therefore!effective!demand!and!growth!(Hein/Truger!2014).!This!policy!
implication!allocates!the!function!of!regulating!real!stabilization!in!the!short!
run!and!inflation!in!the!long!run!to!the!other!policy!areas,!namely!fiscal!and!
wage!policies.!
In!postMKeynesian!macroeconomics,!fiscal!policy!has!a!major!role!to!
play!as!real!stabilizer!in!the!short!and!the!long!run.!This!instrument!allows!
to! effectively! manage! demand! through! taxes,! expenditure! and! public!
investment.! Together! with! low! interest! rates! in! financial! markets! and!
!
12!
aggregate!demand!stabilized!by!means!of!fiscal!policy!in!the!goods!market,!
positive! profit! expectations! stimulate! investment! which! is! an! essential!
determinant! of! effective! demand! (Hein/Truger! 2008:! 16).! Fiscal! policy!
should! aim! at! real! stabilization! of! aggregate! demand! at! full! employment!
levels! and! consist! of! automatic! stabilizers! and! discretionary! antiMcyclical!
fiscal! measurers! that! are! under! direct! control! of! the! central! government.!
Taking! the! functional! finance! view! pioneered! by! Lerner! (1943),! the!
government!deficit!should!absorb!the!excess!of!private!saving!over!private!
investment!over!the!cycle,!since!this!would!mean!a!roughly!balanced!current!
account,! which! is! close! to! the! soMcalled! ‘balance! of! payments! constrained!
growth!rate’!(Hein/Truger!2014:!83).!
With! respect! to! wage! policy,! it! is! argued! that! nominal! wages! –!
assuming! given! productivity! or! secular! trend! –! determine! unit! labor! costs!
that!are!in!turn!the!major!determinant!of!prices!and!inflation.!In!this!context,!
nominal!wage!flexibility!is!here!seen!as!a!problem!–!although!not!so!much!
with!respect!to!inflation!but!to!deflation!M!because!it!bears!the!risk!of!falling!
prices! and! inflation! rates! which! has! destabilizing! effects! on! aggregate!
demand! and! increases! unemployment! because! of! real! debt! deflation! and!
negative! impact! on! expectation! formations! of! firms! and! consumers.!
Furthermore,! wage! moderation! has! also! negative! impacts! on! domestic!
demand! and! productivity! growth,! in! particular! in! wageMled! economies.!
Hence,!wage!and!income!policies!are!concerned!with!setting!nominal!wages!
and! thus! nominal! stabilization.! In! order! to! avoid! destabilizing! effects,! unit!
labor!costs!should!grow!at!a!similar!rate!to!inflation!target!or!nominal!wages!
should! grow! in! line! with! the! long! run! labor! productivity! growth! plus! the!
inflation! target! (Hein/Truger.! 2008:! 7M8).! This! wage! formula! keeps!
functional! income! shares! constant! and! avoids! destabilizing! effects! of! real!
wage! flexibility! and! therefore! increases! the! room! of! maneuver! of! fiscal!
policies!for!effective!demand!without!the!risk!of!accelerating!inflation!rates.!!
Accelerating! inflation! and! a! central! bank! that! aims! at! fighting! inflation! by!
raising! interest! rates! can! cause! distributional! conflicts,! as! firms’! price!
setting! has! to! cover! higher! interest! costs! (Hein/Truger! 2014:! 80).!
Furthermore,! following! the! wage! formula! would! also! prevent! ‘beggarMthyM
!
13!
neighbour’Mpolicies.! From! these! policy! implications! we! can! derive! that! a!
careful! coordination! of! the! three! policy! areas! of! monetary! policy,! fiscal!
policy!and!wage!policy!is!required.!!
Conceptually,!the!area!of!the!open!economy!is!not!a!policy!area!in!the!
strict! sense.! Basically,! it! is! concerned! with! international! competitiveness!
and! the! integration! into! the! world! market.! Because! there! is! no! single!
macroeconomic!policy!area!or!tool!that!could!aim!at!managing!the!external!
account!of!a!MPR,!international!competitiveness!is!influenced!by!prices!and!
costs,! global! demand! and! imports.! The! effective! exchange! rate,! as! a!
macroeconomic! indicator! focuses! on! inputs,! especially! labour.! This! is! a!
macroeconomic!indicator!that!takes!into!account!the!exchange!rate!relative!
to! major! industrial! countries! based! on! unit! labour! costs! and! weighted!
according! to! the! export! structure! in! terms! of! the! geographical! orientation.!
Basically,! as! outlined! above,! the! current! account! should! be! balanced,! in!
order! to! avoid! macroeconomic! imbalances.! Additionally,! the! wage! policies!
should! prevent! mercantilist! strategies.! The! balance! of! trade,! in! turn,! is! an!
indicator! for! the! outcome! competitiveness! as! it! takes! into! account! both!
exports!and!imports.!!
!
4.&France’s&Macroeconomic&Policy&Regime&
!
The! analysis! of! the! effects! of! the! French! macroeconomic! policy! regime! on!
competitiveness! will! not! only! examine! France! but! also! Germany! as! a!
reference!anchor.!This!is!for!two!reasons.!First!of!all,!authors!from!different!
theoretical! backgrounds! claim! that! France! has! a! lack! of! international!
competitiveness! relative! Germany,! or,! respectively,! that! France! as! an!
‘innocent!victim,!suffered!from!German!mercantilist!exportMled!development!
(Gallois!2012,!SVR!2014,!Hein/Truger!2009!and!2014,!Flassbeck/Lapavitsas!
2013,! and! Lucarelli! 2013).! Secondly,! France! and! Germany! are! the! most!
important!countries!within!euro!area,!and!have!a!comparable!size.!!
The!period!under!consideration!covers!the!years!from!the!beginning!
of!the!currency!union!in!1999!until!the!2013.!This!is!for!two!reasons.!First!of!
!
14!
all,! 1999! marks! the! beginning! of! the! ‘Maastricht! regime,! consisting! of! the!
fiscal! rules! of! the! Stability! and! Growth! Pact! (SGP)! and! the! common!
monetary! policy! carried! out! by! the! European! Central! Bank.! Secondly,! this!
period! allows! for! an! assessment! of! the! impact! and! repercussions! of! the!
global! financial! and! economic! crisis.! Therefore,! the! assessment! is! divided!
into!the!two!periods!1999M2007!and!2008M2013.!
!
4.1.&Macroeconomic&performance&in&France&and&Germany&1999J2013&
!
The! macroeconomic! performance! is! assessed! by! four! key! macroeconomic!
variables:!real!GDP!growth,!employment,!demand!structure!and!inflation.!
Figure'3:'Real'GDP'growth'France'and'Germany'1999K2013,'per'cent'
6.0
4.0
2.0
0.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
M2.0
M4.0
M6.0
France
Germany
!
Source:'European'Commission'(2014),'author’s'calculations.' '
Over! the! period! of! 1999M2007,! France! outperformed! Germany! in! terms! of!
GDP! growth,! which! averaged! 2.2! per! cent! compared! to! 1.7! per! cent.!
Unsurprisingly,!the!global!economic!crisis!constituted!a!break!with!respect!
to!economic!performance.!Between!2008!and!2013!the!French!real!growth!
rate!then!averaged!at!only!0.1!per!cent,!reflecting!double!dip!in!2008M9!and!
2012.! Germany’s! recovery! from! the! global! economic! crisis! was! better.! The!
GDP! growth! averaged! at! 0.7! per! cent.! In! terms! of! employment,! the! picture!
was!similar.!In!the!first!period!under!consideration,!employment!in!France!
grew,!whereas!employment!decreased!in!Germany.!In!the!wake!of!the!crisis,!
!
15!
this!picture!turned!around.!Inflation!in!France!met!the!ECB’s!inflation!target!
and!was!only!slightly!lower!in!Germany.!
Over! the! period! of! 1999M2007,! French! growth! was! exclusively!
domestic! demand! driven,! in! particular! by! private! consumption! and! gross!
fixed!capital!formation!with!a!negative!contribution!of!the!balance!of!goods!
and!services.!In!contrast,!Germany!relied!heavily!on!external!demand,!while!
domestic!demand!was!considerably!weaker,!in!particular!investment.!!
In! the! wake! of! the! crisis,! France! lost! its! growth! favourable! demand!
structure.! Domestic! demand! collapsed,! however! the! balance! of! goods! and!
services! did! not! hamper! growth! any! more.! Germany,! on! the! contrary,!
experienced!a!relatively!stable!but!low!growth!contribution!from!domestic!
sources.! However,! the! contribution! of! the! balance! of! goods! and! services!
became!almost!neutral.!
Table'2:'Macroeconomic'performance'in'France'and'Germany,'average'values'1999K2007'and'
2008K2013'
France
1999#2007
2008#2013
Germany
1999#2007
2008#2013
Real-GDP-growth,-per-cent
2.2
0.1
1.7
0.7
Employment-growth,-per-cent
0.4
#0.2
#0.2
0.4
Inflation-(HCIP-growth-rate),-per-cent
Growth-contribution-of-domestic-demand-includingstocks,-percentage-points
Growth-contribution-of-private-consumption,percentage-points
Growth-contribution-of-public-consumption,percentage-points
Growth-contribution-of-gross-fixed-capital-formation,percentage-points
Growth-contribution-of-the-balance-of-goods-andservices,-percentage-points
1.8
1.8
1.6
1.7
2.5
0.1
0.8
0.7
1.4
0.3
0.5
0.6
0.4
0.4
0.1
0.3
0.7
#0.4
0.2
0.0
#0.3
0.0
0.9
0.1 !
Source:'European'Commission'(2014).'
!
4.2.&Monetary&policy&
!
In! a! currency! union! such! as! the! EMU,! the! interest! rate! policy! targets! the!
whole!currency!union!and!is!therefore!not!able!to!address!regional!shocks!in!
a! heterogeneous! currency! union.! Diverging! inflation! rates! thus! lead! to!
different! real! interest! rates.! According! to! Hein! and! Truger! (2007:! 223)!
monetary!policy!in!the!euro!area!had!an!‘antiMgrowthMbias’!in!the!first!half!of!
!
