The French and German economies

Based on 'Prudence lags behind prodigal' from FT, 4th July 2006

The German economy is surely doing better than the French economy? Germany has high engineering exports, business confidence is at a 15 year high, June saw the largest increase in manufacturing production since April 2000, a new chancellor has been appointed and Germany’s progress to the semi-finals in the World Cup has boosted morale.

For France, the story looks somewhat bleak – there are political storms ahead, a mere 9% of the population feel that France is on the right track, companies have lost competitiveness compared to Germany and the French trade deficit is mounting.

Despite this, French economic growth is predicted to outpace Germany’s. This is mainly due to France’s huge consumer demand compared to Germany’s sluggish domestic performance.

Elie Cohen, part of the French PM’s economic advisory panel argues that “It is strange to have this kind of supply-side policy and nothing on the demand side, and to accept consumption [being] …low.’

The French government has taken further steps to boost consumer spending by allowing an early exit from savings schemes run by employers whereas Germany has done the opposite by increasing VAT by 3% from January 1 2007. However, consumption-led growth is “not a model for eternity” as argued by Daniel Gros, director for European Policy Studies in Brussels. Similar sentiments are also reflected by the OECD, which believes that France should improve labour markets, show more fiscal discipline and boost competition.