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AB 2000 studies

Alain Boublil Blog


The worrying Germany

We know the famous metaphor: soccer is a game played by two teams where at the end Germany wins. It was following the French team defeat in 1982 at Seville during the World Cup semi-final. It has been used after to compare respective economic achievements of the two countries but it is much less adapted to the current situation. During the last edition, Germany suffered a humiliating elimination after having been defeated by South Korea at the end of the preliminary phase and France won the title. Regarding economic issues, if France is not shining thanks to its successes, its neighbor is itself also confronted with difficulties which put in doubt the superiority of the “German model” and which worries about its adaptation capacities on the long term to the new conditions of the globalization. In 2019, its growth rate, according to official and private think-tanks like IFO, would fall to around 0.7%, i.e. half French expected one. Germany wouldn’t be, as in the past a model of economic success. We would be wrong to be happy with that because German economy good health is essential to Europe prosperity and equilibrium and to its influence in current international discussions, with the U.S. as with China.  

Until now, what has made the country strength was the accumulation of its surplus. Public accounts have a positive balance for three years when France has hardly reduced its deficits to bring them back below 3% of its GDP in 2017 and 2018. It will be again above this level in 2019. France trade balance last year carried a 60 billion deficit when Germany surplus was above 220 billion, which provides Donald Trump with its favorite arguments against Europe. German industry power, which is at the origin of this international success, has not been built in one day. During the whole 19th century, along with the constitution of the strong and unified nation we know today, and when population was multiplied by three to reach near 60 million people, country resources were employed to create a powerful industrial tool, the one the French author Paul Valery described in his book in 1897: “The systematic conquest”. During that time, France used its resources to achieve colonization, giving the priority to its political influence to the detriment of its economic power or believing that both were going along, which will be a deep mistake.

The parallel about the different strategies adopted by the enterprises of both countries to cope with globalization is attractive. French groups made all out acquisitions, frequently financed by indebtedness when German groups built supply chains in foreign countries to lower their costs, but in keeping the maximum of the value-added and, due to that, jobs in the country. Net foreign positions of the two countries are conveying well that difference: debtor at 34% of its GDP for France, creditor at 44% for Germany. Consequences for the job market are not negligible, which, partly explains the gap between the two unemployment rates, 5% in Germany and near 9% in France. The number of employees of French company subsidiaries working outside of the country (six million) is superior to their German colleagues (five million) when the size of the German economy is by large bigger than the French one.

The recovery of German public accounts after the heavy deficits generated by the reunification is quite also spectacular. But it has been achieved to the detriment of the family policy, whose weakness is not without link with the demographic crisis the country is going through. Infrastructures are decrepit and it will be necessary to remedy to it. Military expenditures GDP share is very inferior to French one. The high employment level can also be explained by the important proportion of part-time workers or employees with precarious status, which generates deep inequalities and weights on consumption and internal demand growth. To offset the demographic deficit, the government has encouraged immigration but that has caused populist parties rise and weakened traditional political formations. Their successive policies had been at the origin of the current prosperity but this one is becoming less and less shared, which, on the long term, creates doubts about its resilience.

The predominance of some sectors, as the car industry or mechanics, and their spectacular success are at the origin of the trade surplus. But it has a reversal: the insufficient diversification of the German economy. The respective shares of the industry in France and Germany are different and this argument is put forward to denounce France “de-industrialization” . But it could be also possible to show, as it is starting to be done on the other side of the Rhine, the bad aspect, i.e. the weakness of the country regarding services and the fragility of its banking system. One of the reasons of the German growth taking down is precisely due to the car industry, hurt by the “Dieselgate” which it is difficult to recover from it, by the hardening of the norms dictated by Brussels and by the increasing power of Chinese competition. These factors have few chances to soften in the future.

The accumulation of surplus carries also a long term depressive impact on Germany partners, which weights on their growth. As these one are, by a majority, euro zone members that confirms the European Central Bank in its choice to keep interest rates at a very low and even negative level. That will harm more and more pension mechanisms where capitalization occupies a large share when, due to an ageing population, these systems will be more and more appealed. Atop of that, among the accumulated assets are, at a high level, debts from foreign countries or economic agents hurt by this depressive environment. This risk, at the end, will be bear by savers or future pensioners and will weaken the German banking system, already penalized by the consequences on its margins of the interest rates low level. The project of a merger between Deutsche Bank and Commerzbank results from the incapability of the first two biggest German banks of building for them an independent future. The addition of their market capitalizations (25.2 billion) is hardly above the value of the third French bank, Société Générale (22.6 billion). The low trust financial markets grants to the German banks is one more contradicting signal about the highly positive opinion which was shared about our main partner economy until now in France.

The constant and always in disfavor of France comparison between the two countries put under light the weaknesses of French economy. They result both from inappropriate political choices and wrong corporate strategies which have weighted on growth and employment without generating concluding returns for themselves. But the unanimous and without any nuance admiration our neighbor is giving rise is excessive. The last crisis which hurt Europe came from the Southern countries. If no correction is brought, the next crisis could come from the most important among Northern countries, Germany.        



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