16!
the! 2000s,! that! was! mainly! due! to! an! overly! restrictive! definition! of! price!
stability,! which! contributed! to! weak! economic! development! in! large!
economies,! in! particular! Germany.! According! to! the! postMKeynesian! policy!
implications,!central!banks!should!focus!on!targeting!low!real!interest!rates!
in!credit!and!financial!markets,!that!is!slightly!positive!and!below!the!longM
term!rate!of!longMterm!real!GDP!growth.!The!difference!between!the!former!
and! the! latter! is! considered! as! a! tool! to! evaluate! the! effects! of! monetary!
policy.! A! positive! (negative)! value! indicates! restrictive! (expansive)!
monetary!policy.!
Table' 3:' Key' macroeconomic' variables' of' monetary' policy' in' France' and' Germany,' average'
values'1999K2007'and'2008K2013'
France
1999#2007
Short#term0real0interest0rate,0per0cent
2008#2013
Germany
1999#2007
2008#2013
1.4
0.1
2.4
0.2
Long#term0real0interest0rate,0per0cent
2.5
Short#term0real0interest0rate0minus0real0GDP0growth0
rate,0percentage0points
#0.8
Long#term0real0interest0rate0minus0real0GDP0growth0
rate,0percentage0points
0.3
Source:'European'Commission'(2014),'author’s'calculation.'
1.8
3.5
1.3
0.0
0.8
#0.6
1.7
1.9
0.5
Table! 2! shows! that! the! shortMterm! real! interest! rate! in! France!
averaged! at! 1.4! percentage! points! over! the! period! of! 1999M2007.! The!
difference!of!the!shortMterm!real!interest!rate!and!the!real!GDP!growth!was!
negative! and! thus! growthMconducive! (M0.8! percentage! points).! Yet,! the!
difference!with!respect!to!longMterm!real!interest!was!slightly!positive!(0.3!
percentage! points).! This! was! much! more! growthMfavourable! than! in!
Germany,! where! due! to! low! rates! of! inflation! and! real! GDP! the! values!
remained!positive.!However,!again!this!picture!turns!around!after!the!crisis.!
Due!to!the!sluggish!recovery!in!France!with!low!real!GDP!growth!rates,!and!
although!accompanied!by!very!low!nominal!interest!rates!set!by!the!central!
bank,! the! difference! between! shortMterm! real! interest! rate! and! real! GDP!
growth! rate! became! zero,! in! Germany! the! difference! became! negative.!
Essentially,! France! was! less! vulnerable! to! the! restrictive! ECB! interest! rate!
policy! strategy! in! the! first! period! under! investigation.! Since! 2008,! the! low!
interest!rate!policy!of!the!ECB!did!not!stimulate!a!strong!recovery.!Monetary!
policy!reached!the!zero!lower!bound.!Therefore,!ECB!governor!Mario!Draghi!
!
17!
!
called!to!use!fiscal!policy!to!stabilise!aggregate!demand:!
“! (…)! Turning! to! fiscal! policy,! since! 2010! the! euro! area! has! suffered! from!
fiscal! policy! being! less! available! and! effective,! especially! compared! with!
other!large!advanced!economies.!This!is!not!so!much!a!consequence!of!high!
initial! debt! ratios! –! public! debt! is! in! aggregate! not! higher! in! the! euro! area!
than! in! the! US! or! Japan.! It! reflects! the! fact! that! the! central! bank! in! those!
countries! could! act! and! has! acted! as! a! backstop! for! government! funding.!
This!is!an!important!reason!why!markets!spared!their!fiscal!authorities!the!
loss! of! confidence! that! constrained! many! euro! area! governments’! market!
access.!This!has!in!turn!allowed!fiscal!consolidation!in!the!US!and!Japan!to!
be! more! back! loaded.! Thus,! it! would! be! helpful! for! the! overall! stance! of!
policy! if! fiscal! policy! could! play! a! greater! role! alongside! monetary! policy,!
and! I! believe! there! is! scope! for! this,! while! taking! into! account! our! specific!
initial!conditions!and!legal!constraints.!(…)“!(ECB!2014).!
4.3.&Fiscal&policy&
!
Figure'4'Sectoral'financial'balances'as'percentage'share'of'nominal'GDP'in'France'1999K2013'
10.0
8.0
6.0
4.0
2.0
0.0
M2.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
M4.0
M6.0
M8.0
Private!sector
Public!sector
External!sector!
M10.0
!
Source:'European'Commission'(2014).'
!
According! to! the! norm! for! fiscal! policy! in! the! long! run,! the! government!
deficit! should! absorb! the! excess! of! private! saving! over! private! investment.!
The! French! government! deficit! only! partly! (82! per! cent)! absorbed! the!
excess! of! private! savings! from! 1999! to! 2007,! as! France! ran! a! surplus! until!
2004.! When! France! started! to! run! current! account! deficits! and! since! the!
crisis,! when! the! private! sector! began! to! run! higher! surpluses,! this! meant!!
large! budget! deficits.! The! German! excess! of! savings! would! have! required!
government! deficits! far! beyond! the! deficit! criteria! of! the! stability! and!
!
18!
growth! pact.! Hence,! the! tight! fiscal! policy! in! Germany! contributed! to! the!
huge!current!account!surpluses.!!
!
Figure'5'Sectoral'financial'balances'as'percentage'share'of'nominal'GDP'in'Germany'1999K
2013'
12.0
10.0
8.0
6.0
4.0
2.0
0.0
M2.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
M4.0
M6.0
M8.0
M10.0
Private!sector
Public!sector
External!sector
!
Source:'European'Commission'(2014).'
!
In!the!short!run,!the!stabilising!or!destabilising!effects!of!fiscal!policy!
on! economic! development! are! measured! by! comparing! changes! in! the!
output!gap!and!the!cyclically!adjusted!budgetMbalance!to!potential!GDP!ratio.!
A!positive!value!indicates!that!the!capacity!is!outstripped;!a!negative!value!
indicates! capacity! is! not! fully! utilised.! A! positive! (negative)! change! of! the!
output!gaps!indicates!an!upturn!(downturn)!(Hein/Truger!2014:!89).!Fiscal!
policy!can!constitute!an!expansive!stimulus!on!demand,!if!there!is!a!negative!
change!in!the!cyclically!adjusted!balance!and!vice!versa.!A!constant!cyclically!
adjusted! balance! indicates! that! the! automatic! stabilizers! are! at! work.! Thus!
fiscal! policy! is! neutral! (Hein/Truger! 2009).! If! the! output! gap! and! the!
structural! balance! change! in! the! same! (reverse)! direction,! fiscal! policy! is!
antiMcyclical! (proMcyclical)! (Truger! et! al.! 2010).! However,! Truger! (2014)!
criticizes! the! usual! methods! of! cyclical! adjustment! because! they! tend! to!
underestimate! the! cyclical! fluctuations! and! will! therefore! have! proMcyclical!
effects! if! applied! to! fiscal! policy.! This! happened! in! the! peripheral! crisis!
countries! and! France,! when! output! gaps! were! revised! between! 2010! and!
2014,!which!simply!reflected!the!worsening!of!the!cyclical!condition!of!the!
!
19!
economies!brought!about!by!the!quick!exit!from!expansionary!fiscal!policy!
and!the!switch!to!austerity.!
!
Figure' 6' Sectoral' financial' balances' as' percentage' share' of' nominal' GDP' in' Germany' 1999K
2013'
12.0
10.0
8.0
6.0
4.0
2.0
0.0
M2.0
M4.0
M6.0
M8.0
M10.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Private!sector
Public!sector
External!sector
!
Source:'European'Commission'(2014).'
Figure'7'Cyclically'adjusted'budgetKbalance'as'percentage'of'potential'GDP,'Stuctural'
Government'Balance'and'Output'gaps'in'France'1998K2013'
4.0
2.0
0.0
M2.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
M4.0
M6.0
M8.0
Cyclically!adjusted!budgetMbalance!as!percentage!of!potential!GDP,!per!cent
Structural!Government!Balance!as!a!share!of!GDP,!per!cent
Output!gap!as!percentage!of!potential!GDP
!
Source:'European'Commission'(2014).'
Over! the! period! 1999M2007,! the! French! fiscal! policy! had! only! slightly!
restrictive!effects.!!Only!in!one!out!of!8!years,!fiscal!policy!was!proMcyclically!
restrictive.! After! the! crisis,! and! with! the! beginning! of! the! euro! crisis,! fiscal!
policy! became! proMcyclically! restrictive.! However,! the! growth! contribution!
of! public! consumption! remained! stable! over! the! entire! period! under!
!
20!
consideration.!In!contrast,!Germany’s!fiscal!policy!had!restrictive!effects!and!
was! proMcyclical! especially! during! the! implementation! of! the! Hartz2
Reformen.!In!the!wake!of!the!crisis,!fiscal!policy!was!antiMcyclical!expansive,!
however!it!returned!to!a!restrictive!path!in!2012.!This!is!also!visible!in!the!
lower!growth!contributions!of!public!consumption.!In!the!euro!area,!in!line!
with!the!somewhat!misleading!analysis!of!the!causes!of!the!Great!Recession!
(sovereign!debt!crisis),!the!fiscal!framework!(fiscal!compact,!Euro!Plus!Pact!
implemented! in! 2011)! became! even! stricter! in! terms! of! budget! deficit!
surveillance.! However,! as! described! above,! even! without! such! an!
institutional! setting,! the! technical! nature! of! the! output! gap! estimations!
reinforces!restrictive!proMcyclical!fiscal!policies,!which!act!as!a!vicious!circle!
requiring! ever! more! consolidation! efforts! and! underestimating! the!
consolidation!already!undertaken.!!
Summing! up,! with! regard! to! shortMrun! real! stabilization! function! of!
fiscal!policy,!fiscal!policy!in!France!had!only!slightly!restrictive!effects!until!
the!crisis.!In!the!aftermath!of!the!crisis,!fiscal!policy!could!have!done!more,!
however!the!fiscal!framework!of!the!euro!area!did!not!allow!for!even!more!
expansive! fiscal! policy,! which! would! have! been! required! especially! since!
monetary!policy!reached!the!zeroMlower!bound.!In!Germany!fiscal!policy!had!
significant! restrictive! effects! over! the! whole! period,! which! contributed! to!
the!current!account!imbalances!infringing!the!long!run!policy!implication.!
!
4.4.&Wage&policy&
!
