Home > Global Imbalances, Growth, Structural Reforms, Wages > Should Paris Go East?

Should Paris Go East?

December 6, 2012 Leave a comment Go to comments

Last week I was invited to speak at a conference on the relationship between France and Germany, 50 years after the Elysée Treaty. It was an occasion to look at France’s options for the near future.

I started by highlighting the French weakness in this particular moment:

  • France suffers, like all other eurozone countries, from a protracted period of slow growth; it is the effect of the global crisis, and its vicious evolution into a local sovereign debt crisis.
  • This problem is compounded by the structural weakness of France, witnessed by its deteriorating external position in the past 15 years. A loss of competitiveness that contrasts  with the increasing strength of Germany.

The commonsensical solution seems therefore to “do like Germany”: structural reforms aimed at lower wages and lower taxes on firms, in order to improve competitiveness (I did not say it, but this of course goes together with a reduced role of the government and a leaner welfare state). Nevertheless, i pointed out  that there are a lot of “buts“, that make the solution less commonsensical than it would appear at first sight:

  1. The first “but” is that in advanced economies most of competitiveness comes from non-cost measures, like technological lead in niche products, focus on high value added sectors, and the like. Germany is a good case in point: not many would argue today that Germany’s strong performance stems from cost advantages. Engaging exclusively in non price competitiveness risks triggering a race to the bottom, a zero-sum game that will leave only losers on the floor. Generalized cost reductions would not work to improve competitiveness , unless we managed to trade with aliens (and even then, we must assume that labour is expensive on Mars!).
  2. Second “but”: can we say that structural reforms improve well-being? Not so sure… Theoretically it is hard to show it, as soon as we abandon the ideal world of first bests;  empirical evidence is also surprisingly weak. The trade off between unemployment and wages does not disappear because of structural reforms. Structural reforms basically amount to choosing a point where high employment is “paid” through low wages. This leads me to the third “but”:
  3. There are costs to the German strategy: the good employment performance was accompanied by a number of not so good performances on other indicators. First, downward pressure on wages. How strong? Substantially. Poverty increased 4% in Germany since 2005, and only 1% in France.  Then, the increase in employment came at the price of lower hours worked. Finally, the increase of unwanted part time jobs disproportionately impacted  women, thus affecting gender equality. I have nothing to object to this. Germany is a democratic country, the people who  designed these policies were elected, and they delivered what they promised. What I want to emphasize is that another country could, also legitimately, decide not to pay these prices. It is astonishing, and in my opinion it was not emphasized enough, to see top German politicians setting the agenda of the French government.
  4. The last “but’ is related to the role of demographics. We all know (look at this short and interesting piece) that population numbers are on the side of France. Germany is aging much more slowly, and has a smaller immigration pool to draw from. This of course may be taken as a justification for Germany’s emphasis on savings and current account surpluses (for future consumption of the elderly);  but it is  also an indicator that the French debt is more sustainable. In other words, demographics is one of the many factors that make today’s “one-size-fits-all” approach to European policies nonsensical.

The conclusion was obvious: France needs not necessarily to walk the path of Germany. And this  makes the issue of  policy coordination much harder to solve. Harmonization by rules (e.g. the Fiscal Compact) neglects diversity, and a real coordination of intertwined policies would imply care for the common good  that is nowadays a very rare good in the EU.

I ended with some comments on the two-arms strategy of the Hollande government: embracing austerity and the “competitiveness shock”. I argued that the latter may be a welcome first step in restoring competitiveness, if it fuels investment, and favours specialization in high value added sectors. But the mix with austerity risks being lethal, precisely because the lack of demand will defuse the positive effects of lower taxes on businesses. More on that shortly…

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  1. July 1, 2013 at 4:33 pm

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