The French Differential

As I keep indicating the French economy – although not a spectacular success – continues to outperform the German one. This is interesting, since the French political system has been much more laggard than the German one in implementing reforms. That is why I place emphasis on the demographic differential.

Consumer spending in France, Europe’s third-largest economy, rose the most in 16 months in August as unemployment retreated and retailers cut prices.

Spending on manufactured goods rose 1.9 percent from July, when it increased 1.2 percent, the statistics office Insee said in Paris today. Economists predicted an increase of 0.3 percent, according to the median of 23 estimates in a Bloomberg survey. From a year earlier, spending jumped 5.7 percent, the biggest year- on-year jump since June 2000.

Unemployment dropped the most in more than four years in July and companies such as Ikea SA offered discounts. Today’s report suggests spending, after a second-quarter drop, will spur French growth and fuel expansion in the 12-country euro region, helping offset a 55 percent increase in oil prices.

“It’s the summer’s second miracle after the drop in unemployment,” said Marc Touati, chief economist at Natexis Banques Populaires in Paris. “It’s very good news for third- quarter growth. Is it going to last if hiring doesn’t pick up? The increase in oil prices is going to crimp purchasing power.”

This entry was posted in A Fistful Of Euros, Economics and demography and tagged , , , 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".

24 thoughts on “The French Differential

  1. Here is an article in the Times that proposes a different explanation for the German economic situation:
    http://www.timesonline.co.uk/article/0,,1061-1786944,00.html
    The author is quite pessimistic about the prospects, whatever the shape of the future government.

    He suggests that, economically, the best thing would be a coalition between CDU, FDP and the LEFT !

    Bu the recognises that it is “a possibility not worth discussing any further”

  2. “Here is an article in the Times that proposes a different explanation for the German economic situation:”

    Well not quite Karl Heinz, since, while I think Anatole Kaletsky makes a lot of sound points, he doesn’t offer an explanation of why consumer demand (and hence domestic investment) has been so flat. (In another area Kaletsky – like me – is very doubtful about the benefits of the euro in general).

    “The need for mutual support between pro-competitive supply-side reforms and expansionary macroeconomic policies should be obvious to anyone with an understanding of Keynesian economics.”

    I think this is just the point, I am questioning the validity of traditional Keynesian reasoning in an ‘ageing society’ context. Basically cyclical fiscal policy hits the limits of structural age-related fiscal pressures (remember my issue with Bofinger?).

    Kateltsky says:

    “Without supportive macroeconomic policies, pro-market structural reforms will only depress demand and make Germany’s economy even weaker than it is.”

    I agree with the first part of this statement, but don’t accept the second part. I don’t think the supply side reforms will do a hell of a lot for demand, but they will make immigration more acceptable, and that would help.

    “The whole eurozone, in fact, is in denial about one of the clearest lessons of modern economic experience, which is that tough structural reforms of the kind promoted by Germany’s new government will work only amid rapidly expanding demand. ”

    I agree, but my argument is that precisely for demographic reasons this is what we won’t see. Here it seems Kaletsky and Bofinger have one thing in common: they ignore the whole issue. I don’t think ignoring something counts as refuting it. You saw in my recent comments on Brad Setser’s blog that there is now a large body of research – both theoretical and empirical – which suggests that the marginal propensity to consume is affected by age.

    The point about Keynesianism isn’t that it is wrong, but that it applies only to one part of the demographic transition – esssentially that between young adult and mature adult societies.

    With old adult societies this hits a brick wall. In fact both monetary and fiscal policy have been fairly demand side relaxed in the last few years in Germany, but the medicine doesn’t work.

    Incidentally, this was a post about France :). What would be interesting to explore would be why France is doing better. What I am looking for are arguments – other than demography – which might help us understand France’s relatively better economic performance.

  3. I don’t think the supply side reforms will do a hell of a lot for demand, but they will make immigration more acceptable

    Could you explain this point a bit more ? What is the link between making immigration acceptable and supply side reforms ? I would think that, at least in the short term, such changes as easier firing of workers would increase competition in the labour market and make voters less likely to view immigration as a good thing.

