French and German Deficits In The Light Of Comparative Demographics

In case you hadn’t noticed, a right royal (no, not royale) row has been going on in recent weeks – a battle of the Titan-Presidents you might almost say – with the key protagonists being European Central Bank President Jean-Claude Trichet in the red corner and French President Nicolas Sarkozy in the blue one. There are many issues which separate the two of them at the present moment – ECB independence from political interference, the conduct of monetary policy for the eurozone, and the future of the Stability and Growth Pact among others. On the first of these I am with Trichet, we do not need more political meddling in the conduct of ECB affairs. On the second I am nearer to Sarkozy – although possibly for other reasons, as I try to explain in this post and comments. Here I will restrict myself to the third issue – the SGP – and try to explain in very simple terms why I have a certain sympathy for what Sarkozy is attempting to argue.

Matthew Lynn explains some of the details which lie behind the recent controversy in this Bloomberg article, where he also argues that they should bury the hatchet. Even if I agree that these two economic actors should not be seen to be quarreling so forcefully in public – and certainly not at this delicate moment in time – I am not of the opinion that Sarkozy should back off on the French deficit issues, and here, quite simply is why.

First, a little bit of background. According to wikipedia

The SGP is based on Articles 99 and 104 of the European Community Treaty (with the amendments adopted in 1993 in Maastricht), and related decisions. It consists of fiscal monitoring, and sanctions against offending members.

The pact was adopted in 1997, so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro have to meet the Maastricht convergence criteria, and the SGP ensures that they continue to observe them.
The actual criteria that member states must currently respect are:

* an annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc)
* a national debt lower than 60% of GDP or approaching that value.

Now one point that Wikipedia does overlook here is the background debate which underlay the original decisions back in 1993. The reasoning which lay behind the formula – if you go back and look – was primarily a demographic one. In the face of ageing populations, deficits in most of the EMU member states were projected to rise sharply – and pressure on public finance in general as a consequence – as the proportion of the elderly dependent population rose and rose. In particular the sharpest moment for such pressure was thought to be looming in the years 2010 – 2015.

Now, and before we go any further, I would like to emphasize that I am on record on this blog, and in many posts over a long period of time (and especially in the present context in connection with the Pébereau Report), as saying that France badly needs to reform the structure of its health and pension systems. That is not at issue. What is at issue here is timing, and whether the French administration should at one and the same time make short term deficit reductions and large structural changes. I think Sarkozy is right here, and not only is he right, it is in the interest of all the eurozone economies that France be cut some slack in this context as we enter the next downturn.

So what I am saying is that I have no doubt that France has a large debt burden – something like 64 per cent of GDP ay the present time, and this years the public sector deficit is expected to be almost €42, or some 2.3 per cent of GDP (assuming a2007 GDP growth rate, which may of course, at this point in time, be in doubt). The issue is, does France need to achieve a zero percent annual deficit by 2010 with the same urgency that Germany does. My answer is a resounding No!

The reasoning which lies behind this rather categorical assertion on my part is that, basically, France and Germany are in very different positions in terms of their comparative demographics. So let’s take a look, and see whether my assertion is well grounded or not. Firstly median population ages. Here is a chart for France:


What needs to be noted here, is that France is still a comparatively young country, it is still under 40 in fact, and the French median age is rising comparatively slowly over the years. Now let’s look at Germany:

German Median Age

What we can see here is that Germany is much older, it is now knocking around the 43 mark, and the median age is rising much more quickly, especially during the last few years. Simply put this means that the weight of the old age dependency issue is hitting Germany much more quickly than it is France. France has at least 20 years to go before it gets to where Germany is now. Also, as a point of comparison, let’s take a quick look at the evolution of US median age:

US Median Age

Now there are lots of interesting things which we could note here about the evolution of the US median age, but for present purposes what I would like to emphasise is that France is much more like the US than it is like Germany in terms of its age structure. This does not, of course, mean that neither France nor the US have to reform, it simply means that they have more time and more margin to do this, and we here in Europe should leverage France’s demographic advantage to our mutual benefit.

So why is France so much younger than Germany? Well there are a number of reasons for this, but the most obvious one can be seen in the following chart: French fertility has been consistently much higher than German fertility.

French and German Fertility

(the red bars are the French ones, and the greens the German ones)

So – to keep this fairly brief and to the point – I don’t see why France should be penalised in this way for its “good housekeeping” on the fertility front. Indeed, au contraire, I think they should be congratulated and rewarded for the balance they have achieved. As I say, it isn’t as if Sarkozy was arguing that he isn’t going to address the issues Pébereau raised, he is simply saying that he wants to do all this in an orderly fashion, and that while in Germany the issue is an extremely pressing one (and hence that 2010 deadline), France is not so pressed, and has just a little more leeway.

