German and French Macroeconomic Policies: A Comparison Essay

German and French Macroeconomic Policies: A Comparison

Introduction
Germany and France are trading partners and their economies are two of the largest in the world. The two countries experienced sluggish economies in recent years but are slowly recouping their losses and are expected to re-emerge as leaders in economic growth. Both countries are also bedevilled with employment problems where their unemployment rates registered double digits. France, in particular had a persistent problem of putting its young people and unskilled labour sectors to work. The recent riots that the French youth initiated had primarily been brought about by demand for more job opportunities from the government. Other factors that may influence the economic performance of the two countries include climate conditions, oil price volatility, the performance of the Euro, and global economy. Germany’s economic growth has been affected by the reunification in the nineties. The slow recovery is attributed to the burden of carrying the economy of former East Germany.

            Macroeconomic strategies and decision-making are important factors that could make or break a nation’s economic growth. While both countries are traditionally trading partners, they still differed in planning for their respective economies. Both countries are also part of the EU. Aside from considering domestic provisions for economic stability, they also need to comply with directives from the EU. In the ensuing sections of the paper, the two countries’ macroeconomic strategies are examined. Some analysts believed that both countries are on the road to a robust economic growth. Generally, in the last three years, both countries had managed to contain stagnation and injected new strategies to prime up their sagging economies.

Country Overview
Germany
The German economy is the largest in the EU and is the third largest in the world. Germany is still dependent on manufacturing as the main driver of the economy. In addition, the industrial sector contributed 30 percent of the GDP. Germany is one of the technological leaders in several industries like steel, cement, chemicals, machinery, vehicles, electronics, and shipbuilding (CountryWatch 2007,p.85). However, Germany’s economy slowed down after unification with East Germany. Germany experienced annual average real growth of only about 1.5 percent and stubbornly high unemployment. Since the unification, Germany’s best economic performance registered in the year 2000 when Germany realized growth of 2.9 percent (CountryWatch 2006,p.57). Germany’s export activities comprise a third of the country’s economic output. Labour problems existed because German employers are keener on hiring overseas talent than locals. There is also an imbalance and “brain drain”. More people with skill and education migrate to the west in search of better opportunities. The German economy continues to do a very poor job of creating job opportunities. The welfare state structure, inflexible labour markets and generous benefits for the long-term unemployed needed some reforms. In the years to come, unemployment is predicted to have adverse effects on the German economy (CountryWatch 2006,p.58).

            Germany’s economy weakened from 2001 onwards registering a low –0.1 growth in 2003.  This was attributed to worldwide recession and weaker Euro currency against the US dollar. Despite large flows within the individual components of its current and financial accounts, Germany has maintained a remarkable overall balance in its international transactions. According to CountryWatch (2006), “Germany was

running surpluses on merchandise trade account, deficits in services, near balance on net international income flows and deficits on unilateral transfers, Germany’s current account had been in minor deficit in the US$3-20 billion range over the decade to 2000, constituting percentages of GDP less than one percent” (p.58).

Business Climate

            Although Germany has the fifth largest economy in the world, it is one of the slowest growing in the European zone. Many problems have beset the country and they have yet to recover the setback. The recent election called for economic reforms that will propel the German economy into a better position. The unemployment level remains high. To meet the challenges of globalisation and EU integration, Germany must initiate corporate restructuring ease up on their inflexible labour markets. The growing capital markets are also setting the foundations that could allow Germany comply with the requisites of the EU (p.85). Germany also has an aging population and the different retirement funds and endowments have put pressure on the economy of the country.

            When establishing a business in Germany, expect no special treatment. Foreign businesses are treated the same way as their local counterparts when it comes to regulatory measures, taxation and labour. Germany is ranked 15th as the least corrupt nation in the world by Transparency International. Taxation in Germany is quite heavy. Almost all the goods are levied a value added tax (VAT) at 16 percent.

            Under the German labour legislation, it does not require foreign companies to hire a specific number of German citizens. However, if the company would be hiring foreign nationals, they must comply with the requisites of the German Immigration Law. Under that law, for a foreigner to “pursue commercial interests of any kind in Germany, regardless whether employed or self-employed, [he] must obtain a residence permit as required by the Aliens Act (Ausländergesetz)” (Begemann ; Garms n.d.).

