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The Euro area imbalances narrative in a Franco-German perspective: The importance of the longer-run view

Author

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  • Belke, Ansgar
  • Gros, Daniel
Abstract
There is a symmetrical debate in two Euro area core countries: in France about the restrictive fiscal policy of Germany, leading to a huge external surplus, in Germany about the insufficient compliance with fiscal rules and the lack of structural reforms in France. What are the real causes of the divergence between the two economies? We show that different indicators of competitiveness yield very different results depending on the base period used, e.g. 1995 (peak of reunification boom), 1999 or 1990. A comparison with the preunification period shows little gain in competitiveness. We also find, somewhat surprisingly, that Germany's industry is not more integrated in international value chains than that of France or Italy. We then look at the link between export growth and export prices and argue that in the long run exports are not driven by competitiveness but by the increased supply of labor resulting from unification. In addition, we ask what drove 'wage moderation' in Germany: policy or the labor market. We finally analyse the longer-term trend in fiscal policy and the resulting distributional consequences in both countries. Our more general policy implication is that any analysis which compares today to the trough of German performance after unification risks over-estimating the potential of the country. Given that the 'internal unification' process is complete now, one should not expect the Germans to continue to outperform France as it has done over the last two decades.

Suggested Citation

  • Belke, Ansgar & Gros, Daniel, 2020. "The Euro area imbalances narrative in a Franco-German perspective: The importance of the longer-run view," Ruhr Economic Papers 843, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:843
    DOI: 10.4419/86788978
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    Keywords

    France; Germany; international competitiveness; current account imbalances; wage moderation;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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