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Learning to live in Euroland The role of France and Germany Conference France and Germany in the International Division of Labour Centre Saint-Gobain for Economic Studies Paris, 9-10 December 2004 Stefan Collignon Professor of European Political Economy LSE 1 Professor Stefan Collignon Learning to live in Euroland Franceallemagne as motor of European integration? “Red lanterns” in Euroland ? Rigid labour markets ? An out-dated social model ? A more complex reality Fundamental change is the monetary system from Bretton Woods to EMS to EMU Adjustment to the new reality takes more than labour market reforms 2 Professor Stefan Collignon Learning to live in Euroland Economic convergence as a precondition for political union A remarkable degree of convergence has taken place Germany suffers from German unification Fiscal policy suffers from institutional deficiencies and this blocs economic growth and employment in Euroland Unless political initiative emerges from France and Germany, 50 years of integration will perish Economic stagnation is systemic Collective action problem in EU25 bad policy output undermines legitimacy But France and Germany have ideologically converged 3 Professor Stefan Collignon Learning to live in Euroland 1. The problem with economic growth • GDP trend growth has been higher in France than Germany, although only by a small amount (less than 1 %) • Historic turning points: Figure 1: GDP growth in France and Germany Bretton Woods 1.Oil shock 2. Oil shock 0.08 German Unification EMU France - End of Bretton Woods and 1. Oil shock West Germany 0.07 FR. Germany 5 yr MA Germany 0.06 5 yr MAFrance 5 yr MA United Kingdom 0.05 - 2. Oil shock and EMS 0.04 0.03 0.02 - German unification and Maastricht 0.01 0 -0.01 • growth rates have been highly correlated since the mid 1980s (Correlation coefficient 0.60-0.90) - only national shocks: early Mitterrand years and German unification 4 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 -0.02 1961 - Euro Learning to live in Euroland Professor Stefan Collignon Per capita income (in euros) has also converged in France and Germany • but growth is less in UK and USA (strong exchange rates!) Figure 6. Per capita income in current euro prices 100 Euro German unification 2. Oil shock 10 FR. Germany West Germany France United Kingdom 2005 2002 1999 1996 1993 1990 1987 1984 1981 1978 1975 1972 1969 1966 1963 1 1960 logarithmic scale 1. Oil shock United States 5 Learning to live in Euroland Professor Stefan Collignon Two reasons for slow income growth 1. Productivity has persistently slowed down • Deterioration faster in Germany since unification • Deterioration accelerated in France due to 35 heures • Capital intensity has slowed in F-D, increased in UK-US Figure 7. Average labour productivity growth (5 year m oving average) 0.06 1. Oil shock 2. Oil shock German unif icat ion Euro 0.05 0.04 0.03 0.02 0.01 FR. Germany France Unit ed St at es Unit ed Kingdom 2005 2002 1999 1996 1993 1990 1987 1984 1981 1978 1975 1972 1969 1966 1963 1960 0 6 Professor Stefan Collignon Learning to live in Euroland Two reasons for lower income growth 2. Employment rate is improving in France, but not in Germany • • Dramatic deterioration in East German manufacturing New jobs in services (F 2.7, D 4.3, UK 2.9 over 1992 to 2001) 7 Professor Stefan Collignon Learning to live in Euroland Job creation is low when GDP growth is below productivity growth Germany France 8 Professor Stefan Collignon Learning to live in Euroland Total Factor productivity (the efficiency of combining labour and capital) is also disappointing • • Surprising cyclicality Possibly related to low investment - lower incorporation of new technologies 9 Learning to live in Euroland Professor Stefan Collignon Investment ratio has collapsed: Why? Figure 5. Investment ratio 0. 31 1. Oi l 2. Oi l G e r ma n E ur ope 0. 29 0. 27 0. 25 0. 23 0. 21 0. 19 0. 17 FR. Ger many West Ger many Fr ance Uni t ed K i ngdom 2005 2002 1999 1996 1993 1990 1987 1984 1981 1978 1975 1972 1969 1966 1963 1960 0. 15 Uni t ed St at es 10 Professor Stefan Collignon Learning to live in Euroland Insufficient demand • Output gaps are negative - in size (controversial) - in frequency 11 Learning to live in Euroland Professor Stefan Collignon The likelihood of insufficient demand is not 50:50 Figure 12a. Demand and investment: Germany Demand expectation Germany 1.2 0.31 Investment share: Germany 0.29 1 0.27 Germany 0.8 After 1980: 66 % 0.4 0.25 0.6 0.23 0.21 0.19 0.2 0.17 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 0.15 1960 0 Figure 12b. Demand and investment: France Demand expectation France 1.2 0.31 Investment share: France 0.29 1 0.27 France 0.8 0.25 0.6 0.21 0.4 0.19 0.2 0.17 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 0 1960 After 1980: 60 % 0.23 0.15 12 Learning to live in Euroland Professor Stefan Collignon • Insufficient demand affects the expected profitability of firm’s new investment • labour markets cannot be blamed for low profits Figure 14a. Wage shares 73 1. Oil shock 2.Oil shock 3. German Unification 4.Euro 71 69 67 65 1983 63 61 59 FR. Germany West Germany France United Kingdom United States 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 1960 57 13 Professor Stefan Collignon Learning to live in Euroland Nominal wage moderation is higher then in the 1960s • In Germany wages are stagnating • In France they increase less then in the UK 14 Learning to live in Euroland Professor Stefan Collignon But entrepreneurial profits are improving • cost of capital have fallen with lower interest rates, while unit labour costs have stabilised • Tobin’s q has improved (Ratio of market prices to cost of production) - More of the