Why Macron Should Not (and Cannot) Follow the German Model

Jörg Bibow | June 2, 2017

The Economist‘s analysis of Germany’s job market miracle of the past ten years offered in “What the German economic model can teach Emmanuel Macron” is more balanced than the usual accounts one hears in Germany itself. Germans are in love with the idea that structural reform of their labor market and persistent budgetary austerity were solely responsible for the German economy’s superior performance in recent years. The Economist highlights that Germany was fortunate enough to embark on its route for national salvation – the decisive lowering of its labor costs relative to its European partners – at a time when the world economy and global trade were booming, when China was craving German capital goods, and German companies were restoring their special relationship with a region reemerging from behind the iron curtain. No doubt France and its struggling euro partners are facing a far less benign regional and global environment today.

The Economist would have done well to remind us that despite enjoying a more favorable economic context, Germany became known at the time as “the sick man of Europe/the euro.” Between 1996 and 2006, Germany managed to almost persistently suffocate domestic demand to such an extent that the economy was growing, if barely, on exports alone: the background to Germany’s 8.5 percent-of-GDP current account surplus today. As for France, the bar is much higher today, not only because of stagnant export markets, but also for the fact that France is a far more closed economy than Germany. In other words, there is more to suffocate in terms of domestic demand, but less to gain in terms of exports. In short, the chances of France getting seriously sick by mimicking Germany are very high indeed.

Also, if Europe’s second-largest economy were to embark on the deflationary path earlier trodden by Germany, bear in mind here that the European Central Bank is already in a quagmire. After overcoming many obstacles, legal and intellectual, the bank is applying its full weaponry today in trying to move Eurozone inflation back closer to its 2 percent price stability norm – while facing the prospect of soon running out of ammunition in terms of the fast-shrinking German public debt available for purchase on the market.

And this directs the attention to the true challenge that France and Europe are facing today: German public debt is shrinking fast because Germany runs a sizeable budget surplus. Quite obviously – as the vast imbalance between private saving and investment reveals, which is closely related to the surge in inequality in Germany –this is only made possible by the fact that Germany runs a massive external surplus: the counterparts to which are current account deficits and rising debts of other countries. The upshot of all this is that France and Europe have a zero chance to rebalance for as long as Europe’s largest economy refuses to rebalance too; which means that Germany’s evangelized, but greatly distorted, narrative of its own success will need some fine-tuning too.

For the sake of Europe, let us hope that Angela Merkel’s newfound wisdom that “we Europeans must really take our destiny into our own hands” means that Germany is finally getting ready for a decisive course change to its own economic affairs. Failure to do so, leaving France out in the cold under Emmanuel Macron, would bring Marine Le Pen back into the limelight much sooner than in five years’ time.

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2 Responses to “Why Macron Should Not (and Cannot) Follow the German Model”

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  1. Comment by Ralph MusgraveJune 2, 2017 at 12:15 pm   Reply

    According to the link below, external trade as a % and GDP for France is 31% (and for Germany it’s 39%). Thus an extended period of low wage increases and increased efficiency ought to solve France’s problem about as quickly as it solved Germany’s problem. Not of course that I’m suggesting the Eurozone’s method of dealing with a country’s external trade deficit is exactly a work of genius: look at Greece.

    http://data.worldbank.org/indicator/NE.IMP.GNFS.ZS

  2. Comment by Joerg BibowJune 2, 2017 at 2:09 pm   Reply

    The import ratios, which this comment refers to, are of interest too. In the German case there is a significant gap between imports and exports. Most people know about that stark imbalance by now. It’s all over the media in fact. Germany’s export ratio is in the 46% of GDP ballpark, France’s around 30%. Most people consider that kind of gap significant. My blog post suggested that this issue is relevant in assessing what might happen to France if it embarked on the German path to virtue and prosperity. Cheerleaders of organized disaster and looting may prefer alternative facts of course.

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