France’s Economy is Doing All Right, Thanks

The analysis of what’s wrong with the French economy appears to be clear: France is mired in idleness, a quasi-religious belief in an expansive role for the state, outdated economic structures and an inability to combat rising unemployment. The advice is perfectly clear as well: Francois Hollande, France’s newly elected President, should finally do what… well, what the Germans have done.

Sounds great, right? A closer view, however, reveals that the broader finding — that the French economy is beset by long-term weaknesses both cultural and structural — is not particularly apropos. Nor is the recommendation that France should quickly copy what seems to have been working for the extremely export-dependent German economy.

It is true that French exports have been growing more slowly than German exports for years — losing a great deal of market share in the process. It is also true that the unemployment rate in France exceeds that of Germany — and that only the German unemployment rate has fallen substantially since the 2009 recession.

Both of these facts indicate a need for reforms. But what should these reforms really look like? According to the OECD, France already imposes lower taxes on corporate profits and income than Germany does. And the average French worker logged 1,554 hours on the job in 2009 (the last year for which comparative data is available) — considerably more than the 1,390 hour per year for the average Germany worker.

Likewise, expenditures on active labor market policies are no higher in France than in Germany. And the ratio of long-term unemployed persons in France is still lower than Germany’s. How about public debt? France’s net sovereign debt abroad amounts to as little as 9% of GDP, according to UniCredit Chief Economist Erik Nielsen.

If French companies have lost market share, then this is likely to be largely due to the fact that they are less specialized, deliver poorer quality and are therefore more susceptible to cheap providers or soaring exchange rates than their well prepared German rivals. German firms have lucked out during this cycle because they offer precisely the kind of investment goods the investment boom in the emerging markets demands.

This was why the French and the Italians were hit harder when the euro appreciated by a trade-weighted 40% between 2000 and 2008, making European products more expensive across the globe. It is no coincidence that the collapse in French market share occurred almost in tandem with the euro’s rally.

Of course, if France had — as Germany does — a backbone of highly specialized small- and medium-size enterprises that also happened to be world market leaders in their industrial segment, they would be able to sell their wares at pretty much any price. But that is an impractical suggestion. The real question is whether pursuing such a strategy would not cost France more than it would stand to gain from it.

Part of Germany’s success story appears to be a kind of response to pent-up demand after a number of lost years of growth. What really counts, however, is the long-term scorecard. And that, it turns out, shows some quite amazing results.

Eleven per cent per annum more is invested in France’s economy today than during the boom year 2000. In Germany, the comparable figure amounts to just 3.3%. In other words, the latest increases in Germany have only been sufficient to make up for the loss sustained until 2005.

Conversely, in spite of the current economic doldrums in France, 3.8 million more people are employed today than in 1993. It should also be noted that between 1997 and 2008 the unemployment rate was lower in France than it was in Germany.

All in all, France’s GDP today is 38% higher than it was in 1990, while Germany’s has risen less than 30%. The German economy will have to continue booming for a number of years until the gap is finally closed. This makes it even more doubtful whether it is really is so desirable for the French to emulate the Germans.

France’s growth advantage

“Both countries function according to two completely different patterns in economic terms,” says economist Véronique Riches-Flores of Société Générale. Whereas in Germany roughly 50% of aggregate economic output goes into exports, this figure amounts to just 27% in France. Accordingly, in arithmetical terms alone, a great deal more export impetus will be necessary to sustain the entire economy.

Basically, Ms. Riches-Flores believes the French economy is much more diversified — not only in the field of exports and industry, but also service providers, consumers, the tourism industry and the real-estate sector. That is no wonder, considering that the French have what is increasingly rare among European economies — a growing population. And, as is the case with the United States, that is a potential growth advantage for years to come.

Just how quickly a heavy reliance on exports can become a liability is shown by the downturns in Germany in 2009 and 2011. If and when the level of international demand declines, then even the supposedly robust German economy will stagnate at a breathtaking pace. Last year saw a contraction from record growth figures within months. In contrast, the French economy continued to expand throught the winter.

This does not mean that jump-starting the French economy is not an urgent matter. However, the deeper-seated problem of exports does not appear to be the crux of the issue at all. The acute dilemma lies in the effects of an overvalued currency — and the fact that the French are going into consumer strike mode out of sheer panic.

This kind of situation will not be remedied by preaching austerity and calling for oom-pah band-style reforms according to a German model which the French have already emulated, in part, for some time — and which has not really resolved the crisis.