Finally I would like to thank Claus Vistesen of Alpha Sources, who made the calculations which lie behind the charts.

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

4 thoughts on “French and German Deficits In The Light Of Comparative Demographics

  1. Tobias logged in as admin –

    “The reasoning which lay behind the formula – if you go back and look – was primarily a demographic one.”

    Actually, I did just that a couple of years ago, and in my impression the discourse around the SGP was not particularly influenced by demographic considerations. I’m sure some people had already thought about demographic implications, but I believe the SGP was designed in the way it was because otherwise Germany would not have consented to the creation of the Euro. Not because of projected populations, but because there was a general mistrust about what would happen to some countries deficits (remember the whole debate about “no common currency without a common fiscal policy!”) certainly once the interest rates had come down due to the transfer of the Bundesbank’s credibility to the entire European monetary system. The SGB thus was and is a soft-budget restraint and self-committment mechanism for countries. I know that many (possibly most) economists don’t like the formal rigidity (in practice, I’d say, the SGP IS much more flexible, as we have seen), but from a political standpoint, this very much makes sense to me.

    All that, of course, doesn’t make it less interesting to take demographic considerations into account (at least theoretically).

  2. The system of penalties provided in the SGP is completely wrong. If a strong penalty is imposed (tens of billions euros), it only worsens the penalized country;s problems. If it is light, it has no impact on economic policy. It would have been much better to reduce the country’s voting rights.
    Seen from Brussels, the French debt looks pretty moderate. Belgium at one time had one equal to 140% of GDP and it is still above the French one

  3. Hi Tobias,

    “and in my impression the discourse around the SGP was not particularly influenced by demographic considerations.”

    I thought you wouldn’t be entirely in harmony with the way I am putting things here 🙂

    Look, I think we can both agree that what we are conveying about this earlier debate are impressions, and that impressions are somewhat subjective things, and we may both be seeing rather more of what we are looking for than of what there really is.

    Also my guess is that the debate inside Germany may well have been rather different from the debate elsewhere, and, for better or worse, we are still a europe of nations.

    Maybe there isn’t too much point in digging up the old bones, so let’s leave the dead to lie where they are.

    The point is really what the SGP should be about today, and I would want to argue that in terms of deficits what we need to be thinking about is the ageing components in public finance, since these are normally structurally inbuilt to increase as the median age of the population rises, and as we can see the median age of the population is rising much more rapidly in Germany than it is rising in France.

    That means quite simply that over a short term horizon – say 2010 to 2015 – German public finance is going to come under a lot more pressure than French public finance. So there is a clear case to be made for having a more flexible policy at this point, and allowing France more time to get its house in the pensions and health system department in better order, since it already has its house in much better order in the fertility department. This is really the only point I want to make in this post.

    Sarkozy is in the right here, and Trichet is in the wrong.

    Hi Pampero,

    “The system of penalties provided in the SGP is completely wrong.”

    Well I don’t disagree with you at all. I think since Solbes departure and the arrival of Almunia the whole Economics Commission has come nearer to being a public relations department than an economics one. The attitude towards the SGP has become near to a sick joke afaiac. The issues here are not France and Germany, but the “near basket case” public debt members Greece and Italy. You can’t simply take the data from the best year in a decade – 2006 – and extrapolate forwards as if every year was now going to be like this, which is what some people seem to be doing.

    Basically I think the Commission has lost the authority it needs to control the situation, and the ECB is exercising what authority it has by saying that it will cease to accept government bonds at par from any country which loses investment grade from the ratings agencies, you know, those organisations which Sarkozy recently said ought to get much stricter. Now we will have the opportunity to see if they will do so, since Italy’s situation must be up for review anytime around now.

    Of course, the ECB could always back off on this, and then will find their credibility going the same way as the credibility of the Commission on this front. In which case the whole anti will just be raised to a new and even more dangerous level.

  4. Incidentally, Tobias,

    I really don’t see how anyone could have been so silly as to argue that a 3% increase in the VAT consumption tax would have not have a significant impact on domestic demand. If you look at the retail sales performance of this year over las, the effect is evident even to the naked eye, isn’t it? (ie take a look at the charts I’ve done here if you want).

    So really a “tax hike” fix is no solution to the problems of sustaining the funding of your health system, and I think you’ll be needing to do a rethink here.

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