  4. “Could you explain this point a bit more ?”

    Yep, sure. Basically with unemployment up near the 10% mark people aren’t especially convinced by the ‘you need more immigrants argument’. Why not employ people who are already in Germany the argument goes.

    But many who are already in Germany are reluctant to do the jobs migrants normally take, so you need to address this. One way is a supply side reform to make it marginally less attractive to not work, and marginally more attractive to work. This you do by readjusting the benefit and tax situation of those on the borderline.

    So you work to get the unemployment down to the more normal 5% level, even if, since most people’s income situation hasn’t changed greatly, aggregate demand may not be too much different.

    But at a 5% unemplyment level, people are much less resistant to immigration (look at the UK and the Eastern Accession members, or at Sweden) and then it is more feasible to press a systematic economic migration policy, which you need if you are to attempt to address the structural weaknesses in your age pyramid. Longer term you can do this via fertility changes, but in the short term, over the next twenty years this has no effect, and it has no effect on cohort imbalances, which are one of your problems.

    “as easier firing of workers would increase competition in the labour market and make voters less likely to view immigration as a good thing.”

    Well, if you could get round to a more dynamic labour market, the being fired issues wouldn’t be so important, as people would know they could walk into another job. There is a positive feedback, virtuous circle aspect here.

    Of course there are another set of job-specific benefits, like seniority payments, and I suspect they are at the heart of this problem.

    making it easier to fire also makes it cheaper to fire, ie less in the way of long-term service severance payments.

  5. Incidentally, this was a post about France

    Well, you started it with
    As I keep indicating the French economy – although not a spectacular success – continues to outperform the German one. and your next sentence is about Germany, too 😉

    In fact both monetary and fiscal policy have been fairly demand side relaxed in the last few years in Germany That’s not my impression from the articles I read in the press. Given the low inflation in Germany (compared to other Euro countries), interest rates are seen as comparatively high (though much lower than, say, in the early 90’s) and there have been significant (not too successful) attempts to reduce state expenditures rather than a deliberate expansion.

  6. “Well, you started it with”

    Yes, I know, I get what I ask for :).

    But maybe people are less interested in good news. The thing is I reckon you could get a ‘self sustaining’ recovery in France in the way I think it is unlikely in Germany. A France without reforms seems able to run growth in the 1.5 – 2.0% per annum range. Post Sarkozy France could get that up to 3% for a time. This would make a big difference in keeping their pension and health systems afloat.

    “That’s not my impression from the articles I read in the press.”

    No, but many of these articles also suffer from negative feedback, ie they re-inforce each other if they miss the central point.

    Now, as you know, I am not a great euro fan. Of course without the euro Germany could have had a much more accomodative interest rate. But 2% rates are hardly high, and they can’t go below 0%.

    Otoh, the ECB have consistently argued (and the Deutschbank befoer them) than in the Eurozone (and here read German) economy matters aren’t so interest rate sensitive as in the US. This is a big *academic* debate, and we can’t resolve it here. However the ECB does target M3, and in recent years it has been extremely lax in interpreting its own rules about limits to M3 growth.

    So basically monetary conditions have been fairly relaxed. And then comes the issue as to whether Germany has fallen into something like the Japan-type trap. See this post:

    http://fistfulofeuros.net/archives/001706.php

    and the Morgan Stanley debate which is linked to.

    Also if you really want to get into this you could try:

    ECB Monthly Bulletin, March 2005 p.15ff

    or the Elga Bartsch MS GEF post which really got me interested in this:

    http://www.morganstanley.com/GEFdata/digests/20050404-mon.html#anchor4

    As she says (in April):

    Turning to money, the minor easing in headline M3 money supply growth to 6.4% in February does not take the pressure off the ECB. At a good two percentage points above the reference value and more than that above nominal GDP growth, the excess liquidity is piling up further. It’s just that it is doing so at a slightly slower rate. To mop up some of the excess liquidity, however, we would need to see headline M3 growth fall below the reference value. But there seems to be little chance of that happening.

