Seven Economic Misconceptions about France and Germany

The two biggest economies in Europe have been the subject of various wrong analyses and common-knowledge truisms. This report sets out to refute seven such misconceptions. These are: a higher French birth means potential growth is higher than in Germany; labor productivity is higher in France than in Germany because of France’s higher number of unemployed; Fiscal austerity is stronger in Germany than in France; France lost the competitiveness battle to Germany; German SMEs are performing better than French ones; France is Germany's main trading partner; and Because it grows faster, Germany should invest more than France. 

  • Belief #1: “As the French have more babies, potential growth is higher than in Germany”. Wrong! Having more human capital - a high fertility rate - alone does not help, this human capital has to be put to work - employed - to drive potential growth.

  • Belief #2: “Labor productivity is higher in France than in Germany because France has many unemployed people”. Wrong! After correcting for underemployment, France still outperforms Germany’s productivity by 1.4% (5% pre-correction).

  • Belief #3: “Fiscal austerity is stronger in Germany than in France”. Wrong! Since 2013 French public spending has grown at less than half the pace seen in Germany (cumulated 6% versus 13.6%).

  • Belief #4: “France lost the competitiveness battle to Germany.” Wrong! Between 2012 and 2017, the increase in German Unit Labor Cost – ULC – (+9%) has been nearly three times as great as the increase in French ULC (+3.4%).

  • Belief #5: “German SMEs are performing better than French ones”. Wrong! Profit margins (net income/turnover) stand at 3.1% in France and only 2% among German SMEs. The return on capital employed (ROCE) is 22.4% for French SMEs, and 15.3% for German ones. The cash position is also higher in France, with 4.9% (cash flow/turnover), when it is only 4.1% in Germany.

  • Belief #6: “France is Germany's main trading partner." Wrong! Though Germany is #1 trade partner for France (16.5% of goods exports and imports), France is the second trading partner after China, the second destination after the US, and the third supplier after China and the Netherlands.

  • Belief #7: “Because it grows faster, Germany should invest more than France.” Wrong! In 2016, the investment-to-GDP ratio was 22% in France, while it was only 20% in Germany. Both the French public and corporate sectors have higher investment ratios than their German counterparts (+1.3 pp and +1.0 pp, respectively).