rising capital income share gores to real investment, less to rentiers Figure 15. Prices, production costs, unit labour costs and Tobin's q 1 1 Germany France 0.7 0.6 0.5 0.4 0.4 0.3 0.3 0.2 0.2 LGermany ULC LGermany P star lt 1960 1970 1980 1990 LGermany P LGermany P star st LFrance ULC LFrance Pstar lt 0.1 1960 2000 1.4 q st D q Euroland st 1.50 q lt F q st F D 1970 1980 LFrance P LFrance Pstar st 1990 2000 1990 2000 q lt D 1.2 D 1.25 1.0 1.00 F F 1960 1970 1980 1990 2000 1960 1970 1980 15 Professor Stefan Collignon Learning to live in Euroland The public sector • Expenditure in France and Germany larger than in UK or US • But no change over recent years - no evidence for lower growth • in Scandinavia it is even higher -no stifling of lower growth • Public investment - is stable at 3 % of GDP in France - has fallen to historic low of 1.7 % in Germany 16 Learning to live in Euroland Professor Stefan Collignon The public sector But the financing of public expenditure is reflecting the “conservative” model of welfare state • in France high social contribution until Juppé- reforms 1996 • in Germany social contributions are Kohl’s Portokasse Figure 17. Tax burden including imputed social security contributions 50.0% German unification 2. Oil shock 1. Oil shock Euro 45.0% Total tax burden 35.0% 30.0% Taxes 25.0% 20.0% Social contributions 15.0% France total burden West Germany total burden France tax net of social contributions West Germany tax net of social contributions West Germany social contributions FR. Germany total burden United Kingdom total burden FR. Germany tax net of social contributions FR. Germany social contributions France social contributions 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 10.0% 1960 percent of GDP 40.0% 17 Professor Stefan Collignon Learning to live in Euroland To summarise: • Economic structures in France and Germany have converged - they are more alike than anglo-saxon economies • The handicap is macroeconomic policy - in EMU this is a matter of the policy mix - monetary policy interacts with fiscal and wage policies • Can Francallemagne improve their situation by “economic reforms”? 18 Professor Stefan Collignon Learning to live in Euroland 1. Is the labour market too rigid? • Mobility: high in Germany led to same wage levels in East and West • Are wages too high? - Unskilled workers: reforms have happened - Average wages reflect productivity: unit labour costs 19 Professor Stefan Collignon Learning to live in Euroland No competitive disadvantage for Franceallemagne • Both countries’ ULC are below Euroland average • stable in France • decreasing in Germany build up of advantage Figure 19. Evolution of relative ULC levels in EMU Portugal Spain Netherlands Belgium 2005 Italy 2004 2003 Greece 2002 France France Luxembourg 2001 2000 1999 Austria Germany Germany Finland Ireland -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 20 Professor Stefan Collignon Learning to live in Euroland • This adjustment is justified, because Germany has lost the DM-advantage of low interest rates • it translates into renewed competitiveness -exports are increasing: from 25.7 % of GDP in 1999 to 32 % in 2004 • But France gained from losing FFr, hence more stable ULC • But does not solve the problem, when lower ULC simply lead to falling prices rather than higher profits - problem of large countries 21 Learning to live in Euroland Professor Stefan Collignon But profits do not improve enough • Higher RoC elsewhere - France and Germany have converged -but higher RoC in IRL, Sweden, US, UK Figure 20. Gross Return on Capital 21 1. Oil shock 2. Oil shock Euro German unification 19 17 15 13 11 9 Ireland United States Sweden United Kingdom France Euroland FR. Germany West Germany 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 1960 7 Italy 22 Professor Stefan Collignon Learning to live in Euroland 1. Average productivity of capital stock is higher in anglosaxon and Scandinavian countries • job protection versus income protection? • low investment rate slows modernisation of capital stock 2. Investment reponds to Tobin’s q • q responds to monetary policy • In Franceallemagne still below Euroland average • although ULC are falling, prices are also falling relative to Euroland price level: why? 23 Professor Stefan Collignon Learning to live in Euroland The policy mix • Overriding priority of price stability • ECB must respond to ULC-developments (supply side) • ECB must respond to fiscal policy (demand side) - Aggregate fiscal stance for Euroland - National responsibility - Coordination only by SGP 24 Professor Stefan Collignon Learning to live in Euroland ECB takes both factors into account But fiscal deterioration prevents lower interest rates 25 Professor Stefan Collignon Learning to live in Euroland • ECB is more concerned about fiscal than wage policy • SGP is not implemented • Commission has no ultimate power • Therefore: there exists no European fiscal policy and policy mix is sub-optimal 26 Professor Stefan Collignon Learning to live in Euroland The solution • Define aggregate fiscal stance for Euroland at EU-level • Allocate deficit permits to member states for implementation • But: binding obligation is only possible with full democratic backing - vote by European parliament - create European political Union with full democracy 27 Professor Stefan Collignon Learning to live in Euroland This is where France and Germany have a role to play But ultimately it is up to European citizens to charge the institutions with the proper management of their common affairs European democracy is the next step! 28 Professor Stefan Collignon Learning to live in Euroland Ceterum censeo: pactum stabilitatis esse delendum Et rem publicam europaeam esse errigendam 29