Reuters: Core problem for Europe as France, Germany drift apart

20 February 2013

Even as the eurozone periphery starts to spy some glimmers of hope, concern is mounting that Germany is drifting apart from other countries at the core of the single currency bloc, notably France.

Economically, the worry is that insistence on fiscal austerity by an out-performing Germany will delay an upturn in France, which has been steadily losing competitiveness to its larger neighbour. Politically, the risk is that already uneasy relations between French President Francois Hollande and German Chancellor Angela Merkel could come under further strain when the eurozone needs strong, cohesive leadership to create a new institutional framework for the euro.

Paris is more in tune with Italy and Spain than with Germany in wanting to put growth before deficit reduction and structural reform. In the period 1999-2007, France outperformed Germany. Since the crisis, however, France's economy has shrunk 0.1 per cent a year on average, while Germany's has grown 0.8 per cent, according to economists at JP Morgan. Germany is reaping the benefits of a fall in its real exchange rate by 16.4 per cent since 1999, achieved by dint of wage discipline. By contrast, France's rate has risen 4.5 per cent over the same period. That helps explains why France has lost a bigger share of global markets since 1999 than any other member country except for Italy and Greece.

France is not the only core euro member struggling to keep up with Germany. Finland contracted in 2012, hurt by weak exports and troubles at one-time telecoms growth engine Nokia. The Netherlands is in recession as a depressed housing market saps confidence and consumption.

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