            Barriers to new investments are the German tax, labour, health, environmental and safety regulations (CountryWatch 2006, p.85) Many investors also consider the highly regulated investment environment of Germany as too bureaucratic. But the government is trying to simplify everything to make the foreign investors feel more welcome. Germany’s population is aging and the country is also faced with pension fund solvency issues. The German government provided special incentives to invite more foreign investors in the country. Subsidies may be availed when applicable.

France
France is Europe’s third most important economies and its strength lies in its “substantial agricultural resources, a large industrial base, and a highly skilled workforce.” (CountryWatch 2007 (b), p.93) However, in the recent years, France experienced mixed results in economic growth. The country is also challenged by the growing unemployment problem. The service sector contribution comprises about 70 percent of GDP and most new employment opportunities came from that sector.  In the industrial segment, France is particularly strong in the manufacture of automobiles, pharmaceuticals, transport equipment, and aircraft (p.93). In agriculture and agro-industry, France ranked second to United States as the world’s largest agricultural producer (p.93).

            The French government also instituted structural changes to allow France to compete in the global market. Its formerly statist structure gradually transcended into a more liberal structure where privatisation activities became part of the reforms. The French government actively participates in the economy with the state owning major companies in the transportation and utility sectors (p.93). But the government’s tax policies, generous employee’s benefits proved to be disadvantageous and made the creation of new jobs difficult. Furthermore, the burden of state’s pension systems and health care provisions are putting too much strain on the French economy.

            Compared to other EU states, France enjoys a robust domestic demand. The high household savings, a profitable financial sector, and a robust housing sector all contributed to the economic stability of the country. In undertaking reforms in the pension systems, minimum wage and other incentives that would support household consumption, it boosted the confidence of the country.

            Other factors that had adverse effects on the French economy were stagnating employment, rising oil prices, and political turmoil surrounding the rejection of the EU constitution. With the sharp increases of oil prices in the world market, domestic consumption was tapered. France’s unemployment rate remained at 10 percent, one of the highest in the EU region. Young people had trouble finding permanent employment and this sparked the recent riots in late 2006. In France young people found it more difficult to gain employment compared to other countries.

Business Climate

            The French government has opened up its economy for more foreign investments. By privatising large firms formerly controlled by the government, it enabled a more competitive environment. The telecommunications sector in particular is gradually being opened to competition. The government is committed to capitalism yet it retained measures to ensure social equity through “laws, tax policies, and social spending that reduce income disparity and the impact of free markets on public health and welfare.” (CountryWatch 2007 (b), p.119)

            Compared to other nations, France’s investment climate is less restrictive. France only imposed restrictions on some industries that required a one month review before being allowed to operate in the country. Businesses that required the review include “health sector, public order or the national security” regardless of size or nationality (p.119). France became an attractive investment venue when it applied market oriented economic reforms. However, it still lagged behind to improve its inflexible labour market. Labour cost remained high and the 35-hour workweek was considered restrictive. In addition, France has one of the highest taxation in Europe (about 43.8 percent of GDP in 2003) (p.119). Foreign investors often cited unnecessary labour regulation and high income and payroll taxes as the greatest barriers to investing in France.

The German and French Economy in from 2004-2007
Germany has yet to recover from demands of unification. The unification with East Germany had put undue stress to the German economy in the 1990’s. The slow growth of the German economy was attributed to challenges posed by inadequate plans for long-term growth, issues of employment and the management of public financial sustainability. To date, the German government is still struggling with its budgetary deficits. While there were marked improvements in the export segment, domestic demand had remained weak. Two trends appeared to weaken the domestic demand. Imposing wage controls may have improved competitiveness but it had reduced household income thereby reining in consumer spending. Compared to other Euro areas, Germany had low inflation but this resulted to raising real interest rates. The lack of movement in currency is also attributed to the single currency (Euro) adopted but it had buoyed up Germany’s exports. There are signs that improvements were achieved. Domestic demand is picking up and exports showed improvement from 2005 to 2006 data. Table 1 shows some key macroeconomic figures to support the observation.

Table 1 – Germany’s Macroeconomic Development Figures (Anonymous 2007, p.2)

            Germany continued to miss its targets in spending targets and deficits remained high. The government’s general deficit reached 3.3 percent of GDP in 2005 and has remained consistently above the 3 percent level for four straight years. The imposition of VAT to compensate for loss revenues in previous reductions in direct taxes was implemented in the early quarters of 2007 (OECD 2006,p.1).

