Differences in the core of the euro area

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January 10th, 2014

The euro area has presented positive quarter- on-quarter GDP growth for the last two quarters. Six quarters after the economy entered a double-dip recession, it appears to have finally got back onto the road to recovery. However, this aggregate growth at the level of the euro area conceals differences, not only between the core and periphery but also between two large countries: Germany and France. The quarter-on-quarter growth rate shown by both countries over the last two quarters is not very different, 0.4% on average in Germany compared with 0.2% in France, but several indicators point to this gap continuing over the coming quarters or even increasing.

One of the indicators raising questions is the PMI, usually a highly reliable predictor of the short-term trend in GDP. While in Germany this has consolidated at levels clearly above 50 points, as from which positive growth rates are normally recorded, in France it has notably slumped over the last few months. Consequently, the differences in growth rates between both countries look very likely to, at least, continue in 2013 Q4.

Beyond this short-term trend, structural indicators for the two economies, both macroeconomic and those concerning the economic environment, show notable differences which suggest that the paths taken by these two economies might diverge considerably over the coming years. The recent trend in key macroeconomic indicators is highly revealing. While Germany has already passed its pre-crisis level of GDP, France is still slightly below this level. Significant differences can also be seen in the labour market. Germany's unemployment rate is lower than France's and the latest data do not point to this gap narrowing in the near future. The performance by each country's foreign sector also differs greatly. German exports have remained strong over the last few years with an average annual growth rate of 7.7% between 2010 Q1 and 2013 Q3. In France, however, this growth rate has remained at 4.6%. The greater  internationalisation of the German economy and the comparative trend in labour costs in both countries (see the enclosed table) lead us to believe that this difference could continue over the coming quarters.

Those indices that attempt to measure the state of the economic environment, on the other hand, tend to reflect an economy's underlying trends and are therefore usually a good indicator of its long-term growth capacity. The competitiveness index calculated by the World Economic Forum is very useful in this respect. Germany is in a better situation in five of the most relevant areas: differences in infrastructures and technological capacity are less marked while the greatest discrepancies can be found in institutions, labour market efficiency and, to a lesser extent,   innovation. The good news for France is that such differences can be resolved through structural reforms. However, the lack of political and social will to carry these out does not encourage optimism.