Ferdinando Giugliano
We’ve become so gloomy about the euro zone that it’s easy to neglect the bright spots.
After a very tough 2018 for President Emmanuel Macron, France, the second-largest economy in the monetary union, is faring much better than most experts would have assumed. Its economic model – less reliant on exports than Germany – is proving more resilient to the dangers of a U.S.-inspired trade war. At the same time, the government’s decision to embark on some fiscal stimulus at the end of last year to stave off the revolt from the “yellow vests” has proven to be lucky. It provided support just as the European economy was about to slow.
French gross domestic product expanded by 0.2% in the three months to June. While that was slightly less than expected, it was in line with the euro zone as a whole and was better than Italy and Germany. Indicators for the third quarter also appear stronger than elsewhere. In July and August, France’s manufacturing PMI – a barometer of industrial activity – was more robust than in Germany and the currency union overall. In services it was roughly in line. The European Commission expects French output to expand by 1.3% this year, in contrast with 0.5% in Germany and 0.1% in Italy.
France is much less exposed to the vagaries of international trade than Germany. Exports of goods and services represent, respectively, 31.3% and 47% of the two countries’ GDP, according to World Bank data. France has a very slight current account deficit – 0.6% of GDP – while Germany has a whopping 7.3% surplus, and Italy 2.5%.
Having a more closed economy is useful only so long as internal demand can support growth. That has been increasingly the case in France. The labor market has improved, with unemployment falling to 8.6% in July, the lowest in more than 10 years. Wages are accelerating, putting more money into people’s pockets. Real household income per capita rose at an average rate of nearly 1% in the two quarters around the turn of last year. In Germany it was 0.65% and just above zero in Italy.
An expansionary stance has helped. Macron has given the country a fiscal boost worth nearly 25 billion euros ($27.7 billion), according to the consulting firm Oxford Economics, most of it to appease the gilets jaunes protests that threatened to bring down his government.
Last December these measures looked like an unnecessary giveaway, which ran contrary to Macron’s promise to cut the budget deficit. But the start of the tariff showdown between the U.S. and China, and the repercussions for the global economy, have made this boost look wise in hindsight. It has lifted disposable income and put a spring in the step of business and consumers. The contrast with Germany’s increasingly depressed companies is striking.
This doesn’t mean, of course, that all’s well in France. While its 10-year bond yield stands at about -0.35%, its debt-to-GDP ratio is among the highest in the euro zone. Macron’s vaunted domestic reforms have been half-hearted, as evidenced in the case of the labor market. A recession in Germany, which looks increasingly likely, is bound to dampen growth for its neighbor too. The president’s laudable push for an overhaul of the institutions governing the euro zone has made remarkably little progress because of opposition from Berlin and other northern capitals.
There’s no doubt, though, that in less than a year France has gone from being in the European sickbay to being a rare symbol of health. For a president seen as prematurely doomed, it’s quite a turnaround.
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