    and

    According to ECB estimates, the nominal money gap, the difference between the actual level of M3 and the level that would have been consistent from M3 growth at the reference level, continues to rise. Even once the money gap estimate has been corrected for the fact that part of the excessive M3 growth has been absorbed by above-target inflation and for the fact that portfolio shifts have bloated M3, the money gap is still running at around 3%. The ECB reckons that M3 money supply growth adjusted for portfolio shifts is running above the official numbers by nearly half a percentage point. This is a remarkable shift from the previous three years where official M3 money supply growth was running a good one and half percentage points above adjusted growth rates.

    This is all pretty technical, but what it boils down to is that liquidity conditions have been exceptionally loose, the problem is (in particular in Germany) people don’t want to borrow.

  7. Thanks for the explanation about immigration. But doesn’t that mean that you have to get unenployment down *first* before you can allow more immigration ? And probably you need a fairly long period of solid employment before the locals are comfortable with more immigration ?

    Doesn’t this mean that you have to get the economy running before you can do something about the demographics ?

  8. “But doesn’t that mean that you have to get unenployment down *first* before you can allow more immigration ?”

    Oh yes, I agree. Although we don’t need to go to absolutes here, you already have immigration, it’s just that most of it is illegal, so this needs addressing. All EU member states need to review their policies in this regard. I think then a whole other debate will open up.

    I wouldn’t say “before ‘more’ immigration”. I’m not for a freeze. What I am for is moving to a policy which actively encourages immigration, systematically, in a context where the majority of the population realises why this is important.

    Incidentally, many of the links on this post are relevant:

    http://fistfulofeuros.net/archives/001897.php

    Especially the ones to the European Policy Centre magazine articles in “Towards a European Area of Freedom, Security and Justice”?

    Plus the article on globalisation and mobility by Nigel Harris.

    “Doesn’t this mean that you have to get the economy running before you can do something about the demographics ?”

    Yes, of course. That is why the supply side reforms are so important. The economy won’t be running on empty, it will be export driven. I see this as inevitable for the time being. So Germany won’t contribute to reducing global imbalances, in fact it will form part of them.

    It’s a complex picture, but then, we’ve never been here before.

    “Thanks for the explanation…”

    And thanks for asking the questions which give me the chance to explain. I don’t demand that people agree with me, I’m just happy at these stage if they are prepared to keep their options open on the story I am trying to tell.

    Btw, I’ve put one post up on A few euros more on Finland, and I’m just about to do another (going up in about an hour), you might find some of the argument there relevant and interesting….. even while not agreeing :).

  9. Edward,
    I have offered to provide data on issues you are interested in, but didn´t get a reply from you. The comment format just isn´t optimal for presenting the abundance of information
    contradicting your perceptions.
    However, I can certainly share some impressionistic evidence here. I recently talked to a pizza driver. He turned out to be a young German electronics engineer who was utterly frustrated about the fact that his daily earnings never exceeded 20 Euros (from which he even has to subtract car repair costs, since he has to provide the car if he wants the job).
    He mentioned that one of his colleagues was a mathematician from India.
    BTW, two years ago marginal earnings for a pizza driver were three times higher. Germans are increasingly taking the seasonal jobs in agriculture that used to be a monopoly of Polish migrant workers, etc. etc.
    Being “on the ground” in Germany, I see lots of trough-of-depression phenomena.

    “the problem is (in particular in Germany) people don’t want to borrow”
    Another topic that deserves detailed treatment. There is an obvious test for your implicit demographic explanation in this context.

    “remember my issue with Bofinger”
    On the other hand, you suggested Danish “flexicurity” as a solution. Did you check the fiscal ramifications? Another self-contradiction in your argument.

    “That is why I place emphasis on the demographic differential.” vs. “French political system has been much more laggard than the German one in implementing reforms”
    Is this really so hard to see? You just provided “What I am looking for … arguments – other than demography – which might help us understand France’s relatively better economic performance.”