            Wurzel (2006) observed that key structural changes in Germany helped improve and stabilise economic conditions after experiencing post-unification recession. Germany was able to re-establish competitiveness in the external markets through reforms made in wages and employment and price cuts. The efforts had resulted in positive supply in external competitiveness. However, due to the challenges posed by wage reforms, productivity remained depressed.

            German economy is improving despite high unemployment rate at 10 percent. Germany’s economy is driven by exports. The country was able to gain trade surpluses in recent years that compensated for other negative impacts of weak domestic demand,

Analysts view the German economy as gradually recovering. Unemployment remains an issue. In 2006,unemployment figures rose to 12 percent (BBC News 2006).

            Germany’s trade balance also improved in 2006 with “trade surplus [registering at] 13.1bn euros ($15.97bn; £9.13bn) in February, up from 12.5bn euros the previous month” (BBC News 2006 (b)). Exports grew at 4.6 percent whole imports rose to 4.8 percent. These indicators represent Germany’s gradual recovery and gaining a foothold in the international markets.

            Several external factors also affected Germany’s economic growth in recent years. One of them is the rising cost of fuel and energy. Energy prices in Germany rose 22 percent in 2006 largely influenced by high fuel cost. Electricity cost also rose 24 percent compared to figures in the previous year. These would impact on the inflation rate as it too rose to 2.1 percent breaching the 2 percent limit imposed by the European Central Bank (BBC News 2006 (c)).

            France, like Germany, is also recovering from negative economic results from the previous years. France’s recovery began in 2004 when it reached 2 ¼ percent growth despite weaknesses in the region. Its unemployment rate is high at 10 percent. The high unemployment rate was attributed to “high minimum cost of labour and strict employment protection legislation, as well high tax wedges on labour” (OECD 2005, p.2). France is also struggling to contain its budget deficit and public sector debts. The government had instituted some measures to curb the deficits. The public sector deficit reduced 4.2 percent GDP in 2003 to 3.6 percent GDP in 2004. The French government is aiming for below 3 percent GDP for public sector deficit has not yet been successful. To date, public sector deficit remained beyond 3 percent.

            To reduce the deficit problem, the government introduced measures in the hope of boosting public savings. Reforms in public health insurance schemes and public employment were implemented to reduce public expenditures. The French labour market is also considered inflexible due to restrictive employment protection laws. For many companies in France, dismissing employees could prove to be expensive. This discouraged them from creating new jobs. This in turn resulted in lack of employment for many French youths. France also restricted competition. This had affected the productivity levels and also hindered the generation of new employment. In addition, restrictive competition laws aimed at curtailing unfair competition could also affect the consumers negatively. They cannot reap the benefits of competition among the producers. This also had put undue pressure on the inflation rate of the country.

            The state is still a major stockholder in big companies that limits competition in the market. Although the government had already divested interests in some major companies, it needs to accelerate its privatisation activities to keep up with the momentum. Table 2 exhibits the macroeconomic figures of France from 2005 until the second quarter of 2007.

            In 2006, French exports gained from 3.2 percent in 2005 to 6.5 percent. However, GDP growth slowed at 0.4 percent compared to 0.9 percent in 2005. Some industries though were affected by competition from other global markets. The French lost its market share in the auto manufacturing industry to Japanese and South Korean rivals (INSEE 2007 (a), p.13)

Table 2 – France Macroeconomic Figures (INSEE 2007 (b), p.45)

Assessment
The overall performance of the two countries remained below expectations. However, it should be noted that both economies are recovering albeit slowly. According to OECD (2005, 2006) the French and German economic planners need to implement more reforms so that the results would be felt across all sectors. For Germany, it would need a more integrated strategy so that policies would interact with each other positively. The labour market reforms are a thorny subject for both the French and German governments because it would undermine household confidence and reduce domestic consumptions. Both the French and German government need to meet their fiscal targets to avoid exacerbating the already ballooning deficits.

            The French government need to liberalise its market by divesting interests in major corporations to allow healthy competition to prevail. In Germany, highly restrictive investment climate should be reviewed. Both France and Germany imposed high taxes that discourage potential investors from pursuing business interests in those countries. The unfavourable conditions of employment legislations also hindered the generation of more new jobs to prime up the economies of both countries. Both countries need to lower their unemployment rates so that they can maximise productivity and employability of their citizens.

            On a positive note, both countries appeared to have gotten out negative economic growth and it appeared some of the reforms they introduced have made some progress. However, the two countries need to implement more reforms to realize their targets.

Bibliography
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