As with many topics, misconceptions abound about Europe’s big two economies – Germany and France. In a note, Allianz Economic Research busts seven of the biggest myths…
As with any field of human activity, economics is not immune to myths. In Europe, many of the most persistent relate to Germany and France – the two biggest economies of Europe – and their relationship. Allianz Research, in a recent report, busts seven of the biggest myths.
Population growth can benefit economic development, but not always. France’s fertility rate in 2015 was 1.96 per woman, higher than the 1.5 recorded for Germany. Yet, in its latest economic forecast, the European Commission puts German potential growth at 1.9 percent for 2017 and 2018, versus 1.2 percent for France.
More human capital benefits the potential growth of an economy only if people can actually work. In Germany, the employment rate for those aged 15-64 reached 74.7 percent in 2016. In France, it stood at just 64.2 percent, show Eurostat figures. This shows that higher birth rate does not necessarily mean higher potential growth.
The average output per worker in France is among the highest in the world and has remained so during the recent crises of 2008 and 2011. In 2016, for example, productivity in France was 5 percent higher than in Germany. Even after adjusting for unemployment rate, labor productivity remains 1.4 percent higher in France.
This debunks the myth that unemployment is driving the productivity of French workers versus their German counterparts.
The world tends to see the German government as thrifty, or at least not as profligate as the French. Yet, since 2013, German public spending has increased at a pace more than twice that of France (cumulative 13.6 percent versus 6 percent). In 2016, the German government’s expenditure rose 4 percent, partly due to the refugee influx, compared with just 1.1 percent in France.
Germany, far from being close-fisted, seems to be switching to an expansionary fiscal course and France is not quite the spendthrift it is made out to be. France seems to be comfortably meeting EU benchmarks that require government spending growth to be at or below a country’s potential economic growth rate.
The basis of this belief is that higher labor costs in France make the country less competitive than Germany. But measured in terms of unit labor cost (ULC), the gap has been clearly narrowing in recent years.
A significant ULC gap did emerge between the two countries after 2000, when the Hartz reforms, tough labor market changes, moderated German labor costs. From 2002 to 2012, labor costs rose 9 percent in Germany versus 21 percent in France. However, between 2012 and 2017, after France decided to tackle its lagging competitiveness, the increase in German labor costs was nearly three times as large (9 percent) as that of France (3.4 percent). This is narrowing the competitiveness gap.
Whether the two continue to converge will depend on policies adopted by the respective governments concerning labor law reforms, tax credits and minimum wage requirements.
Germany’s famous Mittelstand (small to mid-sized companies) are praised for providing the backbone for the world’s fourth largest economy. They certainly create an impressive export engine. There are 300,000 exporters in Germany, and only 125,000 in France.
Yet, in terms of profit margins, France’s small and medium enterprises (SMEs) outperform those in Germany. In France, the profit margin is 3.1 percent; in Germany, it is only 2 percent. French SMEs come out better on other counts too. For example: in France, the return on capital employed is 22.4 percent and in Germany, it is only 15.3 percent, while the cash position is 4.9 percent versus 4.1 percent.
To be fair, the differences could be because of the definition of SMEs in the two countries and because of data availability. Financial information is available for 100 percent of German SMEs but only 47 percent of French SMEs. This can lead to data distortion.
Germany is France’s leading bilateral trade partner, accounting for 16.5 percent of all import and export. But France is not Germany‘s top bilateral trade partner. It’s China at 7.9 percent; France comes in second at 7.7 percent.
France is the second destination for German exports (8.4 percent) after the U.S. (8.9 percent) and only the third supplier for imports after China (9.8 percent) and the Netherlands (8.8 percent). In comparison, Germany clearly remains France’s most important source of imports (16.9 percent) and destination for exports (16.1 percent).
France has been losing importance as a trade destination for Germany, but it is far from alone. In 2000, about 46 percent of German exports went to the eurozone, by 2016 this had declined to 37 percent.
You would think so, but the opposite is true. Since 2002, the total investment-to-GDP ratio in France has been consistently above that of Germany.
The investment-to-GDP ratio indicates how much a country is investing in new equipment, technology and research. A high figure can indicate a country is trying to catch up to other nations, or that it is trying to increase its international competitiveness.
In 2016, the ratio stood at 22 percent for France and at 20 percent for Germany. Both the French public and corporate sectors have higher investment ratios than their German counterparts. This suggests Germany faces a significant investment backlog.
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