    I have difficulty accepting your terms of debate. If I did, though, I would ask if an ageing society might not be less amenable to reform and whether it should not be allowed to be substantially more “Keynesian” in its policy orientation than a “younger” society. Your logic works the other way. Those who you claim are less productive are supposed to carry at least the same burden – which, in your framework, translates into carrying a proportionally bigger burden.
    You also don´t see that an economy that manages to achieve an export surplus definitely shoulders a bigger “burden” than one that doesn´t. So while “younger” societies may very well learn to try harder and achieve more, the two most rapidly ageing societies – Japan and Germany – still have a lot of baggage that they can decide to drop. Their reluctance to do so should be very understandable, though. Most ageing athletes don´t ever quit sports entirely. Indeed, there is ample medical evidence demonstrating that one should never stop training abruptly.

  10. Hi Joerg,

    We’ve been debating these issues for years now, I think we are just going to have to accept that we differ. This wouldn’t be a grand issue I don’t imagine, since most people seem to – disagree with me that is.

    But then, being few in number doesn’t mean being wrong :).

    “Germans are increasingly taking the seasonal jobs in agriculture that used to be a monopoly of Polish migrant workers, etc. etc.”

    This may be (incidentally wouldn’t the seasonal jobs be in the submerged economy, ie ones you do to supplement your benefits). But if unemployed over-50-year-olds are really taking agricultural and pizza delivery jobs in large numbers why doesn’t this appear in the unemployment numbers (other than for the reason I have just given)?

    “Being “on the ground” in Germany, I see lots of trough-of-depression phenomena”

    I’m sure this is true. My issue is simply that the surprising thing is that we may be at the top of the cycle (global growth last year and this has been at record levels) and not the bottom. So these “trough-of-depression phenomena”
    seem to be structural (age related) and not cyclical. In the next global downturn they may all get worse.

    “Another topic that deserves detailed treatment. There is an obvious test for your implicit demographic explanation in this context.”

    Well, as I keep saying, this is where a lot of global research is pointing.

    “On the other hand, you suggeste Danish “flexicurity” as a solution. Did you check the fiscal ramifications?”

    Well here I would not be dogmatic. All I am saying is that in Denmark they have something like a 30% job turnover every year. This is a dynamic labour market. So there is in fact less insecurity, you lose a job, you get one. They invest a lot in ‘changing-job employment-services support, apart from that I don’t see the fiscal issues. Can you enlighten me?

    “I would ask if an ageing society might not be less amenable to reform”

    Well look at the election results. I think you are right. But hard as it is this is why its important to move now, since Germany could become less and less amenable as it gets older and older. This is my worry.

    “still have a lot of baggage that they can decide to drop. Their reluctance to do so should be very understandable, though.”

    Of course, but if you are saying they shouldn’t (in the interests of inter-generational solidarity) simply drop them in one load bang, then I would definitely agree with you.

    “Most ageing athletes don´t ever quit sports entirely. Indeed, there is ample medical evidence demonstrating that one should never stop training abruptly.”

    Of course, this is what we are all trying to avoid, that’s why some measure of ‘rejuvenation’ wouldn’t be such a bad thing.

    Oh yes, and some atheletes move on and become trainers. Gus Hiddink in Korea is one example that comes to mind. Maybe this is something to think about.

  11. All I am saying is that in Denmark they have something like a 30% job turnover every year

    German Job Agency statistics:
    http://www.pub.arbeitsamt.de/hst/services/statistik/000000/html/start/monat/aktuell.pdf

    According to p.25, in the first 8 Months of 2005, 5 Million Germans out of a total of 39 Million employed got a new job after being jobless. That’s 20% per year and does not include people who moved directly from one job to another.

    Doesn’t strike me exactly as an inflexible market.

    Moreover, quality and productivity in many tasks suffers when there is high turnover. For such cases, flexible markets are not a pure blessing.

  12. “According to p.25, in the first 8 Months of 2005, 5 Million Germans out of a total of 39 Million employed got a new job after being jobless.

