France vs. Germany: Taking on political and economic challenges while reinventing Europe

Historically, Germany and France have always had different views and approaches in the political arena. Some say the Franco-German engine is sputtering right now, often attributing this to fundamental differences and value systems in both countries. While there was potential for closer cooperation during the quieter and brighter post-war years, the current challenges of war, inflation, and environmental issues make cooperation increasingly difficult. Now, both countries are currently mired in political deadlock and are dealing with the rapid rise of right- and left-wing extremist parties, which reflect the perceived decline of the middle class. Both nations are trying to redefine themselves in a now unstable post-war world without acknowledging it, and this has led to them increasingly looking past one another. Communication issues between Germany and France extend to the economic sphere as well. In Europe, progress depends heavily on the joint efforts of these two countries.

Divergent Economic Philosophies

The two countries have different approaches and philosophies regarding economic policy. In Germany, there is skepticism towards strong, directive, and industrial policy interventions, whereas in France, there is a belief that economic policy should guide businesses. Historically, Germany’s economic model has been more successful. For instance, Germany's industrial sector is significantly larger than France's, and Germany has been more successful in terms of the industrial share in export markets. However, these differences stem from differing philosophies, and more dialogue and attempts to bridge these gaps are needed.

?Often, the two countries develop counter-cyclically. Recently, the French government has implemented a series of business-friendly reforms, such as reducing taxes, significantly curtailing wealth taxation, changing various regulations, and creating institutions to support new businesses. These measures have had a positive impact. However, France has also accrued significant debt, with a debt ratio now at 110 percent of GDP. In contrast, Germany has had worse growth performance but less debt and faces a significant backlog of reforms. To achieve economic success, Germany must create conditions conducive to business. Currently, Germany has the highest corporate tax rates [DR1]?among the G7 countries and has done little for infrastructure.

France has been proactive in removing obstacles for new businesses, even creating an agency where companies can seek help with bureaucracy. This has sent a strong signal that business start-ups and foreign direct investment are welcome. Germany could benefit from adopting a similar approach.?

Debt Versus Austerity

In recent years, France has accrued substantial debt, while Germany has taken a more cautious approach. In the current crisis and highly competitive environment, it might be necessary to consider increased spending.

There are arguments for financing certain investments with debt, but in France, much of the debt has gone towards consumption. This is risky, as high debt levels can lead to pressure to increase consumer spending or cater to interest groups. Instead, it is crucial to focus on making necessary investments and developing appropriate concepts.

?Germany, with its near full employment and labour shortage, must consider that increasing investment is not just about taking on debt but also about implementing these investments. This requires redistributing resources, which in financial policy terms means reallocating spending, including for defence.

Enhancing Cooperation

Germany and France should increase their cooperation to benefit Europe. However, both countries' politics are heavily focused on domestic issues and upcoming elections, often neglecting broader European goals. The focus should not only be on learning from each other but also on working together. This includes advancing Europe, deepening the internal market, and integrating capital markets. Increased investment and collaboration in defence policy are also crucial.

Higher defence spending is challenging for each country alone, but cooperation could lead to significant savings. Currently, there is a tendency for governments to ensure that public contracts benefit their own national companies, which hinders broader cooperation.

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Despite these challenges, there are crucial common goals. Both French President Emmanuel Macron and German Chancellor Olaf Scholz have emphasized the importance of further developing the European internal market and cooperating more closely on the accomplishment of the capital markets union and the banking union. Now, these plans need to be implemented. Both countries need to become more open and collaborative as, on a global scale, neither country is large enough to stand alone. Now more than ever, a deepened Franco-German cooperation is essential for a strong European Union, even if instability seems to be gaining the upper hand in both countries and around the world.

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