In!a!monetary!union,!wages!play!an!important!double!role!because!nominal!
exchange! rates! are! fixed! and! therefore! they! cannot! serve! as! a! means! of!
adjustment.! On! the! one! hand,! wages! are! meant! to! maintain! or! improve! a!
country’s! price! competitiveness;! on! the! other! hand! wages! constitute! an!
import! part! of! domestic! demand.! Empirically,! there! is! a! relation! between!
unit! labour! cost! and! the! price! level.! Changes! in! the! price! level! affect! the!
international! price! competitiveness! relative! to! other! countries! as! well!
(Düthmann! et! al.! 2006:! 15).! Basically,! wage! policies! are! concerned! with!
nominal!wage!growth!and!nominal!stabilization!of!the!economy,!as!nominal!
!
21!
wages! are! important! determinants! of! prices! and! inflation.! Therefore,! wage!
policy! should! aim! at! avoiding! destabilizing! effects! of! nominal! wage!
flexibility!on!prices,!especially!with!regards!to!deflation.!Furthermore,!realM
wage! flexibility! can! have! destabilizing! effects! on! aggregate! demand,!
particularly! in! wageMled! economies! such! as! France! and! Germany!
(Hein/Vogel!2008).!In!order!to!avoid!these!destabilizing!effects,!according!to!
the!normative!wage!formula,!nominal!unit!labour!costs!should!grow!in!line!
with! the! country’s! inflation! target,! in! order! to! prevent! both! destabilizing!
effects!and!mercantilist!policy.!In!the!EMU!this!is!below,!but!close!to!two!per!
cent.!!
!
Table'4:'Key'macroeconomic'variables'of'wage'policy'in'France'and'Germany,'1999K2007'and'
2008K2013'
France
1999#2007
2008#2013
Germany
1999#2007
2008#2013
Growth/rate/of/nominal/compensation/per/employee,/per/cent
2.8
2.4
1.1
1.9
Growth/rate/of/nominal/unit/labour/costs,/per/cent
1.8
2.0
#0.1
2.2
Growth/rate/of/real/compensation/per/employee,/per/cent
0.9
0.9
0.3
0.7
Labour/income/share,/average,/per/cent
61.7
63.0
58.6
57.4
Annual/change/in/labour/income/share,/per/cent
#0.2
0.7
#0.9
0.8
Source:'European'Commission'(2014),'author’s'calculation.'
!
Over! the! whole! period,! French! wage! development! was! almost! perfectly! in!
accordance! with! the! ECB’s! inflation! target.! The! labour! income! share!
remained! roughly! constant! up! to! the! crisis! and! increased! of! course!
drastically!during!the!crisis.!Since!2010,!however,!the!labour!income!share!
declined.!The!real!wage!saw!stable!growth,!which!contributed!positively!to!
domestic!demand.!The!French!wage!policy!fulfilled!its!nominal!stabilization!
function!and!contributed!to!domestic!demand,!which!was!growthMconducive!
as! France! is! a! wageMled! economy.! On! the! contrary,! Germany’s! wage!
development!undercut!the!inflation!target,!which!contributed!to!improving!
international! competitiveness! relative! to! France! but! also! destabilising!
effects! in! the! current! accounts.! The! wage! restraint! dampened! domestic!
demand!in!the!wageMled!economy!over!the!period!1999M2007,!which!also!led!
!
22!
!
to!the!heavy!dependence!on!foreign!trade.!The!labour!income!share!declined!
remarkably.! In! the! wake! of! the! crisis,! the! German! wage! policy! even!
exceeded! the! inflation! target.! Real! wages! caughtMup! with! France! but!
remained!still!below!French!real!wage!growth.!In!sum,!France!wage!policies!
were! optimal,! whereas! Germany’s! wage! policy! was! mercantilist! and!
dysfunctional!to!a!wageMled!economy.!!
!
4.5.&Open&economy&&
!
Table'5:'Key'macroeconomic'variables'open'economy'in'France'and'Germany,'1999K2007'and'
2008K2013'
France
1999#2007
Growth/rate/of/nominal/effective/exchange/rates/relative/
to/37/industrial/countries,/per/cent
Growth/rate/of/real/effective/exchange/rates/relative/to/
37/industrial/countries,/per/cent
2008#2013
Germany
1999#2007
2008#2013
0.7
0.1
0.8
0.1
0.3
0.5
#2.0
0.6
Exports/of/goods/and/services/as/share/of/GDP,/per/cent
27.0
26.2
37.9
48.5
Imports/of/goods/and/services/as/share/of/GDP,/per/cent
26.6
28.5
34.1
42.8
Net/exports/of/goods/and/services/as/a/share//of/nominal/
GDP,/per/cent
0.4
#2.2
3.8
5.7
!
Source:'European'Commission'(2014),'author’s'calculations.'
!
The! integration! into! the! world! economy,! indicated! by! the! degree! of!
openness,! increased! slightly! since! the! early! 2000s,! driven! by! imports.!
Exports!lost!importance.!
As! key! indicators! of! international! competitiveness! the! nominal! and!
real!effective!exchange!rate!visMàMvis!37!industrial!countries!has!been!used.!
A! positive! (negative)! change! of! these! indicators! means! an! appreciation!
(depreciation).! From! 1999! to! 2007! the! France’s! international!
competitiveness!worsened!via!a!nominal!appreciation!of!the!euro,!especially!
between!2001!and!2004,!which!was!mainly!influenced!by!low!inflation!rates!
!
23!
in! Germany,! associated! with! wage! moderation.! Over! the! entire! period,! the!
change! averaged! at! 0.7! per! cent.! In! real! terms,! the! effective! exchange! rate!
appreciated! at! 0.3! per! cent,! indicating! the! decline! in! French! international!
competitiveness,! which! became! visible! in! the! balance! of! trade! deficit! since!
2005.! From! 2008! onwards,! the! nominal! effective! exchange! rate! became!
quite! volatile! and! averaged! at! 0.1! per! cent.! However,! since! the! crisis!
France’s! real! effective! exchange! appreciated! even! further! which! did! not!
contribute! to! the! improvement! of! the! international! competitiveness.! This!
competitive!disadvantage!persisted.!!
In! contrast,! the! German! international! competitiveness! improved!
considerably! via! wage! restraint! that! compensated! for! the! nominal! euro!
appreciation.!The!real!effective!exchange!rate!dropped!drastically!in!the!first!
period!and!kept!pace!with!France!in!the!second!period.!Germany!was!able!to!
participate!in!the!rapid!growth!of!world!trade,!thus!exports!grew!faster!than!
imports,!which!found!expression!in!persistent!net!exports!averaging!at!3.8!
and!5.7!per!cent!of!GDP.!
!
4.5.&Identifying&a&macroeconomic&policy&regime&
!
In! the! first! period,! France! had! an! almost! perfect! macroeconomic! policy!
regime,! consisting! of! a! favorable! interest! rateMGDP! growth! constellation,!
only! slightly! restrictive! fiscal! policy! and! a! neutral! wage! policy! that! was! in!
total! accordance! with! ECB’s! inflation! target.! The! growth! was! domestic!
demand!driven.!However,!France,!due!to!a!lack!of!competitiveness!suffered!
from! an! open! flank! of! net! exports,! which! found! expression! in! a! negative!
growth! contribution! of! the! balance! of! goods! and! services,! which! was!
associated!with!the!real!appreciation!relative!to!Germany!in!the!mid!of!the!
last!decade!and!weak!export!performance.!
Over! the! period! 2008M2013,! France! lost! its! favorable! demand!
structure,! as! domestic! demand! broke! down! in! the! course! of! the! crisis! and!
has! yet! to! recover.! Monetary! policy! reached! the! zero! lower! bound,! which!
calls! for! expansive! fiscal! policy.! The! French! government! ran! deficits,! yet!
fiscal! policy! became! proMcyclically! restrictive! in! France.! At! the! same! time,!
!
24!
the!real!effective!exchange!rate!appreciated!even!further.!Only!wage!policy!
was!still!in!total!accordance!with!the!wage!formula.!!
In!sum,!the!growthMfriendly!macroeconomic!policy!regime!suffered!from!
an! open! flank! in! the! balance! of! goods! and! services,! due! to! Germany’s!
mercantilism.! In! the! course! of! the! crisis,! France! lost! its! very! favorable!
demand!structure.!At!the!same!time!the!open!flank!in!net!exports!persisted.!
Therefore,!France!can!be!seen!as!innocent!victim!of!the!global!financial!and!
economic!crisis!and!German!mercantilism.!
!
5.&Explaining&the&open&flank&of&net&exports&&
!
The! French! balance! of! goods! and! services! deficit! has! attracted! some!
attention!over!the!past!few!years.!The!analysis!of!the!MPR!suggests!that!the!
French! trade! deficit! is! a! consequence! of! external! factors! such! as! the! euro!
appreciation! and! German! mercantilism! associated! with! aggressive! wage!
moderation.! This! is! in! line! with! Hein/Truger! (2009)! and! other! heterodox!
authors! as! for! instance! Flassbeck/Lapavitsas! (2013)! and! Lucarelli! (2011M
2012)!who!problematize!that!Germany!undercut!unit!labour!costs.!
!
5.1.&Literature&review&
!
Other! authors! developed! the! discussion! along! two! lines.! On! the! one! hand,!
some! authors! argue! that! the! French! deficit! is! rooted! in! the! lack! of!
international! competitiveness! in! exports.! On! the! other! hand,! further!
explanations! point! out! that! the! deficit! is! related! to! different! domestic!
demand!dynamics,!which!drive!the!imbalances!in!the!current!accounts.!It!is!
important!to!note!that!this!implies!that!competitiveness!is!measured!in!two!
ways.!Initially,!export!performance!is!concerned!with!export!growth!that!is!
determined! by! price! competitiveness,! the! sectoral! specialization! and!
sectoral! composition! of! exports.! The! assessment! of! current! account!
imbalances! is,! however,! concerned! with! both! export! performance! but! also!
!
25!
import! demand.! A! country! that! runs! a! deficit! is! considered! to! be!
uncompetitive.!!
According!to!Louis!Gallois!(2012),!the!French!government’s!General!
