During the UEFA EURO 2020 opening game, France arguably dominated its archrival Germany. While both teams have since exited the tournament, we find a welcome tie between the EU’s two largest economies when it comes to weathering the Covid-19 crisis, judging by GDP developments, labor market performance, debt toll and policy support. While this is only a halftime assessment as the Covid-19 crisis still far from resolved, and economic activity remains subdued, it suggests that the Eurozone policymaking won’t have to face a penalty for economic divergence. 

Headline GDP performance: France 0 – 0 Germany. Judging by the latest headline GDP figures, the French and German economies show no meaningful divergence, with both registering roughly 5% below pre-crisis GDP levels in Q1 2021. However, Q1 acted as the great equalizer in this regard, with the French economy proving relatively resilient (-0.1% q/q) at the start of 2021, whereas German GDP contracted by close to -2% q/q. However, looking beneath the surface, we find some quite notable divergence

Investment and Exports: France 0–1 Germany. Given its more favorable position to profit from the industrial upswing, thanks to its product palette and geographical focus (US and China absorb 17% of German exports compared to 12% for France), Germany leads on investment and exports – both of which are within reach of pre-crisis levels. In contrast, in France, the Covid-19 gaps remain larger (10pp for exports). Particularly during the long Covid-19-induced economic hibernation of domestic demand, it was German industry – the country’s Achilles heel in 2018-19 – that helped prop up economic activity. 

Consumption: France 1-1 Germany. When it comes to private consumption, Germany is lagging behind developments in France. A key reason is the extension and tightening of Covid-19 restrictions in Germany in Q1. As a result, German consumers stumbled into the new year, resulting in a marked contraction of -5% q/q in private consumption in contrast to a mild expansion in France (+0.2% q/q). Germans also nursed a consumption hangover following the temporary VAT reduction between July and December 2020. 

Economic recovery prospects: France 1-2 Germany. France will be lagging the German economic recovery by around six months, given a projected return to pre-crisis GDP levels only by mid-2022. Europe’s largest economy is on track to already hit that milestone by the end of this year. The key driver of the German lead will be a stronger rebound in consumer spending as German consumers are better positioned to fuel the recovery momentum in the coming quarters. For one, there will be more pent-up demand that can be unleashed. After all, in Germany, the savings rate shot up to 21% – its sharpest move since the start of the pandemic – whereas it declined in France. Nevertheless, with consumer sentiment in France returning close to pre-crisis levels, a consumption boom driven by pent-up demand still remains firmly on the cards (in contrast German households remain somewhat more cautious). However, even by end-2022, a GDP gap will remain with regards to the economies’ pre-Covid-19 growth path. The gap will be slightly larger in France (2.8%) compared to Germany (2.1%). Unlike the US, which will be catapulted above its pre-crisis GDP growth path, thanks to a turbo-charged fiscal stimulus, Europe’s heavyweights will not close the Covid-19 GDP gap in the medium-term.