Transcript Learning to live in Euroland

Learning to live in Euroland
The role of France and Germany
Conference
France and Germany in the International Division of Labour
Centre Saint-Gobain for Economic Studies
Paris, 9-10 December 2004
Stefan Collignon
Professor of European Political Economy
LSE
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Professor
Stefan
Collignon
Learning to live in Euroland
Franceallemagne as motor of European integration?
 “Red lanterns” in Euroland ?
 Rigid labour markets ?
 An out-dated social model ?
A more complex reality
 Fundamental change is the monetary system
 from Bretton Woods to EMS to EMU
Adjustment to the new reality takes more than labour
market reforms
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Professor
Stefan
Collignon
Learning to live in Euroland
Economic convergence as a precondition for political union
 A remarkable degree of convergence has taken place
 Germany suffers from German unification
Fiscal policy suffers from institutional deficiencies and
this blocs economic growth and employment in Euroland
Unless political initiative emerges from France and
Germany, 50 years of integration will perish
 Economic stagnation is systemic
 Collective action problem in EU25
 bad policy output undermines legitimacy
But France and Germany have ideologically converged
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Professor
Stefan
Collignon
Learning to live in Euroland
1. The problem with economic growth
• GDP trend growth has been higher in France than Germany,
although only by a small amount (less than 1 %)
• Historic turning points:
Figure 1: GDP growth in France and Germany
Bretton Woods
1.Oil shock
2. Oil shock
0.08
German Unification
EMU
France
- End of Bretton Woods and 1. Oil shock
West Germany
0.07
FR. Germany
5 yr MA Germany
0.06
5 yr MAFrance
5 yr MA United Kingdom
0.05
- 2. Oil shock and EMS
0.04
0.03
0.02
- German unification and Maastricht
0.01
0
-0.01
• growth rates have been highly correlated since the mid 1980s
(Correlation coefficient 0.60-0.90)
- only national shocks: early Mitterrand years and German
unification
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- Euro
Learning to live in Euroland
Professor
Stefan
Collignon
Per capita income (in euros) has also converged in
France and Germany
• but growth is less in UK and USA (strong exchange rates!)
Figure 6. Per capita income in current euro prices
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Euro
German unification
2. Oil shock
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FR. Germany
West Germany
France
United Kingdom
2005
2002
1999
1996
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1990
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1981
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1972
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1960
logarithmic scale
1. Oil shock
United States
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Learning to live in Euroland
Professor
Stefan
Collignon
Two reasons for slow income growth
1. Productivity has persistently slowed down
• Deterioration faster in Germany since unification
• Deterioration accelerated in France due to 35 heures
• Capital intensity has slowed in F-D, increased in UK-US
Figure 7. Average labour productivity growth
(5 year m oving average)
0.06
1. Oil shock
2. Oil shock
German unif icat ion
Euro
0.05
0.04
0.03
0.02
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FR. Germany
France
Unit ed St at es
Unit ed Kingdom
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Professor
Stefan
Collignon
Learning to live in Euroland
Two reasons for lower income growth
2. Employment rate is improving in France, but not in
Germany
•
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Dramatic deterioration in East German manufacturing
New jobs in services (F 2.7, D 4.3, UK 2.9 over 1992 to 2001)
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Professor
Stefan
Collignon
Learning to live in Euroland
Job creation is low when GDP growth is below
productivity growth
Germany
France
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Professor
Stefan
Collignon
Learning to live in Euroland
Total Factor productivity (the efficiency of combining
labour and capital) is also disappointing
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Surprising cyclicality
Possibly related to low investment
- lower incorporation of new technologies
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Learning to live in Euroland
Professor
Stefan
Collignon
Investment ratio has collapsed: Why?
Figure 5. Investment ratio
0. 31
1. Oi l
2. Oi l
G e r ma n
E ur ope
0. 29
0. 27
0. 25
0. 23
0. 21
0. 19
0. 17
FR. Ger many
West Ger many
Fr ance
Uni t ed K i ngdom
2005
2002
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0. 15
Uni t ed St at es
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Professor
Stefan
Collignon
Learning to live in Euroland
Insufficient demand
•
Output gaps are negative
- in size (controversial)
- in frequency
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Learning to live in Euroland
Professor
Stefan
Collignon
The likelihood of insufficient demand is not 50:50
Figure 12a. Demand and investment: Germany
Demand expectation Germany
1.2
0.31
Investment share: Germany
0.29
1
0.27
Germany
0.8
After 1980: 66 %
0.4
0.25
0.6
0.23
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Figure 12b. Demand and investment: France
Demand expectation France
1.2
0.31
Investment share: France
0.29
1
0.27
France
0.8
0.25
0.6
0.21
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After 1980: 60 %
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Learning to live in Euroland
Professor
Stefan
Collignon
• Insufficient demand affects the expected
profitability of firm’s new investment
• labour markets cannot be blamed for low
profits
Figure 14a. Wage shares
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1. Oil shock
2.Oil shock
3. German Unification
4.Euro
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West Germany
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Professor
Stefan
Collignon
Learning to live in Euroland
Nominal wage moderation is higher then in the 1960s
• In Germany wages are stagnating
• In France they increase less then in the UK
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Learning to live in Euroland
Professor
Stefan
Collignon
But entrepreneurial profits are improving
• cost of capital have fallen with lower interest rates, while unit
labour costs have stabilised
• Tobin’s q has improved (Ratio of market prices to cost of production)
- More of the rising capital income share gores to real investment, less to
rentiers
Figure 15. Prices, production costs, unit labour costs and Tobin's q
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Germany
France
0.7
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0.5