Commissioner!for!Investment,!the!lack!of!international!competitiveness!is!a!
driver! for! deindustrialization,! declining! export! market! shares! and! the!
balance!of!trade!deficit,!which!is!in!turn!responsible!for!the!budget!deficits!
and! high! rates! of! unemployment.! In! detail,! the! report! argues! that! the!
intensified! globalization! forced! French! firms! to! reduce! prices,! in! order! to!
restore!price!competitiveness,!which!in!turn!reduced!profit!margins!because!
the! unit! labour! costs! grew! stably.! The! cut! back! of! profit! margins! then! had!
negative! repercussions! on! the! nonMprice! competitiveness! because! French!
firms!lost!sources!for!internal!funding!for!innovations.!
The! OECD! (2009)! argues! that! the! lack! of! competitiveness! is! not! the!
driver! of! the! decay! of! the! French! economy,! but! rather! the! phenomenon! of!
the!weaknesses!deeply!rooted!in!the!structural!characteristics!of!the!French!
economy,! namely! the! lack! of! innovations,! high! degree! of! bureaucracy,! the!
lack!of!competition!and!the!tax!burden,!which!impede!raising!the!long!run!
growth!path.!Concerning!export!performance,!the!OECD!argues!that!France!
did!not!lack!global!demand,!however!due!to!headMtoMhead!competition!from!
Germany! (similar! geographical! and! sectoral! specialization),! French!
exporters! were! not! able! to! pass! on! the! increase! of! unit! labour! costs! and!
therefore! had! to! lower! margins! with! negative! impact! on! aforementioned!
nonMprice!competitiveness.!
Concerned! with! export! performance,! Pluyaud! (2006)! showed! that!
exports! are! more! sensitive! to! price! competitiveness! for! intraMeuro! area!
trade!than!for!extraMeuro!area!trade!for!both!France!and!Germany.!Bayoumi,!
Harmsen!and!Turunen!(2011)!confirm!the!higher!priceMsensitivity!of!intraM
euro! area! trade! as! it! is! much! more! difficult! to! adjust! relative! prices! to!
restore! competitiveness! within! a! currency! union.! This! implies! that!
geographical!orientation!plays!an!important!role!for!the!explanation!of!the!
French! export! performance.! Related! to! this! finding,! Felettigh! et! al.! (2006)!
emphasized! that! the! geographical! orientation! of! France! is! much! more!
oriented! towards! the! euro! area! than! Germany’s! or! Italy’s.! By! implication,!
!
26!
French!exporters!are!then!more!exposed!to!price!competition!than!German!
and!Italian!exports.!
In!contrast,!Villetelle!and! Nivat!(2006)!argue!that!traditional!export!
equations! including! indicators! of! exportMmarket! growth! and! price!
competitiveness! fail! to! account! for! France’s! relative! inability! to! service!
foreign! markets! in! the! preMcrisis! period.! Accordingly,! Egert! and!
Kierzenkowski! (2010)! brought! forward! the! argument! that! the! rise! of! the!
construction! sector! in! France! reallocated! capital! and! labour! from! the!
manufacturing! export! sector! to! the! construction! sector.! Similarly,! Gaulier!
and!Vicard!(2012),!by!showing!that!current!account!dynamics!are!correlated!
with! unit! labour! costs! and! imports! (1999M2007),! argue! that! a! domestic!
demand!shock!in!nonMtradable!sectors!(construction)!and!services!played!a!
key! role! in! the! buildMup! of! trade! imbalances.! The! domestic! demand! shock!
then!triggered!a!real!estate!boom!as!well!as!rising!prices!in!services!in!the!
euro! area! peripheral! member! states,! which! tightened! the! labour! market,!
increased! real! estate! prices! and! the! cost! of! services! inputs,! which! in! turn!
affected!exporting!firms!indirectly.!
Moreover,!Stahn!(2006)!and!Storm!and!Nastepaad!(2014)!argue!that!
the! impact! of! price! competitiveness! became! considerably! smaller! for!
Germany’s! export! performance.! The! economic! activity! of! the! trading!
partners! outweighed! the! effects! of! price! competitiveness.! The! weak!
domestic!demand!in!Germany!then!explains!the!huge!trade!surplus.!!
Along! this! line,! with! respect! to! the! imbalances! of! external! accounts!
the! European! Commission! (2010)! stresses! domestic! demand! factors.!
According! to! the! Commission,! differences! in! export! performance,!
respectively! price! competitiveness! contributed! to! the! divergence.! This,!
however,!was!of!second!order!compared!with!domestic!demand!that!fueled!
import!demand.!
This! implies! that! the! analysis! of! the! French! export! performance!
should! be! guided! along! the! lines! of! price,! cost! competitiveness! and! nonM
price! competitiveness! while! taking! into! account! the! sectoral! and!
geographical!orientation.!!
!
!
27!
5.2.&Export&performance&
!
Figure'8:'Net'exports'of'goods'and'services'as'share'of'GDP,'France'1999K2013,'in'per'cent.'
3
2
1
0
M1
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
M2
M3
M4
Net!exports!of!goods!and!services
Net!exports!of!goods
Net!exports!of!services!
!
Source:'European'Commission'(2014),'author’s'calculations.'
The! problem! of! the! French! balance! of! trade! deficits! arises! from! a!
deteriorating! balance! of! goods,! which! began! in! 2002.! Therefore,! the!
following! analysis! is! concerned! with! export! performance! of! industrial!
goods:! chemicals! and! related! products,! manufactured! goods! as! well!
machinery!and!transport!equipment.!!
Figure'9:'France’s'exports'and'export'market'for'Chemicals'and'related'products'1999K2013'
130
120
110
100
90
80
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Export!market
Exports
!
Source:'OECD'(2014),'author’s'calculations.''
!
28!
Figure'10'France’s'exports'and'export'market'for'Chemicals'and'related'products'1999K2013'
130
120
110
100
90
80
70
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Export!market
Exports
!
Source:'OECD'(2014),'author’s'calculation.'
Figure'11:'France’s'exports'and'export'market'for'machinery'and'transport'equipment'1999K
2013'
130
120
110
100
90
80
70
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Export!market
Exports
!
Source:'OECD'(2014),'author’s'calculation.'
The! figures! show! that! French! industry! was! not! able! to! service! fully! the!
accelerating! demand! for! its! products! in! chemicals,! manufactured! goods! as!
well! as! machinery! and! transport! equipment.! The! export! market! measures!
the! world! demand2!addressed! to! a! country! and! is! defined! as! domestic!
exports!that!would!be!expected!if!its!market!shares!remained!at!their!value!
for!the!reference!year,!here!1999.!Between!1999!and!2007!global!trade!and!
euro! area! trade! grew! rapidly! in! all! product! categories! under! investigation.!
However,! as! table! 6! shows! France! was! not! able! to! pick! up! this! external!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2!World!is!here!conceptualised!as!demand!from!the!OECD!countries,!due!to!data!availability.!
!
29!
demand! and! thus! lost! market! shares.! In! contrast,! Germany! was! able! to!
service! the! external! demand.! During! the! crisis! and! in! the! aftermath,! global!
trade!collapsed,!however!French!export!performance!declined!even!more!in!
the! trade! of! manufactured! goods.! For! chemicals! and! related! products,! one!
can! observe! a! convergence! of! exports! on! the! global! import! demand.! Here,!
France!was!able!to!service!euro!area!demand!completely,!but!did!not!keep!
up! with! extraMeuro! area! demand.! Yet,! the! differential! became! considerably!
lower.! In! trade! of! machinery! and! transport! equipment! in! the! wake! of! the!
crisis,! global! demand! declined! to! a! greater! extent! than! the! growth! rates! of!
French!exports.!
Table'6:'Export'performance'of'industrial'products,'France'and'Germany,'annual'growth'rates'
1999K2007'and'2008K2013,'per'cent'
France'
Germany
1999#2007
2008#2013
1999#2007
2008#2013
Chemicals'and'related'products
Import'demand
From-the-world
Euro-area
Extra#euro-area
12.0
12.8
11.6
3.9
2.1
5.1
12.0
12.8
11.6
3.9
2.1
5.1
7.1
6.0
8.1
2.4
2.1
2.7
12.7
14.0
10.3
2.8
0.4
3.8
10.1
10.3
10.0
0.3
#2.5
0.0
10.1
10.3
10.0
0.3
#2.5
0.0
7.2
6.9
7.7
#3.5
#5.1
#1.6
11.5
10.4
10.9
#0.6
#2.4
0.5
Import'demand
From-the-world
Euro-area
Extra#euro-area
7.9
7.6
8.0
0.9
#2.9
2.4
7.9
7.6
8.0
0.9
#2.9
2.4
Export'performance
World
Euro-area
Extra#euro-area
6.1
5.1
7.0
0.1
#1.2
1.1
10.0
8.2
9.9
1.4
#2.8
2.9
Export'performance
World
Euro-area
Extra#euro-area
Manufactured'goods
Import'demand
From-the-world
Euro-area
Extra#euro-area
Export'performance
World
Euro-area
Extra#euro-area
Machinery'and'transport'equipment
Source:'OECD'(2014),'author’s'calculations.'
!
!
30!
Table'7:'French'import'demand'for'industrial'goods,'annual'growth'rates,'per'cent''
1999#2007
Chemicals*and*related*products
Euro-area
World
Extra#euro-area
Manufactured*goods
Euro-area
World
Extra#euro-area
Machinery*and*transport*equipment
Euro-area
World
Extra#euro-area
2008#2013
10.7
10.4
9.9
2.5
2.4
2.1
9.1
9.7
10.9
#3.0
#2.3
#1.2
7.4
7.8
8.3
#0.8
0.4
1.7 !
Source:'OECD'(2014),'author’s'calculations.'
!
!
5.2.1.&Price,&cost&and&nonJprice&competitiveness&
'
Figure'12:'Export'price'deflators'of'goods,'1999K2013,'national'currency'(2005=100)'
135
130
125
120
115
110
105
100
95
90
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Germany
Spain!
France
Italy
UK
USA
EAM12
!
Source:'European'Commission'(2014).'
!
31!
Figure'13:'Nominal'unit'labour'costs'total'economy,'1999K2013,'national'currency'(2005=100)'
130
125
120
115
110
105
100
95
90
85
80
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Germany
Spain!
France
Italy!
UK
USA
EAM12
!
Source:'European'Commission'(2014).'
Figure!10!shows!the!export!price!deflators!of!exported!goods!of!France!and!
Germany!and!their!main!competitors!as!well!as!old!euro!area!member!states!
as!a!reference!anchor.!Among!euro!area!countries!there!are!only!moderate!
deviations;!France!has!mediocre!price!competitiveness!relative!to!Germany!
