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! Title:'France'–'the'new'sick'man'of'Europe?' A'critical'macroeconomic'analysis' ' Submitted'by:' David'Gölnitz' Berlin'School'of'Economics'and'Law' Department'Economics'and'Business' MA'Political'Economy'of'European'Integration! ' ' ' 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! ! 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! ! 2! 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! ! 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! ! 3! 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! ! ! ! ! 4! 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! ! 5! 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¯oeconomic& 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! ! 6! 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' ! 7! 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! ! 8! 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¯oeconomic&policy®ime&& ! 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¯oeconomic&policy®ime& ! 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.! 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