While Germany’s economy threatens stagnation, having only narrowly avoided entering recession, France is chugging right along and has outpaced the region as a whole. Despite predictions that a slowdown was imminent, third quarter GDP growth of 0.3 percent revealed healthy results. This is partially due to Macron’s decision to introduce billions of euros in stimulus to quell the yellow vest protests – much of which boosted benefits for minimum wage earners – and in turn spurred consumer demand while offsetting a trade slump. France is also showing strength in job creation, suggesting there is more behind the country’s growth than just the fortuitous timing of tax cuts.
Last week, France again boosted its investment and trade after signing contracts with China that covered a wide range of industry in the fields of aeronautics, energy, and agriculture, including approval for twenty French companies to export poultry, beef and pork to the Asian giant – worth more than 13 billion euros. Energy-related deals include a memorandum of understanding between Beijing Gas Group and French utility Engie to cooperate on the construction of a natural gas terminal and storage facility in Tianjin. Meanwhile, France’s Total has agreed to enter a joint venture with China’s Shenergy Group to distribute liquified natural gas by truck, and a nuclear fuel reprocessing facility set to be built in China by nuclear power company Orano.
“With respect to economic policies, we have an all thumbs up for France”, said Berenberg European Economist Florian Hense. “Whether it’s Germany in the early 2000s or France now, the labour market is actually key for all layers of the economy.”
Both the French government and the European Central Bank President Christine Lagarde have advised Germany to spend in support of the economy, but their recommendations have been disregarded thus far. France wants to push a more active industrial policy and aims to build up European champions that will rival the US and China, along with greater resource-sharing between EU-member states. Thanks to their economic success, France has a greater ability to throw its political weight around.
Why France is Doing Well?
Some of the discrepancy between the two major eurozone economies lies in Germany’s economic reliance on export-driven demands. Global trade has been hit hard as of late, stemming from the ongoing trade war between China and the US, as well as domestic political unrest within Europe. France’s economy is more reliant on internal consumer demand and a service economy, allowing flexibility to adapt when export-driven trade dries up. Even still, that doesn’t make France wholly inoculated from the fluctuations of the global economy.
“Things have really slowed down this year, and to be honest, this is a slowdown that started at the end of last year”, said EIU’s Emily Mansfield, principal economist for Europe. Mansfield largely credits the EU’s lack of economic growth to outside forces.
“Germany’s slowdown has had an impact obviously on France, with Germany being the largest European economy, but this is not new, as the slowdown had started in 2018. France, with a smaller export sector, had suffered less from this slowdown”, said Gilles Pradere, senior fund manager at Swiss investment firm RAM Active Investments.
France also benefits from the European Central Bank’s monetary policy, which aids investment that is mostly funded by borrowing, unlike Germany, where investment is not. This may yet pay off for France in the long-term. At Axa, Chief Economist Gilles Moec said “Beyond the cyclical support, the resilience in investment is conducive to decent prospects for potential growth as well.”
Barclays economist Francois Cabau said the first reading for GDP supported his “cautiously optimistic view on France”. “We continue to think that the domestic fundamentals are well oriented and, in particular, private consumption should do well”, he said, also noting that the falling unemployment rate would help keep growth going at a rate of 0.3 percent to 0.4 percent in the coming quarters. But the Bank of France predicts a slower rate of growth next quarter at only 0.2 percent, due to slower industrial production thanks to trade disputes and slowdowns in construction.
Even with France growing strong and Germany in stagnation, the country has a way to go before it can challenge the latter economically. France’s very large public sector is a major drain on its coffers, and in turn limits their resilience. On average, the government spends 56 percent of its annual economic output on these programmes in comparison to Germany’s 45 percent. France’s public debt hovers at nearly 100 percent of their GDP, and though unemployment in France has been dropping, it still stands at double Germany’s rate of unemployment, which also causes drag.
Quality of jobs is a good sign, however, and lasting contracts are on the rise – an improvement credited to Macron since changing laws that had previously kept companies from hiring. Cutting wealth and corporate taxes also gave businesses more breathing room, boosted investment, and allowed the number of start-ups to explode. Updated unemployment benefits have also encouraged workers to seek out work and employers to hire them. And while touching France’s pension system is always a political risk, reforming it will allow workers more mobility and choice in what work they take.
“Nothing will make us retreat from transforming the country”, French Finance Minister Bruno Le Maire said last month on RTL Radio. “Emmanuel Macron was elected for that”. Nonetheless, Macron remains deeply unpopular with many voters – which could indicate that these reforms, as much good as they’ve done for France, may not last.
Working Together for a Global Market
Both France and Germany are set to jointly launch new data infrastructure initiatives, with their respective finance ministries announcing timetables for their development. This will, in turn, lay the foundation for wider European collaboration. While the chief goal may be for the countries to maintain a digital edge, the hopeful by-product will be wider European cooperation in a competitive global market.
In a written statement, German Federal Minister, Peter Altmaier noted that the infrastructure will help Germany regain its digital sovereignty and form the basis for a digital ecosystem. “I am very happy that France and Germany will work hand in hand to lay the foundation of a European data infrastructure based on European values and on the strengths of our diverse economic environment”, he said. “We will now discuss the details of this project, identify the potential for synergies, and will then swiftly approach governments and enterprises from other European countries to become part in this initiative as well.”
“I’m strongly convinced that close cooperation between France, Germany and other European countries is necessary to tackle the technological revolution of the 21st century”, said French Minister, Bruno Le Maire. “We want to establish a safe and sovereign European data infrastructure, including data warehouses, data pooling and develop data interoperability.”
“By working together, European companies will benefit from a larger pool of data to develop their algorithms and enhance their position in a global and very competitive market. This is important for Europe’s digital and technological autonomy.”
Rough Waters Ahead?
A recent IMF report named eight countries likely to dominate global economic growth and trade in 2024. The US, China, and India are on the list, as is Germany. Though France is not, it did make the top twenty countries expected to drive global growth in the next five years. The United Kingdom, formerly ninth, is expected to fall to thirteenth on the list due to the toll taken by Brexit.
However, the Fund also predicts that giants like China and the US will contribute a little less, while economic growth is expected to fall to a rate of 3 percent a year – the worst numbers seen since the global financial crisis that occurred in 2007 and 2008.