    Interesting numbers Karl Heinz. Just a couple of quibbles from a pedant (but not related to a direct challenge to your point):

    “got a new job after being jobless”: I presume this is you speaking, since this isn’t how a labour market actually operates (this is the kind of old-style Phillips curve version of how it works perhaps). Essentially you have people entering and leaving the working ages constantly, you also have people deciding to seek work, or do more study, or spend more time with the family, or whatever in a continuous process, so even within the working age population there is constant to-ing and fro-ing.

    On top of this the economy constantly creates and destroys jobs, and with accelerated technical change and globalisation this ‘job churn’ is spinning faster. So the stat you give is probably for people getting new employment contracts (maybe also full *and* part time?), and not simply people moving off the unemployment pool. This was just really to clarify, not to disagree.

    To reach Danish levels of churn, you would be seeing something like 10 million new jobs a year, but presumeably you would also want to see a total employment market of more than 39 million in a Germany with circa 90 million inhabitants. Pushing the total up is part of what the reforms are about.

    If you look here:

    http://www.statistics.gov.uk/census2001/profiles/uk.asp

    You will see that the UK has an employed population of roughly 25.5 million over a total population of just under 59 million. Geeting these proportions is what would be interesting for Germany.

    “Doesn’t strike me exactly as an inflexible market.”

    Well the World Bank don’t hold your view I’m afraid. If you go here:

    http://www.doingbusiness.org/ExploreEconomies/Default.aspx?economyid=75

    You will find Germany comes no 131 in the hiring and firing ranking.

    But basically the point is this. You do have a problem. You have 10% unemployment. You are already running a high structural fiscal deficit, and you are only getting 1% growth. If you don’t do something to turn all this round, and do it pronto, then you simply aren’t going to be able to maintain pensions and health care at anything like their present levels.

  13. I agree perfectly with your last paragraph. And pretty much everybody else here agrees, too.

    The question is what, exactly, to do about it 😉

    Re: Employed versus total population by your numbers:
    Germany : 39 / 90 = 43.3%
    Britain : 25.5/ 59 = 43.2%
    Geeting these proportions is what would be interesting for Germany.
    Indeed! 😉

    BTW: The population of Germany is 82.5 Million:
    http://www.destatis.de/basis/d/bevoe/bevoetab4.php

    As far as I can tell, the World Bank index ranks legal and contract restrictions, not actual turnover – that is, the theoretical situation rather than the real movement.

  14. You shouldn’t compare it with total population but population between 15 and 65 or something like it as people outside of that age bracket rarely work.

  15. @ khr

    “Geeting these proportions is what would be interesting for Germany.”
    “Indeed! ;-)”

    Yes, but hold on, hold on. Being a gentleman I accepted your version of the German numbers (but being a fool I made my own on-the-fly UK calculations badly :). I think I was working 25.5 over 49 in my head, or something like that. Anyway this doesn’t matter. I think the numbers are good ). But, now that I look at page 25 of the document you cite, I have the impression that the 39 million you cite:

    “5 Million Germans out of a total of 39 Million employed”

    is a figure which seems to include 6.748.164 Arbeitsuchende, or work seekers (formerly called unemployed). So that would mean the comparable number for Germany would be 32 million out of 82.5 million (I was guessing from memory the German pop), wouldn’t it, and the point would still relatively hold, wouldn’t it?

    But since it’s in German, and I might be mistaken, I wouldn’t push my point home too hard.

    “As far as I can tell, the World Bank index ranks legal and contract restrictions, not actual turnover – that is, the theoretical situation rather than the real movement.”

    Oh yes, and the ranking isn’t really that useful, since high scores are of course obtained by those countries where workers have virtually no rights, but the relative comparisons between OECD countries have some validity.

    @ c

    “You shouldn’t compare it with total population but population between 15 and 65 or something like it”

    I don’t really agree, the Lisbon agenda is about trying to raise participation rates in the face of ageing populations in order to make old age welfare and health benefits sustainable, so the comparative numbers which interest me are those working as a proportion of the total population. This is the useful metric.