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LGermany ULC
LGermany P star lt
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LGermany P star st
LFrance ULC
LFrance Pstar lt
0.1
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q st D
q Euroland st
1.50
q lt F
q st F
D
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LFrance P
LFrance Pstar st
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q lt D
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D
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1.00
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F
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Professor
Stefan
Collignon
Learning to live in Euroland
The public sector
• Expenditure in France and Germany larger than in UK or US
• But no change over recent years
- no evidence for lower growth
• in Scandinavia it is even higher
-no stifling of lower growth
• Public investment
- is stable at 3 % of GDP in France
- has fallen to historic low of 1.7 % in Germany
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Learning to live in Euroland
Professor
Stefan
Collignon
The public sector
But the financing of public expenditure is reflecting the
“conservative” model of welfare state
• in France high social contribution until Juppé- reforms 1996
• in Germany social contributions are Kohl’s Portokasse
Figure 17. Tax burden
including imputed social security contributions
50.0%
German unification
2. Oil shock
1. Oil shock
Euro
45.0%
Total tax burden
35.0%
30.0%
Taxes
25.0%
20.0%
Social contributions
15.0%
France total burden
West Germany total burden
France tax net of social contributions
West Germany tax net of social contributions
West Germany social contributions
FR. Germany total burden
United Kingdom total burden
FR. Germany tax net of social contributions
FR. Germany social contributions
France social contributions
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10.0%
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percent of GDP
40.0%
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Professor
Stefan
Collignon
Learning to live in Euroland
To summarise:
• Economic structures in France and Germany
have converged
- they are more alike than anglo-saxon economies
• The handicap is macroeconomic policy
- in EMU this is a matter of the policy mix
- monetary policy interacts with fiscal and wage policies
• Can Francallemagne improve their situation by
“economic reforms”?
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Professor
Stefan
Collignon
Learning to live in Euroland
1. Is the labour market too rigid?
• Mobility: high in Germany  led to same wage
levels in East and West
• Are wages too high?
- Unskilled workers: reforms have happened
- Average wages reflect productivity: unit labour
costs
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Professor
Stefan
Collignon
Learning to live in Euroland
No competitive disadvantage for Franceallemagne
• Both countries’ ULC are below Euroland average
• stable in France
• decreasing in Germany  build up of advantage
Figure 19. Evolution of relative ULC levels in EMU
Portugal
Spain
Netherlands
Belgium
2005
Italy
2004
2003
Greece
2002
France
France
Luxembourg
2001
2000
1999
Austria
Germany
Germany
Finland
Ireland
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
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Professor
Stefan
Collignon
Learning to live in Euroland
• This adjustment is justified, because Germany has
lost the DM-advantage of low interest rates
• it translates into renewed competitiveness
-exports are increasing: from 25.7 % of GDP in 1999 to 32
% in 2004
• But France gained from losing FFr, hence more
stable ULC
• But does not solve the problem, when lower ULC
simply lead to falling prices rather than higher
profits
- problem of large countries
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Learning to live in Euroland
Professor
Stefan
Collignon
But profits do not improve enough
• Higher RoC elsewhere
- France and Germany have converged
-but higher RoC in IRL, Sweden, US, UK
Figure 20. Gross Return on Capital
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1. Oil shock
2. Oil shock
Euro
German unification
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Ireland
United States
Sweden
United Kingdom
France
Euroland
FR. Germany
West Germany
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Italy
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Professor
Stefan
Collignon
Learning to live in Euroland
1. Average productivity of capital stock is higher in
anglosaxon and Scandinavian countries
•
job protection versus income protection?
•
low investment rate slows modernisation of capital
stock
2. Investment reponds to Tobin’s q
• q responds to monetary policy
• In Franceallemagne still below Euroland average
• although ULC are falling, prices are also falling
relative to Euroland price level: why?
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Professor
Stefan
Collignon
Learning to live in Euroland
The policy mix
• Overriding priority of price stability
• ECB must respond to ULC-developments (supply
side)
• ECB must respond to fiscal policy (demand side)
- Aggregate fiscal stance for Euroland
- National responsibility
- Coordination only by SGP
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Professor
Stefan
Collignon
Learning to live in Euroland
ECB takes both factors into account
But fiscal deterioration prevents lower interest rates
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Professor
Stefan
Collignon
Learning to live in Euroland
•
ECB is more concerned about fiscal than wage
policy
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SGP is not implemented
•
Commission has no ultimate power
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Therefore: there exists no European fiscal policy
and policy mix is sub-optimal
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Professor
Stefan
Collignon
Learning to live in Euroland
The solution
•
Define aggregate fiscal stance for Euroland at
EU-level
•
Allocate deficit permits to member states for
implementation
•
But: binding obligation is only possible with
full democratic backing
- vote by European parliament
- create European political Union with full democracy
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Professor
Stefan
Collignon
Learning to live in Euroland
This is where France and Germany have a
role to play
But ultimately it is up to European citizens
to charge the institutions with the proper
management of their common affairs
European democracy is the next step!
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Professor
Stefan
Collignon
Learning to live in Euroland
Ceterum censeo:
pactum stabilitatis esse delendum
Et rem publicam europaeam esse errigendam
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