Economics of France and Germany - Example

Economics of France and Germany Prepared by Submitted to Word count 3012 words (excluding content and references pages) Contents Part A 3 1. Introduction 3 2. National Income 4 3. Impact of Monetary, Fiscal and Supply Side Policies 5 3.1 General impact of the policies on economies 5 3.2 Impact of monetary policies 6 Part B 1. Introduction 10 2. Causes of Unemployment and the Policies Which can be Adopted to Reduce it 13 3. Relationship Between Inflation and Unemployment 14 Part A 1. Introduction This paper is to evaluate and analyse the economy of Germany and France in the last three years. So it is better to introduce the paper and the study with the condition of the economies of these countries in 2005. Though there is crisis in the European economy the Germans faced that better than the France. According to Steven Pearlstein (2005), the Germans are better than they fear and the France is lagging back than it expected. In 2005 the statistics was different. Germany’s economy is barely growing and the France’s economy is growing at 2 percent. Experts opine that though it is a little growth, the Germany’s growth comes from export sector and the France’s is from consumption of private sector. The contribution of exports is very little in its growth. Even this can be considered as a healthy trend as long as the country is able to supply to the private consumption domestically. The export oriented growth in Germany is due to lower benefit costs, higher productivity. These two factors are more in Germany than other countries in Euro zone. As in the industrialised country like Germany, the customer focus being a key discriminator, the efficient service have built some important world famous brands. This is a different case in France as producers are more concerned than the customers. In Germany the unions gave up their hard earned 35 hours week facility for job security, but in case of France it continues, affecting the productivity. For example in France, a pharmaceutical company Becton Dickinson located outside Grenoble yielded to the pressure of the employees for 32 hours a week. By observing the different conditions mentioned above the Germany is moving fast towards needed market reform than France. In addition to these, flexibility in lay off procedures is in Germany. 1 2. National Income As the tax burden is increasingly shifting towards lower income sectors, the working poor can be increased in the recent future in Germany. This is according to the 2006 report of Social watch.org. The efforts of the politicians to consolidate government’s revenues resulted in the burden on the low income categories. This can be supported from the evidence that the share of business and wealth tax is just 17.7 percent of the total tax revenue. There is evidence that the socially inequitable policy is still being pursued in Germany. The national income increased by 3 percent in 2004, but the income generated from the business rose to 10.4 percent in the same period. 2 The above figures are adopted from http://www.socialwatch.org/en/informesNacionales/502.html In 2005 the France’s work force was 2.7 times more than the population in 1965. In 2020, it is projected that it can be 2 times more than the present population. This may effect the grown and the rise of national income. The government was being compelled to pay for health and pensions more and this results in decrease of net national income though a continuous rise is observed in gross national income from 1975 to till now, when 5 year period is taken into consideration. It was observed that the average taxes are 50 percent of the national income. As it is not coming from high income group, there exists a doubt about reasonable increase of national income in the coming years. The effective marginal rates of tax is capable of hitting the income of the people. To make the national income to have a regular growth, France need to lower unemployment, increase work hours and raise retirement age along with cutting of benefits. 3. Impact of Monetary, Fiscal and Supply Side Policies 3.1 General impact of the policies on economies France and Germany are considered as least competitive economies in Europe regarding impact of monetary, fiscal and supply side polices. Many European countries are spending on government consumption at higher percent of GDP. In France it is 50 percent of gross domestic product. It was between 45 and 50 percent in Germany. France and Germany provide useful information about the economic consequences due to the bigger government. The important lesson to be learned form these countries is that the Gross domestic product is linked to the economic policy. The forecasts suggest that the inflation adjusted GDP can grow by 2 percent annually. This is regardless of 21 and 56 percent of consumption of government from economic output. Due to the government spending France is considered as a decrepit welfare state. In addition to these situations, France has reduced the work hours per week and increased spending on health and pensions of the workers and unemployed. The policy did not result in decreasing unemployment and some experts say that decrease of spending on unemployed result in decease of hiring costs and thus decrease of unemployment. 