(seems! to! set! the! pace,! at! least! since! 2005)! on! the! one! hand! and! its! main!
competitors! on! the! other! hand,! which! might! reflect! the! degree! of!
competition!and!therefore!a!pricing!to!market!strategy!of!exporting!firms.3!!
The! comparison! of! cost! competitiveness! indicator! unit! labour! costs! again!
shows! that! France’s! competitiveness! is! mediocre! relative! to! main! trading!
partners!and!in!line!with!the!average!of!the!EAM12.!However,!Germany’s!cost!
competitiveness,! due! to! wage! restraint,! improved! in! particular! from! 2004!
onwards!and!converged!in!the!wake!of!the!crisis.!With!regard!to!the!indirect!
effects!of!the!service!sector!on!export!performance,!for!Germany,!Düthmann!
et! al.! (2006)! argue! that! the! wage! dispersion! between! the! manufacturing!
sector! and! the! service! sector! in! Germany! fuelled! international! cost!
competitiveness.!In!2011,!Germany!was!the!only!country!in!which!wages!in!
services! were! significantly! lower! than! in! manufacturing.! In! France,! the!
dispersion!is!very!low!(Stein/Stephan/Zwiener!2012).!Summing!up,!one!can!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3!It! is! acknowledged! that! the! export! price! deflator! is! a! problematic! indicator,! as! it! only!
accounts!for!surviving!exporting!firms.!Nevertheless!it!sheds!light!to!problematic!price!and!
cost!competitiveness!that!are!two!different!things.!
!
32!
conclude! that! France! lacks! price! and! cost! competitiveness! relative! to!
Germany!in!particular,!but!not!to!the!other!competitors.!!
However,! French! firms,! in! order! to! restore! price! competitiveness!
relative! to! Germany,! had! to! cut! back! their! profit! margins.! According! to!
Ferrero,! Gazaniol! and! Lalanne! (2014),! the! cut! back! of! margins! triggered!
repercussions! on! the! nonMprice! competitiveness! because! diminishing!
margins! fed! back! to! investment! in! innovation,! which! in! turn! made! French!
exports! vulnerable! to! price! competition! because! firms! lost! the! ability! to!
differentiate! their! products! along! nonMprice! criteria! innovation! and! knowM
how.!!
Generally,! nonMprice! competitiveness! is! hard! to! measure.! Sautard,!
Tazi! and! Thubi! (2014)! developed! a! nonMeconometric! index! for! nonMprice!
competitiveness.!This!approach!builds!an!indicator!for!the!priceMsensitivity!
for!a!country’s!exports!based!on!qualitative!intensity.!The!indicator!points!to!
the! direction! of! sectoral! specialisation! in! the! sense! that! for! each! product!
category! a! score! is! calculated! which! in! turn! is! aggregated! into! a! country!
score!according!to!their!share!of!the!country’s!exports.!A!high!product!score!
reflects!the!relative!importance!of!the!quality!dimension!for!the!exports!that!
indicates! low! priceMsensitivity.! For! the! period! 1998M2011,! priceMsensitivity!
was! low! for! aeronautics! and! miscellaneous! chemical! products.! ! Vehicles,!
machinery! and! equipment,! and! pharmaceuticals! have! a! mediocre! priceM
sensitivity.! The! nonMprice! positioning! of! organic! chemicals,! apparel,!
furniture,! rubbers,! wood! articles! and! plastics! (manufactured! goods)! was!
rather! low! (Sautard,! Tazi! and! Thubi! 2014:! 6).! For! the! more! aggregated!
product! categories! in! this! paper,! this! means! that! chemicals! and! related!
products! as! well! as! machinery! and! transport! equipment! have! a! rather! low!
priceMsensitivity.!Manufactured!goods,!yet,!seem!to!be!more!priceMsensitive.!
Aggregated!at!the!country!level,!this!finds!expression!in!the!index!in!figure!
12,!which!combines!the!sectoral!specialisation!with!the!export!quality.!This!
index! should! not! be! interpreted! in! absolute! terms.! It! rather! shows! the!
country!ranking!and!relative!positions!(ibid.).!The!index!shows!that!France!
has! a! mediocre! nonMprice! positioning,! i.e.! a! mediocre! priceMsensitivity!
relative! to! Germany! and! Southern! European! competitors! and! the! UK! and!
!
33!
39
73
94
Plastics & articles thereof
Articles of iron or steel
Furniture, bedding, cushions, lamps & lighting fittings n
prefabricated buildings
a.USA.!As!product!scores!are!identical!for!all!countries,!the!gaps!in!the!country!
These products accounted for nearly 80% of world trade over 1998-201
scores!observed!in!figure!12!are!explained!by!two!components:!the!relative!
products!
in! exports! and!
the! overall! quality!
range! of!
•weighting!
Next,of!we
calculate
a "country
score"
toexported!
measure
products.!
The! sectoral!quality
composition!
exports! to! the!
world! reveals!
the overall
ofof! French!
a country's
exports
or the
that!
machinery! and!
transport!
equipment! accounts!
more! than! fiftyMsix!
average
price
sensitivity
of itsfor!exports.
We deterper!cent!of!the!exports!in!the!three!product!groups!and!thirtyMeight!per!cent!
mine the score by aggregating the overall quality indiamong!
account!
more! than! oneMfourth!
ces all!
forcommodities.!
productsChemicals!
exported
by for!
a country,
weighted by
respectively! 17! per! cent.! Manufactured! goods! that! are! very! priceMsensitive!
each product's share of its exports and the country's
play! a! minor! role! (16! per! cent).! The! share! of! manufactured! goods! is! the!
quality range for each product. The latter indicator is
same! for! Germany,! however! chemicals! are! less! important! and! account! for!
equal to the divergence of a product's export unit value
twenty! per! cent! of! Germany’s! export.! Thus,! machinery! and! transport!
for a country from the average export unit values of the
equipment!accounted!for!almost!twoMthirds!of!German!exports!in!2013.!This!
same products for competitor countries. We can thus
confirms! the! OECD! diagnosis! that! France! and! Germany! have! at! least! a!
take into account eachwhich!
country's
specificheadMtoMhead!
quality range
similar! sectoral! specialization,!
also!
indicates!
17. With the country scores obtaifor
a
given
product
competition.! Bearing! in! mind! the! methodology! of! the! nonMprice!
ned, we can classify countries using an indicator that
competitiveness! index,! this! implies! that! France’s! lack! of! nonMprice!
links sectoral specialisation with export quality range.
competitiveness!in!the!product!groups!under!consideration!is!due!to!lower!
quality!relative!to!Germany.!
Chart 2: Price sensitivity index/non-price positioning of exports (1998Figure'14:'NonKprice'competitiveness'index'of'exports'1999K2011'of'advances'countries'
2011
average)
Price sensitivity
0,95
0,90
0,85
0,80
0,75
0,70
0,65
0,60
0,55
0,50
0,45
Non-price positioning
!
Source:'Sautard,'Tazi'and'Thubi'(2014).'
Source: BACI world trade database (CEPII), DG Trésor calculations.
How to read this chart: The index, normalised on a scale from 0 to 1,
!
should
not be interpreted in absolute terms. Its main purpose is 34!
to show
the country rankings and relative positions.
Firs
than
pos
• J
a
a
n
F
• F
c
v
• B
t
g
As
gap
exp
pro
exp
Thu
Fra
ana
we
land
to F
gen
sim
Por
ren
hav
* Excluding coke and refined petroleum products; excluding correction CIF-FOB
Sources: INSEE, Quarterly national accounts
5 - Margin rate in the manufacturing industry
Figure'15:'Margin'rate'of'manufacturing'industry,'France,'1980K2011
'
Sources: INSEE, Quarterly national accounts
Source:'Eudeline/Sklenard/Zakhartchouk'(2012),'Data'from'INSEE.'
6 - Weight of manufacturing value-added in total value-added (in value)
Figure'16'Business'R&D'expenditure'as'share'of'GDP,'per'cent,'2000K2008,'per'cent'
2.5
2
1.5
2000
2008
1
Source: Eurostat
0.5
December 2012
27
0
France
Germany
Italy
UK
USA
EU
OECD
!
Source:'OECD'(2010)'
!
Table'8:'Gross'domestic'R&D'expenditure'as'share'of'GDP'per'cent,'1995K2008'
France
Germany
Italy
UK
US
EU
OECD
1995
2.3
2.2
1.0
1.9
2.5
1.7
2.1
1996
2.3
2.2
1.0
1.8
2.5
1.7
2.1
1997
2.2
2.2
1.0
1.8
2.6
1.7
2.1
1998
2.1
2.3
1.1
1.8
2.6
1.7
2.1
1999
2.2
2.4
1.0
1.8
2.6
1.7
2.2
2000
2.2
2.5
1.1
1.8
2.7
1.7
2.2
2001
2.2
2.5
1.1
1.8
2.7
1.8
2.2
2002
2.2
2.5
1.1
1.8
2.6
1.8
2.2
2003
2.2
2.5
1.1
1.8
2.6
1.8
2.2
2004
2.2
2.5
1.1
1.8
2.5
1.7
2.2
2005
2.1
2.5
1.1
1.7
2.6
1.7
2.2
2006
2.1
2.5
1.1
1.7
2.6
1.8
2.2
2007
2.0
2.5
1.2
1.8
2.7
1.8
2.3
Source:'OECD'(2010).'
!
With! regard! to! the! argument! that! restoring! price! competitiveness! at! the!
expense! of! margins! fed! back! to! innovation,! OECD! economic! indicators!
regarding! expenditure! for! research! and! development! (R&D)! indicate! that!
gross! domestic! R&D! spending! in! France! increased! in! line! with! the! OECD!
average!between!2000!and!2008!and!remained!above!the!EU!average.!At!the!
!
35!
2008
2.0
2.7
1.2
1.8
2.8
1.8
2.4
!
same! time,! Germany! spent! more! than! the! OECD! and! EU! average.! With!
regard! to! businesses’! expenditure! for! R&D,! France! remained! above! the!
averages! of! the! EU! and! OECD,! however! the! expenditure! remained! roughly!
constant,! while! Germany! and! other! competitors! increased! their!
expenditures! slightly.! On! the! contrary,! the! USA! spent! much! more! on! R&D!
however!their!nonMprice!position!is!lower!than!France’s.!Thus,!it!seems!to!be!
dubious! whether! this! is! a! sufficient! explanation! for! the! lack! of! nonMprice!
competitiveness.!Moreover,!the!similar!sectoral!specialization!together!with!
the!discussion!about!the!importance!of!price!and!nonMprice!competitiveness!
sheds!light!on!geographical!orientation.!
