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Memo to Germans: Be More Like the French!

Why is the French economic recovery crucial for Germany and European economic integration?

June 24, 2002

Why is the French economic recovery crucial for Germany and European economic integration?

With Jean-Marie Le Pen’s surprisingly strong showing in France’s presidential elections, many observers feel that this scenario has already taken place in France. A closer look, however, reveals that Germany is the source of real worry. Most notably, Germany has fallen behind France in several realms where it previously surpassed its western neighbor.

1. How big is the difference in economic performance between France and Germany?

2. How does the French political system manage to push through economic reforms that become stalled in Germany?

3. How does centralization help the French economy? And how does French disdain for authority also help?

4. What is the role of German co-determination in preventing economic reform, and why are German labor problems really much worse than those of the French?

1. Since 1991, the French economy has grown 20% faster than the German economy.

2. Since 1995, the French economy has reduced its unemployment rate from around 11% to 9%, while Germany’s rate remained about 8%.

3. Since 1995, France’s average annual inflation rate of 1.3% has been slightly lower than Germany’s 1.4% rate.

4. The International Labor Organization says that French workers are the most productive in the world — while German workers aren’t even among the top three countries.

5. The French leverage the power of symbolism to pave the way for economic reform, while German distrust of centralized decision-making cripples the country’s ability to change.

6. Ultimately, the French approach emphasizes flexibility, which is the key to success in today’s global economy. By contrast, Germans continue to emphasize the need for consensus and precision. That is an approach more appropriate to the manufacturing economy of yesterday, rather than today’s information economy.

The year 2000 marked the sixth year in a row that France has outperformed Germany in economic growth. Since 1991, the French economy has grown 20% faster. What accounts for the big difference between the two countries?

With essentially the same monetary and fiscal policies, the difference in performance cannot be due to traditional macroeconomic policy. Is it their respective societies and cultures — as well as some basic decisions about economic organization — that explain the real difference?

Interestingly, there isn’t much of a debate about this topic in Germany. Germany starts with a serious handicap — eastern Germany. Integrating the former Communist Länder into a market-based economy was always expected to be costly and difficult.

But Germany’s problems go far beyond its re-unification. Curiously enough, some Germans point to the construction sector as an explanation for why France is better off than Germany. It is true that the French construction sector has been strong, but this hardly accounts for France’s recent economic growth.

The real reasons for the difference in performance lie elsewhere — such as decision-making and elites in making national policy. But these are factors that Germans shy away from discussing.

Only now has it become apparent that even without the east, the “German system” included substantial problems: an indecisive approach to public policy, a poorly thought-out approach to the relationship of management and labor — and an inability to achieve a high payoff from playing the politics of symbolism.

Remarkably, in each of these areas, the French are showing their eastern neighbors the way — if Germany would dare to follow. In surprising contrast to Germany, the French political system seems better suited to managing the difficulties of restructuring and the transition from the older-style welfare economies of the past. This was spectacularly demonstrated in the French debate over the 35-hour workweek.

In Paris, the powers-that-be beautifully leveraged the politics of symbolism. After all, what seemed a victory for proponents of old-style labor markets turned out to be an important reform that allowed French labor markets to become more flexible.

While unions ostensibly got what they wanted, employers go something, too. In exchange for allowing the workweek to shrink, lots of costly non-wage benefits were eliminated. The net result: both sides gained.

Such compromises and leveraged use of symbols seem foreign to Germany — and that is unfortunate. Old institutions (such as labor unions) are forced by the global economy to confront an unprecedented loss of power.

Without symbolic victories to carry them along, these old institutions will require real “victories” (read: higher and higher wages). In reality, these turn out to be Pyrrhic victories, because they not only thwart necessary economic reform, but exacerbate competitive pressures as well.

Then there is the issue of decision-making. Here, the centralized French political system can be a great advantage. For all its pomp and circumstance, it actually allows problems to be resolved. Sometimes, even a bad decision is better than no decision at all.

But for historical reasons, Germans are understandably wary of centralized authority and decision-making. Germany’s answer has been to build complex systems that prevent abuses — but also render decision-making exceedingly difficult.

And as hard as it is to arrive at political decisions at the federal level in Berlin, quite a few of those hard-fought gains are then resisted at the state level — or plucked apart by legal procedures that often last several years.

The impressive way in which France has built a national network of high-speed trains is but one example of the more nimble French approach.

And, even though the French system is more centralized, the French understand that, in some cases, rules are made to be broken. That allows people at lower levels of authority to make decisions — sometimes at odds with official policy.

In contrast, Germans at a similar level of authority tend to send the issue to higher levels, for “further discussion.” It is no coincidence that letting decision-making filter down to lower levels is one of the hallmarks of the new information-based economy.