3 3.2 Impact of monetary policies The economies of France and Germany have shown indicators for the continuation of upswing at a fast rate in 2004 and 2005. This was according to release of economic survey for Europe in 2004. It was estimated the average growth rte of the world output in 2004 will the same at the peak of the cycle in 2000. This is at 4.7 percent. The weak cyclic momentum in France and Germany is dampening the growth rate. This dampening growth rate is more observed in Euro area. This is lagging behind when compared with international growth cycle. France and Germany are not considered as the markets that are dynamos of the global economic activity. The global external imbalances, high levels of public sector debt, bubbles in housing markets are restricting the growth in key areas that gives stable rate of growth in future. The reason for the changes in growth rate in 2004 is the rise in the prices of crude oil in international community. The higher oil prices are capable of restraining the economic activity and this happened in 2004 in France and Germany. Though no noticeable adverse effects are forecasted, the effect of the oil prices cannot be undermined. To neutralise the changes in the monetary policy are required. Germany and France need to decrease the dependence on the imports of oil to minimise the effect of them on the economy. The energy efficiency has proved to be a need to make the economy isolated to the oil price rise internationally. 4 Fiscal rules have gained considerable prominence over the last decade in Germany and France. These are seen as remedy to reduce the deficit bias shown by the governments. The institutional framework and the budgetary processes has substantial effect on the fiscal results. Better administrations are connected with better fiscal performance. The performance and growth of the Germany and France is not better than the other European countries. Though the growth cannot be in par with that of the smaller economies, the fact can’t be ignored. The impact of individual deficits have been less important in these two countries as there is systematic bias. The better budget presented in these three years has reduced the risk premia. As the budget processes are centralised, the risk premia is lower to these countries. The neglect of the role of the institutions lead to the omitted variable bias in the effects of fiscal policy. This is according to the risk premia under European monetary union. The three year analysis has proved that the budget institutions are a better to to reduce the deficit biases in Germany and France. 5 Germany’s performance in the past decade has been very low regarding GDP and productivity growth. When the last three years are considered, the needed market reform brought the minimum required growth but that can be termed as reliable as it is based on exports. This did not result in degreaser of inflation. The job creation, high unemployment and low rates of return on investment are more when the last ten years are concerned, but the situation in the last three years is different. This is due to the export oriented growth and the increase in the productivity that was achieved in 2004-06 in Germany. This is not observed in France in contrast the private consumption increased resulting in increase of inflation from 2004-06. When the last ten years are considered Germany can be termed as under achiever, but the performance of the last three years can be termed as the growth oriented. The last three years resulted in decrease of inflation though very small in Germany, that did not happen in France. 6 It was observed that the inflation/output gap ratio is 0.5 for Germany. This maeans the inflation far lesser than the output and the gap is lesser than indicates the healthy trend. Germany’s economy has recovered in 2006. This is due to the fact that the success in the policy is gaining competitiveness in the exports. This has paid the dividends and in contrast France has not shown this trend in the last three years. The dividends are not that much in France as much in Germany. The difference in contributions for real GDP growth between France and Germany can be observed from the above figure. The above figure is adopted from http://www.polandbusinessnetwork.pl/files/reports/Competitiveness%20and%20Adjustment%20in%20the%20Euro%20Area.pdf It can be observed that the domestic demand is far more then the contributions for real GDP growth in France and the domestic demand is less than the contribution to the GDP growth in case of Germany. This difference between the two countries resulted in export oriented growth in Germany and the growth due to the domestic consumption in France. Part B Main Macro Economics Policies Used by Germany and France 1. Introduction After the introduction of open method of coordination in 2000, soft social polices coordination processes have increased in Germany and France. In the absence of sanctionay mechanisms within the purview of OMCs it is felt that learning may lead to the policy change and the needed reform. This has been done by shift of policy actors’ understanding of problems and their solutions. In this context the national action plans, the good practices, peer reviews along with processes and institutional settings surrounding them can foster learning supranational processes. The focus on National action plans on France and Germany can be taken for comparison. They were a good fit in the case of France and it was made easy to comply with the European coordination process. This was not in the case of Germany. It was considered as misfit for that country and comparison between two countries resulted in opposite outcomes. 