!
5.2.2.&&Geographical&orientation&
!
Figure'17:'IntraKeuro'area'exports'as'share'of'total'exports'of'Germany,'in'per'cent'
60
50
40
30
20
10
0
Chemicals!and!related!
products
Manufactured!goods
1999
2007
Machinery!and!transport!
equipment
2013
!
Source:'OECD'(2014),'author’s'calculations.'
!
36!
Figure'18:'IntraKeuro'area'exports'as'share'of'total'exports'of'France,'per'cent'
60
55
50
45
40
35
30
25
20
15
10
5
0
Chemicals!and!related!
products
Manufactured!goods
1999
2007
Machinery!and!transport!
equipment
2013
!
Source:'OECD'(2014),'author’s'calculations.'
By! implication,! the! higher! priceMsensitivity! exposes! French! firms! to!
price! competition.! In! reference! to! Pluyaud! (2006)! and! Bayoumi,! Harmsen!
and! Turunen! (2011),! the! price! elasticity! of! exports! is,! however,! higher! for!
both!Germany!and!France!for!intra!euro!area!trade,!because!it!is!much!more!
difficult! to! adjust! relative! prices! to! restore! competitiveness! within! a!
currency! union.! Furthermore,! France! and! Germany! are! not! only! headMtoM
head!competitors!but!also!very!important!trading!partners!for!each!other.!!
As! the! figures! show,! French! exports! are! much! more! oriented! towards! the!
euro! area! than! German! exports.! With! respect! to! manufactured! goods! and!
machinery! and! transport! equipment,! one! can! observe! a! strong! negative!
trend.! Chemicals! remained! roughly! constant! in! terms! of! intraMeuro! area!
importance.! This! declining! trend! can! be! observed! in! Germany’s! exports! of!
manufactured! goods! and! machinery! and! transport! equipment! since! the!
beginning! of! the! euro! area.! This! trend! accelerated! remarkably! when! the!
euro! crisis! and! austerity! hit! the! euro! zone,! which! implies! that! German!
exporters! were! less! dependent! on! the! euro! area’s! economic! activity! and!
more! flexible! to! shift! their! geographical! orientation.! The! declining!
importance!of!intraMeuro!trade!for!both!countries!reflects!the!higher!growth!
rates!of!exports!to!extraMeuro!area!trading!partners.!
However,!table!5!shows!that!France!was!not!able!to!fully!participate!
in! extraMeuro! area! demand! either,! although! the! French! exports! growth!
!
37!
towards! extraMeuro! area! trading! partners! exceeded! intraMeuro! exports!
before! the! crisis.! Germany,! due! to! higher! price! and! nonMprice!
competitiveness,! was! able! to! service! both! euro! area! demand! as! well! as!
extraMeuro! demand.! Interestingly,! when! comparing! the! euro! area! import!
demand! and! export! growth! rates! of! France! and! Germany! after! the! crisis,!
France! export! growth! in! chemicals! and! machinery! and! transport! and!
equipment!reacted!less!heavily!to!the!decline!of!euro!area!demand,!whereas!
Germany’s!exports!reacted!in!line!with!the!decline!of!the!demand.!However,!
exports!to!the!rest!of!the!world!compensated!this!decline.!
The! relationship! between! domestic! demand! dynamics! and! imports!!
(Gaulier/!Vicard!2012)!became!much!more!visible!in!the!wake!of!the!global!
economic! crisis.! From! the! MPR! analysis,! we! know! that! France! lost! its!
demand!structure,!domestic!demand!collapsed,!especially!gross!fixed!capital!
formation! and! private! consumption.! Additionally,! the! growth! contribution!
of!the!balance!of!goods!and!services!became!neutral.!Simultaneously,!French!
import! demand! for! machinery! and! transport! equipment,! manufactured!
goods!and!chemicals!and!related!products!collapsed!drastically.!!
Over! the! period! 2008M2013,! export! growth! and! import! growth! converged.!!
With! respect! to! chemicals,! the! differential! between! exports! and! imports! of!
chemicals! became! neutral.! The! euro! area! differential! remained! negative!
although!Germany!became!positive,!which!reflects!the!harsh!decline!in!the!
peripheral!countries.!The!extraMeuro!area!differential!became!positive.!!
For! manufactured! goods,! French! import! demand! declined!
independent!of!the!origin.!However,!exports!to!the!euro!area!declined!even!
more,! extraMeuro! area! exports! declined! to! lesser! extent,! which! found!
expression!in!a!less!dramatic!differential.!
For!machinery!and!transport!equipment,!the!French!import!demand!
growth! declined! to! a! greater! extent! than! global,! euro! area! and! extraMeuro!
area!demand.!Especially,!the!French!import!demand!towards!the!euro!area!
declined!considerably.!Imports!from!extraMeuro!area!trading!partners!grew!
faster!than!from!the!rest!of!the!euro!area.!Imports!from!Germany!declined,!
whereas! export! growth! to! Germany! increased! in! the! wake! of! the! crisis,!
!
38!
which!may!stem!from!intermediate!goods!imports.!The!differential!of!export!
and!import!growth!was!worse!for!extraMeuro!area!trade.!!
Eventually,! fuelled! by! domestic! demand! the! French! import! demand!
for!industrial!goods!grew!rapidly!as!world!trade!did!over!the!period!1999M
2007.!In!the!wake!of!the!global!crisis!the!French!import!demand!collapsed!
simultaneously!with!the!breakdown!of!the!domestic!demand.!With!regards!
to!the!sectors,!import!demand!for!manufactured!goods!declined!most,!with!
high! negative! growth! rates.! For! machinery! and! transport! equipment!
demand,!of!course,!declined!and!growth!rates!became!negative!in!the!euro!
area,!which!did!not!apply!to!extraMeuro!demand.!For!chemicals!and!related!
products,!import!demand!declined,!however!the!demand!is!still!growing!in!
terms! of! intraM! and! extraMeuro! area! trade.! Geographically,! the! euro! area!
played!a!major!role!as!origin!of!imports,!with!only!slightly!declining!trend.!
The!balances!of!trade!for!the!three!goods!with!the!rest!of!the!world!
reveals! that! chemicals! and! related! products! remained! in! surplus! over! the!
entire!period!under!consideration,!which!may!reflect!that!a!rather!good!nonM
price!position!in!parts!of!chemical!production.!The!convergence!of!imports!
and! export! growth! rates! in! the! wake! of! the! crisis! is! visible! with! slightly!
growing! surpluses! with! the! onset! of! the! euro! crisis! since! 2011.!
Manufactured! goods,! which! are! exposed! to! intraMeuro! area! price!
competition! and! high! import! growth! rates,! are! in! deficit! over! the! entire!
period.!Most!problematic!seems!to!be!machinery!and!transport!equipment!M!
a! sector! that! accounts! for! the! largest! part! of! French! trade.! From! 2003! to!
2011! the! balance! turned! from! a! 20! billion! dollar! surplus! into! 10! billion!
dollar!deficit.!However,!the!balance!improved!due!to!the!decline!of!imports.!
!
39!
Figure'19:'Balance'of'trade'of'industrial'products'with'the'world,'France'1999K2013,'in'dollar'
2.5E+10
2E+10
1.5E+10
1E+10
5E+09
0
M5E+09 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
M1E+10
M1.5E+10
M2E+10
M2.5E+10
Chemicals!and!related!products
Manufactured!goods
Machinery!and!transport!equipment
!
Source:'OECD'(2014),'author’s'calculations.'
Figure' 20:' Balance' of' trade' of' industrial' products' with' the' euro' area,' France' 1999K2013,' in'
dollar'
2.5E+10
2E+10
1.5E+10
1E+10
5E+09
0
M5E+09
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
M1E+10
M1.5E+10
M2E+10
M2.5E+10
Chemicals!and!related!products
Manufactured!goods
Machinery!and!transport!equipment
!
Source:'OECD'(2014),'author’s'calculations.'
!
The!problem!of!geographical!orientation,!i.e.!the!lack!of!competitiveness!in!
intraMeuro! area! trade,! becomes! particularly! evident! when! looking! at! the!
French!balance!of!goods!within!the!euro!area.!Here,!France!has!run!a!deficit!
in!all!products!groups!since!2001.!
!
40!
The!problem!of!lack!of!competitiveness!relative!to!Germany!becomes!
very! evident! if! we! exclude! mercantilist! (infringing! the! wage! formula)!
Germany!from!the!French!balance!of!goods!visMàMvis!the!world,!although!this!
exclusion!does!not!capture!the!competition!on!third!markets.!The!exclusion!
of! Germany! from! the! French! domestic! market! would! lead! to! a! surplus! in!
machinery! and! transport! equipment.! However,! the! erosion! of! the! balance!
would! remain.! Moreover,! the! surplus! of! chemicals! would! increase.!
Manufactured!goods!would!remain!problematic.!
!
Figure'21:'Balance'of'trade'of'industrial'products'with'the'world'of'France,'excluding'Germany'
3.5E+10
3E+10
2.5E+10
2E+10
1.5E+10
1E+10
5E+09
0
M5E+09 199920002001200220032004200520062007200820092010201120122013
M1E+10
M1.5E+10
M2E+10
Chemicals!and!related!products
Manufactured!goods
Machinery!and!transport!equipment
!
Source:'OECD'(2014),'author’s'calculations.'
!
41!
Figure' 22:' Balance' of' trade' of' industrial' products' with' the' euro' are' of' France,' excluding'
Germany'
1.5E+10
1E+10
5E+09
0
M5E+09
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
M1E+10
M1.5E+10
M2E+10
Chemicals!and!related!products
Manufactured!goods
Machinery!and!transport!equipment
!
Source:'OECD'(2014),'author’s'calculations.'
!
When! excluding! the! mercantilist! Germany! from! France’s! balance! of! goods!
with! the! euro! area,! the! balances! of! all! products! would! end! up! in! a! deficit,!
although!this!deficit!would!have!been!considerably!smaller.!This!could!imply!
that! the! competition! between! Germany! and! France! (and! also! others)! on!
third!markets!within!the!euro!area!is!too!intense!for!France.!