    Simply put, those with more people over 65 (or 67 as the German age limit, will become) need to get a higher proportion of those between 15 and 65 working.

  16. Greetings from Paris.

    Interesting debate about France where France is hardly discussed :).

    I’d be curious to hear about statistics on household equity in their house and household debt in general in say France vs UK. It’s really nice to get growth, but if it’s just spending borrowed money on imports that’s not going to last. May be it’s just better to have higher unemployment for long term health and pensions issues?

    Also, I read that underground economy is quite high in France (not at Italy level, but I guess higher than Germany an UK) – I remember 15%. That could also relativize unemployment number and statistics in general. I read that during the EU referendum the french president went to a TV show talking with “young” people, and one said flat out he worked undeclared…

    Sincerely,

    Laurent

  17. “5 Million Germans out of a total of 39 Million employed”

    is a figure which seems to include 6.748.164 Arbeitsuchende, or work seekers (formerly called unemployed).

    The labour office page refers to the statistics office (presumably this page):
    http://www.destatis.de/indicators/d/arb410ad.htm

    As far as I understand the terminology and tables, “Erwerbstätige” (roughly Money Earners) includes anybody actually making money from a job, freelance work, as entrepreneur etc.
    That’s the 39 Million.

    “Erwerbslose” are the people who do not earn any money themselves (i.e.get jobless money etc.) – 4.7 Million

    “Erwerbspersonen” is the people who could earn money (the sum of the two numbers). This would exclude stay-at-home moms for example – I guess.

    But international comparison of stats based on national criteria is always tricky. We should beter discuss this based on international stats collections.

  18. Simply put, those with more people over 65 (or 67 as the German age limit, will become) need to get a higher proportion of those between 15 and 65 working.

    We have already touched on this in an earlier discussion. You should not just look at the ratio of old people versus working age people, but at the ratio of working age people versus *all other ages* (i.e.including children) This total ratio usually changes less over time than the ratio for old people alone. Declining populations have more old people but fewer children.

    And the really important number is not the ratio for the working age populations but the ratio of actual workers/earners to all the others, indeed the money earned compared to money consumed. This is susceptible by short-term economic shifts.

    Now you may argue that children require less support than pensioners. I am not aware of good numbers, but I think it is not at all obvious. A few comparative points:
    Caring for a toddler requires as much effort as caring for a sick old person. Older children still need care and supervision.
    Food and clothing may well be more expensive for a child (it is growing).
    Children, teenagers and students need formal education and job training, pensiners do not.
    Health care is more expensive for old people.
    Many other points are really a matter of accepted living standards. E.g.pensioners usually have more housing space available than children.

    So in macro terms, the load from both groups is not clear. But I think you really have to look at whole population ratios, and not just pensioners. Certainly poverty of families and especially single parents with childrens is an issue in Germany.

    But the perspective in the political discussion is heavily biased towards pension issues for a number of reasons, e.g.pensions are public payments, while raising children is still mostly a private investment. Public education come from diffrent budgets than child support, in Germany, pension funds add to labour cost, children don’t vote, pensioners do, private pensions schemes are likely to be money earners for financial companies etc.etc,

    Another, separate but related issue, is that raising education standards will reduce the average number of working people (more young people stay at school/university longer)

  19. The percentage of unemployed cited here (and usually cited in the German media as well) is a number the Schröder government inflicted upon itself by changing statistical procedures when implementing Hartz IV. That has likely cost it an election victory. The standardized ILO figure is lower by about one percentage point.
    The shadow economies in most of continental Europe easily dwarf their Anglosaxon equivalents. How Merkel came to the conclusion that she must stimulate “complementary activity” still further (by raising the VAT by 2%) is beyond comprehension – and also cost her a clear-cut election victory.
    About one half of the German problem could easily be solved by rather simple tax policy, insurance policy and statistical measures.

