France and Germany Remain in a Stalemate on the Euro

Despite the general relief over the far right’s defeat in France, the idea that this electoral outcome marks the ebb of the global populist tide is somewhat illusory. When it comes to its economic implications for Europe in particular, the notion of a long-term normalization seems to rely on the assumption that populism amounts to little more than a bout of political fever – which is expected to dissipate as a result of structural reforms and a federal inflexion of European politics. The likely persistence of populism in the coming years will require a more accurate understanding of Europe’s imbalances and the ills of national economies, especially on the technological front.

French officials tend to insist on the symbolic nature of economic reform and the need to send the right signals to Brussels and Berlin. The main paradox of this administrative line of thought consists in understating the root causes of the French economic malaise, and the actual change needed to tackle mass unemployment and spur technological catch-up. Its proponents expect economic salvation to come from an institutional turning point at the European level and the embrace of a common official doctrine, perhaps more than from an actual rebalancing in terms of competitiveness.

It is often said in Paris that German Chancellor Angela Merkel has a secret plan for a leap towards federalism and a “union of transfers” in the Euro zone, which would eventually loosen the grip on the French economy. “After effort comes comfort,” as the French saying goes. That plan would allegedly be activated once Paris has done its “homework” and restored its credibility, by means of fiscal consolidation and labour market reforms. Although these beliefs could appear to be substantiated by some inner knowledge of German politics, they rather illustrate a trend of misunderstanding among national elites in Europe.

The notion of potentially unlimited transfers is taboo to a vast majority of Germans, across the political spectrum. The establishment of a small and symbolic common budget for the Euro zone, or an investment mechanism, might be considered acceptable, under strict conditions. Meanwhile, an administrative construct allowing for massive transfers would not only be controversial, it would be rejected as unconstitutional.

Economic debates obviously take place in Germany too, and there would be no point in ignoring the gap that separates various schools of thought. Yet, the reality of these debates does not quite fit with what French administrative circles identify as being Germany’s vision for an integrated Europe. Very few people in Germany advocate the kind of federal construct that is nevertheless presented, in Paris, as being Berlin’s plan for a brilliant future when everyone has done its fiscal homework. Even though Emmanuel Macron’s campaign was judged very positively by the Great Coalition in Berlin, the news of his election was also accompanied with sharp comments on the risk that Germany might have to pay the bill for new institutional initiatives.[1]

Even Martin Schulz, the social-democratic chancellor candidate, when he discussed the issue of debt pooling during his time as President of the European Parliament made it clear that these talks merely took place for the sake of intellectual speculation. Even though he clearly opposes such plans, his timid conceptual foray into the subject of debt pooling is nonetheless being used by his opponents as an argument to discredit his current electoral bid.

Despite some clear red lines, a growing number of German economists – although still a minority – lament their country’s unbalanced economic model, of which the trade surplus is the most striking illustration. Germany’s current account surplus neared 9 percent of GDP in 2016 (or almost $300bn, more than that of China, whose economy is three times as large.) Some of these economists subsequently advocate more domestic investments and wage hikes. Their efforts, in a tense intellectual environment, should undoubtedly be hailed as courageous. It is of equal importance, however, for their European counterparts not to indulge in wishful thinking over institutional constructs that will never materialize.

“Sending positive signals to Berlin,” as French officials often put it, will not suffice either to restore competitiveness or to convince Germany to embark on a system of unlimited transfers that would make up for unlimited economic imbalances. Despite winning by a large margin, Emmanuel Macron will have to tread a fine line in a context of severe political tensions. Marine Le Pen has undoubtedly proved incompetent and unable to break with her party’s long history of extremism. After defeating such a controversial and antagonizing adversary, Macron has not yet received a strong mandate to carry out radical reforms.

The politics of “positive signals” would carry the risk of producing yet another series of crablike steps with no overall strategy — a pattern that has dominated French politics for the past four decades. There is an obvious need for reforms that would help to stimulate France’s fossilized business scene and, at the same time, of a genuine economic stabilization at the European level. Illusions over the “Franco-German couple” (as the French emphatically call what is commonly known in Germany as “German-French relations” or “cooperation”) might further delay adjustments that are urgently needed, especially on the industrial front.

French manufacturing has remained stuck in midrange production over the past couple of decades. The loss of competitiveness induced by the euro’s introduction and Germany’s strategy known as “Agenda 2010” has been magnified by the French industry’s lack of modernization. This failure results not so much from a lack of capital in the corporate sector as from timorous investment decisions, under the weight of an ever growing bureaucratic burden. Automation in particular lags behind other industrialized nations. Although robots are particularly suited for the car industry, which helped Germany to modernize fast thanks to its specialization on the sector, France’s lag persists even when accounting for sector specialization.

Populism fuels antagonistic visions which remain trapped in the often superficial distinction between supply-side and demand-side strategies. The idea of an electoral split between an educated elite that benefits from globalization and a working class relegated to peripheral areas is backed by statistical evidence in France, as in most other industrialized nations. Meanwhile, it paradoxically perpetuates the vain and sketchy vision of a divide between enlightened visionaries and a mass of workers doomed to be replaced by machines…

It is true that the rigidity of the French labour market and high labour costs (given the current industrial positioning) fuel unemployment. An equally worrying pattern has emerged, however, in terms of investments, while France suffers from weak productivity gains and a particularly low level of potential growth per capita (which barely reaches 1 percent per annum).

An economic strategy that would only focus on labour market deregulation and lowering labour costs might help to reduce unemployment in the short term and regain market shares to some extent. Without addressing productivity and technological issues, it would however fail to remedy the imbalances facing France and Europe more generally. While automation might destroy low-skilled jobs on the short term, technological backwardness remains, on the other hand, the most certain path to long-term mass unemployment.

The race to the bottom that is currently taking place in the EU not only aggravates imbalances among nations and generations; it further distracts policymakers’ attention away from the most urgent reforms in terms of modernization and innovation. The economic model that has dominated Euro zone policies so far has proved economically short-sighted and fuels a dangerous spiral. As popular discontent is far from receding, there is no alternative to a genuine and ambitious rebalancing among European economies.

[1] “Deutsche Politiker kritisieren Macrons Europapläne”, Spiegel Online, 9 May 2017