In another sad twist, this is also reflected in Germany’s policymaking.

The global economy and its information technology sector long ago abandoned a crippling consensus and unending discussion as efficient ways to make corporate decisions. Both “new worlds” require swift responses.

Ultimately, this means that a fast response now matters as much as the vaunted German engineering skills once did. As a result, German companies (not to mention the German economy) are unable to exploit the new economy.

And so German companies, and the German economy as a whole, are starting to fall behind. As unpleasant as this sounds to German ears, the French system of producing managerial and political elites does its fair share in moving the country ahead.

A final advantage for the French: despite all of their noise, French unions are far less powerful than German unions. Surprised? The answer is in the different way the two countries run their corporations.

Because of its unique system of co-determination, Germany is the only country in Europe where corporate bosses, by law, do not have full power. This system provides for equal participation of managers and employee representatives on supervisory boards, which serve as the control institutions of German companies by electing managers and reviewing important management decisions.

As it happens, the real danger does not arise from a majority vote on the employee side. Instead, heavy union representation on the supervisory board prompts executives to conduct much of their actual business in “back rooms” for fear of confidential information being leaked to unions and the public. This was well-demonstrated by the goings-on in the Mannesmann supervisory board during the acquisition by Vodafone.

Managers are therefore denied the opportunity to discuss a company’s problems frankly in the appropriate forum. The ultimate result is a corporate decision-making process that puts German companies at a disadvantage in comparison to French and other European counterparts.

That is why — in comparing Germany and France — it is a big misconception to believe that “socialist” France makes it much harder for top management to run their companies than fairly “capitalist” Germany.

Unlike Germany, France — for the most part — still neatly divides spheres of authority. Even though it does not always appear that way in France’s public debate, management takes its responsibility in those areas seriously.

The German system of co-determination — where managers of the corporation and union representatives sit around the table in the boardroom and jointly decide on vital issues — is quite unknown in France.

Ironically, the Allies first introduced co-determination to Germany after World War II, mainly to satisfy French worries and keep the German coal and steel industry in check.

In “oh-so-socialist” France, with its revolutionary traditions, the situation looks quite different. The employees in the “conseils de surveillance” are relegated to mere guest status without voting rights. The political class also supports the notion that a company owner must ultimately make his or her decisions in an unencumbered manner.

And the unions prefer to stay out of management because they do not want to compromise their status as protectors of the workers in confrontations — not cooperation — with management. All of that makes quick decision-making easier for the French than for the Germans.

The hallmark of the French attitude is simple: flexibility. That may seem surprising considering the traditional view that the French are more “socialist” (or “statist”) than the Germans. But just consider the matter of highway tolls.

Simply put, users have to pay to drive on France’s “autoroutes,” while Germany’s autobahns are still free. That reflects the more progressive approach the French have taken toward financing their roads. User fees are a much more modern tool for managing overstretched public sector services than funding through tax collections.

That demonstrates the French willingness to look far and wide for solutions, even when those solutions do not fit their preconceived notions. And it may explain why the French have moved more aggressively into exporting services — where the future of the developed economies surely lies — while the Germans remain wedded to their engineering-intensive manufacturing.

Once, Germans liked to think that their economy was the “best” in Europe. Maybe this reputation was well deserved during the days of the “Wirtschaftswunder.” But those times are long gone.

Even when confronted with obvious shortcomings — such as a growing lack of flexibility — Germans liked to point to the fact that other countries had it worse. Since the late 1980s, Germans have defended their growing fiscal deficits by pointing to the fact that Italy (of all countries!) ran even larger deficits — as though such a comparison was a defense against the accelerating erosion of Germany’s public finances.

Now, the evidence that Germany is lagging behind is even clearer. Growth rates are the lowest among the EMU-12. Ten years ago, Germans liked to point to the fact that France — Germany’s main economic rival in Europe — was more inflation-prone, had less economic growth and lower overall productivity than Germany.

In the 1990s, France has overtaken Germany in each of those areas. The inflation issue has been laid to rest with the euro. The French economy has grown faster than the German economy for the past six years.

And, amazingly, the latest data from the International Labor Organization shows that French workers are the most productive in the world — while Germany is not even among the top three countries. Yet, Germany has higher labor costs — French manual workers earn 16% less than their German counterparts.

In the face of this, German voices are silent. Or, worse, they still name reunification as the root cause for all that ails Germany today — even though that horse was flogged to death a long time ago. As such excuses wear thin, Germany has no choice but to confront some unpleasant truths about its own inability to do more than the absolutely minimum required reforms.

Luckily, the French demonstrate that reform is possible — and politically acceptable — in Europe. But Germany shows that, without the right leadership and institutional framework, reform will be difficult. Europe’s last elephant is running out of options for evading the inevitable.