7 The above figure denotes the GDP per capita of various countries in 2003 and those of France and Germany can be observed. The GDP percapita of both the countries in 2003 is almost same just with a little difference. The following figure will illustrate the difference between their economies. The above figure is obtained from http://www.compete.org/pdf/US_Delegation_Briefing_Paper.pdf In the above diagram it was observed that the foreign direct investment in case of France is positive and in case of Germany is negative suggesting that the France is an attractive source of FDIs. The information drawn from the previous diagram suggests that though there is very less inflow of foreign direct investment into Germany when compared to France, the GDP per capita is almost same. This suggests that the economy of Germany is self reliant and there is improvement in domestic industry and the growth is export oriented. Whereas in case of France the growth is related to foreign direct investment and is based on private consumption. This indicates that due to the development of domestic industry, Germany can invest in the other countries more than the France, whereas France has to attract the FDIs from other countries to sustain growth. In the long run it can be estimated that the macro economic planning in the period 2004-06 in Germany will result in extensive export oriented growth and the capacity of investing internationally. This cannot be observed in France as the GDP is not due to increase of domestic industry and is due to the investments of FDIs which demand more incentives from the government. 2. Causes of Unemployment and the Policies Which can be Adopted to Reduce it Keeping in view the important role they play in the world economy the France and Germany have a domestic responsibility towards their own populations. As part of G8 countries they have the global responsibility to lead in efforts to combat the employment crisis internationally. The fundamental reason for the unemployment is inadequate growth. Though just by improving growth the unemployment problem cannot be solved completely, the sustenance of growth can assist in eradication of employment. The rise of employment more rapidly than the labour force and tends to continue like that in future. This trend was made useful in case of Germany and France yielded to welfare demands of the working community. Though France was able to attract foreign direct investments by its policies, it was able to sustain growth on its own. The solution of the problem of unemployment should be in such a manner to accelerate growth without increasing the inflation. The macro economic balances should not be disturbed. The promotion of employability and reinsertion of unemployed should create room to adequate social safety. This has been achieved in Germany by not decreasing weekly working hours. This was not possible in France the unemployment in France is more than that of Germany in spite of decrease of weekly working hours of the work force. In promoting employment intensive growth, the macroeconomic policies are crucial. This fact was identified by Germany it resulted in domestic industrial growth and in future they can invest in other countries. This was not the case with France. The productive investment is FDI and persistent back log of unemployment can be observed in the period 2004-06. Target intervention is observed in Germany to make macroeconomic policies benefit the vulnerable and excluded communities. This is not so easy in France as the intervention of the Government is difficult in case of foreign direct investments. Labour market reforms in Germany should be undertaken in such a way to choose employment rather than inactivity. Even this fact is well observed in case of Germany. The solid example for this case is the less weekly working hours in France and reasonable working hours in Germany. The investment of Germany in human resources is substantial and this developed human resources that choose for employment rather than inactivity. This investment is less in France and the welfare investment is more than the human resource investment and this resulted in slow processes that reduce unemployment. The investment need to promote competitiveness, adoptability and social integration. The general increase in levels of educational attainment is to match the development of skills and the competence with the changing needs. This change was being protested in France in the last three years from its work force. This compelled the government to yield to the pressure and this can be termed due to the absence of long term investment on human resources in the past. The presence of strong economic, social and political arguments for decentralising the delivery of labour market and the other programs are observed in Germany. The lack of initiatives for these activities in France resulted in difference between achievements between two countries. 