28 June 2024

Bruegel: Divergent economic dynamics grind down the Franco-German EU axis

The increasing difficulties of the Franco-German axis in leading the European Union have been attributed to the weakening of President Macron and Chancellor Scholz domestically and their lack of personal chemistry. These factors clearly play a role by reducing the willingness to compromise. But structural divergences between the two economies are the main reason the stuttering of the Franco-German motor. 

Since the 2007-2009 global financial crisis, Germany has pursued strict fiscal policies and based its growth on net exports, fuelled by a manufacturing specialisation in relatively mature technologies and traditional services, helped also by low energy costs. Public and private investment have been low and Germany has disregarded the negative effects of an ageing population.

In contrast, France has benefitted from better demographic dynamics and has focused on advanced services and production innovation. However, it has failed to bring its external imbalances under control through adjustments to its very high public spending.

At the start of the global financial crisis, France’s public debt-to-GDP ratio was slightly above 60%. This was below the euro-area average and close to the German ratio. But by the end of the prolonged euro-area crisis (2013), the ratio had increased by about 60 percent in France and by 45 percent on average in the euro area. Subsequently, before the pandemic, France’s public debt-to-GDP ratio continued to rise, unlike the rest of the euro area. Since the pandemic, it has remained above 110 percent, compared to the euro-area average of 90 percent and about 60 percent in Germany. 

French debt has been driven by public deficits systematically exceeding 3% (except for 2018-2019). France is the only euro-area country to have never, since 2001, achieved a primary balance surplus (the budget balance net of financial charges on its debt). Public expenditure as a share of GDP in France has remained approximately seven to ten percentage points higher than the euro-area average and is currently about nine points higher than in Germany. This lax budgetary management has not translated into higher growth rates in France, especially in terms of per-capita GDP. 

This context helps understand why the results of June European elections in France represented a turning point, regardless of the immediate outcome of subsequently announced national elections.

Since the launch of the euro in 1999, the privileged Franco-German axis has granted France a sort of impunity with respect to European rules and market pressure. The comment “because it’s France,” made by then European Commission president Jean-Claude Juncker in 2016 to justify the lack of application of EU debt rules, provocatively highlighted that German protection long provided a sufficient shield to France to bend EU rules and defuse market instability. Consequently, French governments could reconcile opposing objectives. Their defence of the traditional European model translated into effective instruments of social inclusion, but also into various forms of early retirement, public incentives for innovative initiatives especially in services and inefficient management of public or private companies, among other shortcomings....

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