Cruising at Different Speeds: Similarities and Divergences between the German and the French Economies

GDP growth rates in France and Germany have differed significantly since the crisis. As a result, per-capita income and employment trends have diverged markedly. This Discussion Paper assesses a number of possible explanatory factors behind these developments and suggests, in particular, that differences in labour-market institutions appear critical. Social partners play a key role in both countries, but the application of collective bargaining at the firm level allows for more flexibility in Germany. However, the higher resilience and flexibility of the German labour market comes at the price of higher market-income inequality and poverty across individuals and age groups. There are also differences in economic structure, especially in the public sector, but to some extent also in the private sector, while nominal divergences appear less relevant in explaining recent income divergences. Although Germany’s growth model has allowed it to benefit from the strong post-crisis recovery in the global economy, especially among emerging economies – reflecting Germany’s favourable composition of products and export markets – it also makes it more exposed to swings in the global cycle. France’s growth model, by contrast, has relied more on domestic demand. Together with a larger public sector, this has helped to smoothen economic cycles, but has also implied some losses in cost competitiveness and a significantly higher tax burden.