8 3. Relationship Between Inflation and Unemployment According to Akerlof et al in 1996 and in 2000, the moderate level of inflation can provide grease to the price and wage setting process. The adjustment of the relative prices to shocks will become sluggish in the presence of downward nominal rigidities in wages and prices. In case of zero inflation rate, the individual firms that face an adverse firm specific shock cannot secure real wage reductions. This will instead lay off workers and results in unemployment. Thus it can be termed that a moderate level of inflation will provide employment in the long run. It was observed that the permanent reductions in unemployment can be done by bringing high or low inflation rates to moderate range. This was not completely accepted by all. Gordon in 1996 argued that the prediction of lower rate of inflation would imply higher permanent level of equilibrium. The unemployment cannot be confirmed by the recent historical evidence of cross country analysis. The above figure is obtained from http://staffassoc.web.cern.ch/staffassoc/Enjeux2005-2006/docs/5YR/TREF/TREF263_SituationEcoSoc.pdf It can be observed that in the last three years the economic growth due to the increase in GDP is increasing in case of both France and Germany. Germany has recorded more growth in the last three years and equaled the growth of France without having foreign direct investments equal to France and even much lesser than it. This resulted in decrease of inflation also. It can be observed that they there are fluctuations between the difference between inflation rates between France and Germany, in the last three years Germany was completely dominated France in achieving less inflation. Let us see what effect has it shown on unemployment rates of these two countries. The above figure is adopted from http://staffassoc.web.cern.ch/staffassoc/Enjeux2005-2006/docs/5YR/TREF/TREF263_SituationEcoSoc.pdf The above figure is adopted from http://staffassoc.web.cern.ch/staffassoc/Enjeux2005-2006/docs/5YR/TREF/TREF263_SituationEcoSoc.pdf From the above figure it is clear that the unemployment rate is always lesser than that of France, in case of Germany. In the last three years though the difference is less, this may be due to the achievement of domestic industrial development and decrease of foreign direct investment into Germany. Even in that case, the country is able to manage the unemployment rate slightly less than that of France. Though the inflation is less than that of France it can be termed as moderate level according to the European standards and less level when compared to international standards. As a result it can be termed that the moderate levels of inflation can control unemployment rate and even less inflation can be used to reduce unemployment rate if the growth is due to the development of domestic industry and capacity to export. The export oriented growth when spreads to all the sectors, by not being restrained to particular sectors, the unemployment can be reduced and the permanent solution to create employment opportunities can be achieved. References 1. Steven Pearlstein, 2005, Two Economies, Two Mind-Sets: Germany Gets It, France Doesn't, Washingtonpost.com, ,electronic, 9-4-07, http://www.washingtonpost.com/wp-dyn/content/article/2005/06/23/AR2005062302044_pf.html 2. Uwe Kerkow, 2006, No social progress in Germany, artificially inflated development aid abroad , Socialwatch.org, ,electronic, 8-4-07, http://www.socialwatch.org/en/informesNacionales/502.html 3. Daniel J. Mitchell, Ph.D., 2006, Fiscal Policy Lessons from Europe, The heritage foundation, ,electronic, 8-4-06, http://www.heritage.org/Research/Budget/bg1979.cfm 4. Press release, 2004, A strong but uneven rebound of the ECE economy, UNECE, ,electronic, 9-4-07, http://www.unece.org/press/pr2004/04gen_p12e.htm 5. Mark Hallerberg, Guntram B. Wolff, 2006, Fiscal institutions, fiscal policy and sovereign risk premia, Deutsche Bundes Bank, ,electronic, 8-4-07, http://www.bundesbank.de/download/volkswirtschaft/dkp/2006/200635dkp.pdf 6. Robert Formaini,2005, Germany: Doomed by Schmöllerism, Ludwig von Mises Institute, ,electronic, 8-4-07, http://blog.mises.org/archives/004294.asp 7. Kröger, Sandra, 2006, When learning hits politics or: Social policy coordination left to the administrations and the NGOs?, European integration online papers, ,electronic, 9-4-07, http://eiop.or.at/eiop/index.php/eiop/article/viewFile/2006_003a/18 8.US delegation brief paper, 2005, Benchmarking U.S. and Japanese Economic Performance, Council on Competitiveness, ,electronic, 9-4-07, http://www.compete.org/pdf/US_Delegation_Briefing_Paper.pdf 9. ILO, 1996, Combating unemployment and exclusion Issues and policy options, ILO Home, ,electronic, 9-4-07, http://www.ilo.org/public/english/bureau/intpol/pub2.htm#executive 10. Dr. Sylvester C. W. Eijffinger, 2007, Wage Setting and Price Stability, Committee on Economic and Monetary Affairs of the European Parliament, ,electronic, 9-4-07, http://www.europarl.europa.eu/comparl/econ/emu/20070321/eijffinger_en.pdf Read More