!
5.3.&Summary&
!
In!sum,!the!analysis!of!the!French!net!exports!reveals!that!the!French!
exports! were! not! able! to! participate! in! global! demand! and! thus! rebalance!
French! import! demand.! In! all! product! groups,! the! export! growth! rates!
lagged! behind! the! growth! of! global! demand.! From! the! examination! of!
common! competitiveness! indicators! it! became! evident! that! French!
exporters! lacked! price,! cost! and! nonMprice! competitiveness! relative! to!
Germany! but! not! relative! to! the! main! trading! partner! and! the! old! core!
countries! of! the! euro! area.! Essentially,! France! was! pretty! mediocre.! The!
relation! between! the! cost! problematic! and! repercussions! on! the! nonMprice!
competitiveness! seems! to! be! less! strong! than! argued! by! the! OECD! (2009).!
The!picture!is!not!very!clear!and!the!impact!seems!to!be!rather!indirect!as!
!
42!
for!instance!the!state!also!plays!an!important!role!for!innovation!(Mazzucato!
2013).!!
The!picture!becomes!clearer!when!linking!the!role!of!priceMsensitivity!
to! the! geographical! orientation.! The! geographical! orientation! towards! the!
euro!area!does!not!seem!to!be!very!favourable!due!to!the!lack!of!price!and!
cost!competitiveness!relative!to!Germany!in!the!euro!area,!which!is!import!
and!export!destination.!Germany!is!also!very!competitive!in!both!costs!and!
quality.!Furthermore,!euro!area!problems!associated!with!austerity!depress!
this!very!important!export!market;!on!the!other!hand!the!balances!improved!
due! to! depressed! domestic! demand.! At! the! same! time,! French! exporters!
were! not! to! the! same! extent! able! to! shift! the! exports! towards! extraMeuro!
area!trading!partners.!!
!
6.&France&–&the&new&sick&man&of&Europe?&
!
The!analysis!revealed!that!France’s!favourable!MPR!suffered!from!an!open!
flank! in! net! exports,! due! to! a! lack! of! price,! cost! and! nonMprice!
competitiveness! relative! to! Germany! and! thus! from! the! geographical!
orientation!towards!the!euroMarea,!where!price!competition!is!more!intense!
than! in! extraMeuro! area! trade.! Taking! the! main! trading! partners! as!
benchmark,! however,! the! French! competitiveness! was! mediocre.!
Unfortunately,! the! collapse! of! the! French! demand! regime! neutralized! the!
growth!contribution!of!the!balance!of!goods!and!services!in!the!wake!of!the!
crisis,!and!at!the!same!time!the!collapse!hampered!growth!and!employment.!
As! the! open! flank! of! net! exports! is! a! problem! related! to! the! lack! of!
competitiveness!relative!to!Germany!only,!but!not!to!the!other!main!trading!
partners! and! the! euro! area! average,! it! is! necessary! to! contextualize! the!
debate!of!whether!France!is!new!sick!man!of!Europe!in!the!same!way.!
Comparing!basic!macroeconomic!indicators!such!as!real!GDP!growth,!
unemployment,! gross! fixed! capital! formation! and! debtMGDP! ratio! reveals!
that!France!is!far!away!from!being!the!sick!man!of!Europe.!In!terms!of!real!
GDP! growth! France’s! performance! was! mediocre! compared! to! those! of!
!
43!
major! industrial! countries! that! also! constitute! the! most! important! trading!
partners! and! other! old! euro! area! members.! French! growth! was! only!
exceeded!remarkably!by!Germany!in!2011!and!2012,!when!German!exports!
jumpMstarted!to!the!rest!of!the!world!and!domestic!demand!still!benefitted!
from!stimulus!packages,!while!the!euro!area!started!to!suffer!from!austerity!
measures.!Furthermore,!with!regard!to!investment!an!important!component!
of!GDP!and!the!key!driver!of!economic!growth,!the!chart!shows!that!France’s!
fixed! capital! formation! did! fairly! well,! whereas! Germany! underperformed!
both! the! euro! area! average! and! France.! The! debtMGDP! ratio,! an! important!
indicator!for!European!policy!makers,!shows!that!France!is!in!good!company!
with! the! rest! of! the! industrial! countries! and! the! old! member! states! of! the!
euro!area.!Germany!constitutes!an!exception,!where!the!debtMGDP!ratio!has!
decoupled!from!the!development!of!the!other!countries!since!2010.!!
Summing! up,! the! comparison! of! neither! competitiveness! nor!
macroeconomic!performance!indicators!implies!that!France!is!the!new!sick!
man! of! Europe.! Aforementioned! France! lacked! competitiveness! relative! to!
Germany,! however! this! did! not! find! expression! in! significantly! weaker!
macroeconomic!performance!over!the!period!under!consideration.!
The! collapse! of! domestic! demand! in! the! wake! of! the! crisis! and! its!
repercussions!on!growth!and!unemployment!remains!as!an!issue.!The!proM
cyclically! fiscal! policy! constitutes! one! of! the! major! problems! for! the!
recovery!especially!as!monetary!policy!reached!the!zeroMlower!bound.!!!
!
44!
Figure'23:'Real'GDP'growth'major'industrial'countries'and'EAK12,'1999K2014,'per'cent'
106
104
102
100
98
96
94
1999200020012002200320042005200620072008200920102011201220132014
Germany
Spain
France
Italy
UK
USA
EAM12
!
Source:'European'Commission'(2014),'author’s'calculations.'
Values'for'2014'are'forecasts.'
Figure'24:'Unemployment'rates*'major'industrial'countries'and'EAK12,'1999K2014,'per'cent'
25
20
15
10
5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Germany
Spain
France
Italy
UK
USA
EAM12
!
Source:'European'Commission'(2014).'Values'for'2014'are'forecasts.'*Euroastat'definition.'
!
45!
Figure'25:'Gross'fixed'capital'formation'as'share'of'nominal'GDP'of'major'industrial'countries'
and'EAK12,'1999K2013,'per'cent'
35
30
25
20
15
10
5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Germany
Spain
France
Italy
UK
USA
EAM12
!
Source:'European'Commission'(2014),'authors'calculations.'
!
'
Figure'26:'DebtKGDP'ratio'of'major'industrial'countries'and'EAK12,'1999K2013,'per'cent'
130
110
90
70
50
30
1999200020012002200320042005200620072008200920102011201220132014
Germany
Spain
France
Italy
UK
USA
EAM12
!
Source:'European'Commission'(2014).'
!
!
!
!
!
!
!
!
!
46!
7.&Policy&implications&
!
The!analysis!of!the!French!macroeconomic!policy!regime!has!revealed!two!
findings.!First!of!all,!France!lost!its!favourable!demand!structure!in!the!wake!
of!the!crisis,!i.e.!domestic!demand!weakened.!Secondly,!France!suffered!from!
an!open!flank!of!net!exports!of!goods!due!to!lack!of!competitiveness!relative!
to! Germany.! During! the! first! period! under! consideration! the! balance! of!
goods!and!services!had!a!negative!growth!contribution.!This!came!to!an!end!
during!the!crisis,!when!domestic!demand!collapsed,!however!the!balance!of!
goods!deficit!persisted.!!
Proponents!of!the!institutional!sclerosis!view!essentially!press!for!structural!
reforms!(Gallois!2012;!OECD!2009,!2014a).!Mainly!these!reforms!are!meant!
to!improve!the!functioning!of!the!labour!market!with!supplyMside!measures,!
which! aim! at! encouraging! the! supply! of! labour! and! reducing! the! cost! of!
labour.!Therefore!the!reforms!require!reduction!of!the!tax!wedge,!in!order!
to!increase!the!incentives!to!work!but!also!decrease!firm’s!cost!of!labour!as,!
for! instance,! social! security! contributions.! Other! ways! to! ‘encourage! the!
supply! of! labour’! are! seen! in! reforms! of! the! unemployment! insurance,! i.e.!
the! benefit! replacement! rate! and! its! duration,! which! are! to! be! reduced! in!
order! to! increase! the! incentives! to! work.! Furthermore,! labour! market!
reforms! should! also! reconsider! the! legislation! of! employment! protection!
and! the! minimum! wage! as! these! have! depressing! effects! on! labour! supply!
and!demand!(OECD!2014a).!The!Gallois!report!argues!in!a!similar!direction!
when!pressing!for!the!reduction!of!costs!of!the!production!factors,!in!order!
to! boost! competitiveness.! Here,! lowering! social! security! contributions! is!
seen! to! be! the! key! to! promote! business! investment.! Both! Gallois! and! the!
OECD!do!not!provide!concrete!proposals!for!the!funding!of!these!reductions,!
however! they! point! into! the! direction! of! consumer! taxes! or! a! shift! of! the!
burden!social!contributions,!i.e.!a!freeze!of!the!employers’!contribution!as!in!
Germany! in! the! health! care.! These! cost! reductions! are! meant! to! boost!
investment.!!
However,! there! are! doubts! from! various! angles.! First! of! all,!
theoretically!it!is!difficult!to!derive!unambiguous!implications.!For!instance,!
!
47!
employment! protection! might! raise! firms’! cost! however! it! can! reduce! the!
personnel! turnover.! Moreover,! employment! protection! could! also! be!
exchanged!for!lower!wages,!which!shifts!the!costs!to!labour!and!it!increases!
the!incentive!for!firms!to!invest!in!firmMspecific!human!capital.!With!respect!
to! benefit! replacement! rate! and! its! duration,! one! can! argue! that! the! wage!
pressure!is!increased,!however!if!the!granting!benefits!is!complemented!by!
active! labour! market! policies! this! might! increase! competition! among!
workers! which! in! turn! decrease! the! wage! pressure.! Furthermore,! a! longer!
job!search!could!improve!the!matching!between!jobs!and!employees,!which!
also!has!positive!effects!on!firmMspecific!human!capital!investment.!Finally,!
the!effects!of!a!high!tax!wedge!on!labour!demand!are!negative!only!if!trade!
unions! aim! at! compensating! the! taxes! by! excessive! wage! demands!