    1)elimination of the VAT on services (good for lowering unemployment by two points)
    This would be fiscally costly, but the return in terms of higher “official” employment and higher “official” growth would be guaranteed. Tax cuts for the poor would have less effect, while tax cuts for the rich would just fuel asset inflation (which everybody seems to think Germany needs urgently – so it´s likely to get it)

    2)reformulation of the EU directive on services
    Let me elaborate: in its current form, the directive dictates calculating social security contributions according to the percentage applicable in an employee´s home country. Two points are important here: wages still constitute the largest part of employees´ income, so even if the principle underlying calculation of contributions to social security were reversed (basing them on the rates applying in the guest country rather than the home country), competitive differentials in wages wouldn´t be erased. OTOH, those countries that are net “donors” of migrants – like, e.g., Poland – would automatically buttress their social security systems if they were allowed to implement a reversal of the system currently enshrined in the directive. Actually, such a measure would constitute the transference of a principle which was extremely beneficial to Germany for four decades to the European level. I am talking about the “Flächentarifvertrag”: a convention being followed by German unions and employers that guaranteed moderate, but steady income gains to all workers by minimizing variation across factories and companies. While it´s not guaranteed to be an optimal solution in regard to manufacturing competition with extra-European firms, intra-European trade in services would benefit greatly from it, since it would unanimously be perceived as a source of welfare gains being shared by all.

    3)reference to the ILO number rather than the inflated number now cited (which, among other problems, includes many disabled people who just can´t work)

    These measures would change the psychological climate in Germany enormously and kick-start the economy. Banks would start lending, borrowers would happily borrow… and, of course, seven or eight years later, we´d see writers enthusing about “DAX 18000” right before the boom ends in tears and Trichet´s successor realizes he needs to reduce rates drastically…

    The impression that this recipe is services-oriented is correct. That´s where the problems are. Germany is the global leader in manufacturing and wouldn´t be well advised to destroy what functions smoothly. However, if you compare the percentage that the Estonian IT industry contributes to Estonian GDP with the equivalent German number, you are in for a surprise: Estonia 6%, Germany 2%. Once such “imbalances” have been adjusted, other sectors will automatically follow suit (residential investment etc.) Of course, finally the time will arrive that will see German manufacturing lose its lustre. However, that´s a problem for the future to solve. Identifying causative imbalances and correcting them will, in principle, work as well then as it could now. It´s just not true, though, that having a growing number of old people is an imbalance. If Neanderthal economists could visit our world, they´d likely proclaim that the great numbers of adults living beyond the age of 30 presented a great risk for the survival of our civilization.
    What´s truly strange, though, is that this is the argument Ray Kurzweil would confront Edward with, while Edward somehow manages to believe that the rapid acceleration of progress Kurzweil envisages supports his thesis.

  20. @ Karl Heinz

    “We have already touched on this in an earlier discussion.”

    I agree, I know what you think, and you know what I think, and we simply disagree.

    I still think you don’t adress the point that even if you could balance the numbers in the way you suggest (and I seriously question the idea that the impact on state finances of children is the same as pensioners, people who live to 90 and retire at 65 years are completely supported for 25 years) but even if you could, the net consequence would be population meltdown, so this isn’t a way out.

    “But the perspective in the political discussion is heavily biased towards pension issues for a number of reasons”

    Well the pensioners vote and children don’t, for a start. But secondly, if you don’t raise trend growth above one percent the whole system will go bust, (or you will have a very radical change in your welfare system, which is in many ways the same thing). This is why there is such a debate.

    “Another, separate but related issue, is that raising education standards will reduce the average number of working people”

    Oh yes, this I agree with. It is also fertility negative as it contributes to the upward drift in family formation age. This is part of the negative feedback setup.

    The strong point you do keep making, and that I have heard, and am thinking about is that the rate of job turnover has increased in Germany, but that this increase has not produced an increase in employment levels. This is worrying. I am trying to be optimistic here, even if it doesn’t always seem so :).

    What I am trying to say is that if the labour market reforms for some reason don’t produce higher participation rates in Germany, then you really are in deep s**t.