(Hein/Truger! 2005).! Empirically,! the! tax! wedge! has! no! effect! on!
unemployment.! By! comparing! data! sets! of! 20! OECD! countries! from! 1960M
1999,! Baker! et! al.! (2002)! found! no! statistical! significance! for! positive!
impacts! of! employment! protection! on! employment.! Moreover,! the! benefit!
duration! and! the! benefit! replacement! rate! had! a! negative! effect! on!
unemployment.!
On!the!other!hand,!in!the!public!debate!on!Germany’s!labour!market!
reforms!are!often!seen!as!a!blueprint,!as!they!were!a!response!to!perceived!
institutional!sclerosis.!Germany!M!like!a!phoenix!from!the!ashes!M!previously!
the!sick!man!of!the!Europe!became!somewhat!the!role!model.!In!2012,!the!
Economist! headlined! “Modell& Deutschland& über& alles”& (no! translation!
needed)!because!Germany!weathered!the!crisis!better!than!other!countries!
The!Economist!2012).!
But! what! did! the! Hartz! reforms! accomplish?! ! The! packages! from! 2003! to!
2005! brought! down! the! reservation! wage! and! limited! the! duration! to! 12!
months! and! created! lowMwage! sector! by! lowering! social! contributions! for!
low! paid! jobs! and! liberalising! the! market! for! temporary! work! agencies,!
which!was!lined,!but!not!officially!part!of!the!packages,!by!austerity!budgets!
in! order! to! bring! the! public! deficit! back! in! line! with! the! SGP.! The!
employment! protection! and! collective! bargaining! system! remained!
untouched!(Dullien!2013).!The!MPR!analysis!however!showed!that!this!put!
!
48!
pressure! on! wages! and! had! negative! effects! on! domestic! demand! and! thus!
growth.! Germany’s! success! became! dependent! on! external! demand.!
Furthermore,! it! was! possible! as! only! Germany! followed! this! beggarMthyM
neighbour! policy,! in! particular! France! allowed! that! by! following! the! wage!
formula! perfectly.! Moreover,! this! did! not! have! a! stimulating! effect! on!
investment! as! hoped! by! the! Gallois! report! (see! figure! 22).! Thus! one! can!
hardly!argue!that!these!reforms!paidMoff.!If!all!euro!area!members!followed!
such!deflationary!wage!policies,!the!negative!effects!on!demand!would!have!
prevailed.! It! seems! more! convincing! that! the! corporatist! German! model! of!
social! partnership! of! internal! flexibility! and! shortMterm! work! facilitated! by!
the! government! helped! to! protect! employment! in! the! Great! Recession!
(HerzogMStein/Horn/Stein! 2013).! Also! the! muchMvaunted! success! story! of!
Germany! found! expression! in! the! export! performance! of! German! firms.!
Nastepaad! and! Storm! (2014)! argue! that! the! reform! story! (Modell!
Deutschland!2.0)!might!be!the!wrong!lesson!learned!from!Germany.!It!was!
rather!the!old!German!model!(Modell!Deutschland!1.0)!of!coMdetermination,!
bankMbased! finance,! SMEs! and! the! entrepreneurial! state! that! enhanced!
technological!competitiveness!and!thus!export!performance.!!
But!what!does!this!all!mean!for!France!in!terms!of!policy!implications!
against! the! background! of! a! functional! macroeconomic! policy! regime?!
According! to! OFCE/ECLM/IMK! (2014),! French! business! survey! data!
revealed!that!French!firms!reported!rather!demand!difficulties!than!supply!
constraints.! Since! monetary! policy! reached! the! lower! zeroMbound,! one!
cannot!expect!further!stimulus!by!interest!rate!policy.!The!restrictive!fiscal!
policy!constitutes!the!main!obstacle!to!growth,!which!was!reinforced!by!the!
Euro! Plus! Pact! that! is! inspired! by! the! German! debt! brake.! The! idea! that!
improving! the! supplyMside! in! order! to! boost! investment! did! not! pay! off! in!
Germany,!It!is!dubious,!why!this!should!payMoff!in!France.!Furthermore,!the!
multipliers! of! tax! incentives! are! far! lower! than! expenditure! multipliers.!
Furthermore,!shifting!the!burden!of!social!security!contributions!from!firms!
to! households! and! raising! consumer! taxes! will! counteract! the! stimulating!
effect! of! freeing! firms! due! to! negative! multipliers! for! household!
consumption!(OFCE/ECLM/IMK!2014).!
!
49!
France’s! wage! policy! is! still! in! line! with! the! ECB’s! inflation! target.!
Bearing!in!mind!that!France!is!a!wageMled!economy!wage!restraint!does!not!
seem! an! option.! This! is! even! more! so! as! the! export! channel! seems! to! be!
buried!because!many!peripheral!countries!have!started!wage!deflation!and!
austerity! programmes! leading! to! increased! competition! and! diminishing!
external! demand.! Basically,! mercantilist! strategies! have! negative!
externalities! in! other! countries! while! depressing! growth! in! the! domestic!
economy.!!
Essentially,!national!macroeconomic!policy!reaches!some!boundaries!
in! a! currency! union.! The! Europeanised! monetary! policy! reached! the! zeroM
lower! bound.! Monetary! policy! should! remain! expansive.! The! French! fiscal!
policy!is!too!restrictive,!however!this!is!mainly!influenced!by!fiscal!rules!at!
the!European!level!and!cannot!play!a!major!part!in!terms!real!stabilization!
growth!and!employment.!Wage!policy!should!act!as!a!nominal!anchor!and!is!
an! important! source! of! domestic! demand.! Hence,! France! should! follow! the!
wage! formula! according! to! which! nominal! wages! should! grow! in! line! with!
productivity! increases! plus! inflation! target.! Stockhammer! (2011)! argues!
that! wage! policies! should! be! coordinated! at! the! European! level.! Current!
account! surplus! countries! should! increases! above! the! wage! formula!
whereas!wages!in!deficit!countries!should!grow!below!the!target!in!order!to!
rebalance! competitiveness.! However,! as! put! forward! by! the! Commission!
(Com! 2010)! current! account! imbalances! are! mainly! rooted! in! domestic!
demand!factors!and!not!in!price!competitiveness,!this!constitutes!probably!a!
nonMcomplete!solution.!Furthermore,!the!issue!of!nonMprice!competitiveness!
is!not!captured!in!this!approach,!which!might!be!problematic!in!particular!in!
reference! to! Germany,! which! ran! large! current! account! surpluses.! With!
respect!to!France’s!open!flank!of!net!exports!of!industrial!goods!this!seems!
to! be! even! more! problematic.! Given! the! nonMprice! competitiveness! of!
German!industrial!products,!the!German!income!elasticity!of!imports!would!
prohibit! that! a! sufficient! German! import! demand! for! investment! and!
consumer!goods!that!would!help!to!rebalance!the!French!balance!of!goods.!
Therefore,!a!proposal!put!forward!by!Hein!and!Detzer!(2014)!seems!
to! be! the! most! convincing.! As! price! competitiveness! cannot! fully! explain!
!
50!
divergent! current! accounts,! the! major! burden! of! rebalancing! is! devoted! to!
fiscal!policy!and!industrial!policy.!This!is!in!line!with!functional!fiscal!policy!
in! postMKeynesian! fashion.! In! order! to! avoid! current! account! imbalances!
fiscal! policy! should! absorb! the! excess! of! private! saving! over! private!
investment,!however!that!would!require!the!abandonment!of!the!European!
fiscal! rules! and! national! debt! brakes! as! for! instance! in! Germany.!
Furthermore,! the! Gallois! report! deplored! the! deindustrialization! of! the!
French! economy.! Hence,! French! industrial! policy! should! aim! at!
reindustrialization! and! promoting! highMtech! sectors! of! manufacturing!
production,!in!order!to!escape!price!competition.!!
!
8.&Conclusion&
!
This!paper!aimed!to!critically!consider!the!question!of!whether!France!is!the!
new!sick!man!of!Europe!and!came!to!the!result!that!this!view!does!not!hold!
for! France.! Neither! macroeconomic! performance! indicators! nor! indicators!
of! international! competitiveness! imply! that! France! is! the! new! sick! man! of!
Europe.!France!was!just!mediocre!and!was!far!away!from!being!the!sick!man!
of!Europe!over!the!whole!period!of!under!consideration.!
Initially,!the!institutional!sclerosis!view,!i.e.!the!conventional!wisdom!
that! the! economic! performance! is! determined! by! structural! characteristics!
of!the!labour!market!and!welfare!state!institutions,!is!challenged.!Otherwise!
France! must! have! been! the! sick! man! of! Europe! in! the! 1990s! and! not!
Germany.! Furthermore,! in! terms! of! GDP! growth! France! performed! well!
better!than!Germany!up!to!the!crisis.!
France! had! a! very! growthMfriendly! macroeconomic! policy! mix! up! to!
the!crisis,!consisting!of!a!favourable!interest!rateMGDP!growth!constellation,!
only! slightly! restrictive! fiscal! policy! and! wage! policy! in! total! accordance!
with! the! ECB’s! inflation! target.! However,! the! analysis! of! the! French!
macroeconomic!policy!regime!also!revealed!two!issues.!!!
First,! France! suffered! from! an! open! flank! of! net! exports! of! goods.!
More!precisely,!the!export!performance!did!not!rebalance!imports!due!to!a!
!
51!
lack! of! price,! cost! and! nonMprice! competitiveness,! in! particular! relative! to!
Germany!but!not!to!other!competitors.!Together!with!France’s!geographical!
orientation! towards! the! euro! area,! where! priceMsensitivity! is! higher! than!
extraMeuro!area!exports,!this!in!particular!problematic.!Second,!in!the!wake!
of!the!crisis!domestic!demand!collapsed,!which!hampered!growth.!This!has!
been! reinforced! by! proMcyclical! restrictive! fiscal! policies! in! the! past! few!
years.!!
From! a! postMKeynesian! perspective! the! institutional! sclerosis! is! not!
only! misleading! as! the! example! of! Germany! has! shown.! Structural! reforms!
of! labour! market! and! welfare! state! institutions! will! rather! have! negative!
impact! the! macroeconomic! performance,! in! particular! since! French! firms!
face! demand! difficulties! and! not! supply! constraints.! The! problematic! of!
export!performance!could!be!tackled!by!industrial!policy,!in!order!to!move!
up!the!quality!ladder!and!thus!escape!from!price!competition.!Furthermore,!
France!would!benefit!from!strong!recovery!of!the!euro!area.!
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