    @ Joerg

    “The shadow economies in most of continental Europe easily dwarf their Anglosaxon equivalents”

    I’m not sure that this is the case with the US (illegal migration there is enormous, and by definition they work in the shadow economy), but you are probably right in the UK context. This is relevant.

    “elimination of the VAT on services (good for lowering unemployment by two points) This would be fiscally costly”

    Yes, so the issue is how would you pay for it? or is this a kind of ‘laffer effect’ you are proposing?

    “reformulation of the EU directive on services”

    Is this currently being implemented in Germany, I thought this had caused so much controversy that it was ‘on indefinite hold’?

    “These measures would change the psychological climate in Germany enormously and kick-start the economy. Banks would start lending, borrowers would happily borrow… ”

    Well, it’s a theory, but please allow me to be sceptical.

    Growth is seems is always just around the corner. Unfortunately elusively so.

  21. What I am trying to say is that if the labour market reforms for some reason don’t produce higher participation rates in Germany, then you really are in deep s**t.

    Given that the benefits of such labour market reforms are generally mixed at best (e.g.as mentioned in the discussion on Brad Setser’s blog), I am afraid you can drop the ‘If’. Especially since Germany has been implementing reforms for some time now and unemployment has gotten worse. Normally you would expect even partially implemented policies to have an effect in the desired direction, wouldn’t you ?

    We better start to look for other solutions.

    BTW:
    Here’s a paper on European unemployment that seems quite interesting, though it is a bit too technical for my level of understanding:
    http://www.umass.edu/peri/pdfs/WP76.pdf
    As far as I understand it, the increased emphasis on financial markets in teh 1980’s and 90’s has tended investors to move money to those markets rather than investing in producing goods and hence to lower employment. There is also some reference to differences in the structure of financing between Germany, France and the UK and its effect.

    people who live to 90 and retire at 65 years are completely supported for 25 years
    As are children, teenagers and young adults who go to university.

  22. “Here’s a paper on European unemployment that seems quite interesting”

    Well I imagine you would find it interesting, since it reflects the views of Lafontaine, Linke, and I imagine you yourself :).

    I don’t think you need to be overly technical to get the gist of what he is saying. You either accept it or reject it. Basically he runs regressions on labour markets as an explantatory variable for differential growth performance. He doesn’t find this to be a particularly significant explanatory variable. I agree with him. That is the point of this post. You cannot differentiate between French and German performance on the basis of their respective labour markets. Which doesn’t mean that both of them don’t need reforming.

    However, and here I am saying nothing new to you, the inability of any of these theorists to even mention the demographic issue, and of course to specify and test for it is what surprises me.

  23. Incidentally KHR, the IMF in a document I am about to link to in a main post, seem to be suggesting that the ‘supply side’ reforms (in labour terms) have now largely been carried though (Hartz VI) and that what is now needed is something on the demand for labour side.

    The main factor behind the gloomy picture is the country’s sluggish economic growth, although it may be improved as a result of the Agenda 2010 economic reforms initiated by the previous red-green government.

    According to Raghuram Rajan from the IMF, reforms creating more labour supply could now be “taken to their logical conclusion” by “increasing the incentives for corporations to actually hire more people, for example by reducing some of the regulatory burden on them, reducing the extent of payroll taxes, and so on”.

    Mr Rajan added these steps could “be done by the new (German) government, whoever it is”, at a press briefing following the launch of the report on Wednesday (21 September).

    http://euobserver.com/9/19912

  24. Edward wrote: “You will find Germany comes no 131 in the hiring and firing ranking. But basically the point is this. You do have a problem. You have 10% unemployment. You are already running a high structural fiscal deficit, and you are only getting 1% growth. ”

    From Crooked Timber comments, the following paper

    http://www.newschool.edu/cepa/publications/workingpapers/archive/cepa200404.pdf

    shows that economists are wrong to assume causality as a proven fact in this domain. On a personal note after reading the paper it’s just incredible how little attention most economist pay to data quality and how easily they ignore their own data when it’s against their pre-conceived ideas (or those their employer want them to “prove”).

    Laurent

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