First Germany, now France. I had not expected to write about the EU, and the eurozone’s two biggest economies, in consecutive weeks, but needs must. It is hard to ignore the travails of our near neighbours, and the implications.
I have always had a soft spot for Michel Barnier from the time when, during the Brexit negotiations, he and his team put a huge array of papers, folders and lever-arch files on the table while David Davis, our Brexit negotiator, had an empty space in front of him. Davis, it seemed, had everything he wanted to say in his head, as I used to claim when I hadn’t done my homework, or, as he said later, in a briefcase by the side of the table.
Anyway, having been placed in an impossible position by Emmanuel Macron, the French president, Barnier will now be remembered for something other than being the EU’s very own “Mr Brexit”. He is now the shortest-lived French prime minister since the start of the Fifth Republic in 1958, and the first to be thrown out of office by MPs for 62 years. There may be another autobiography chapter in it.
This was France’s Liz Truss moment — although, perhaps because it was widely anticipated, it had nothing like the effect of our short-lived prime minister’s mini-budget. Barnier’s budget, intended to fix France’s sickly public finances, was killed off at birth. By convention, governments that cannot get a budget through parliament fail.
In contrast to our September 2022 excitement, you could look in vain for any immediate market panic. A day after Barnier was sent packing, French ten-year government bond yields were just below 2.9 per cent, higher than Germany’s 2.1 per cent and similar to those of newly stable Greece, but below Italy’s 3.2 per cent — and, because European official interest rates tend to be lower than those in Britain and America, below UK ten-year gilt yields of 4.25 per cent and America’s 4.2 per cent.
Nor did the euro suffer immediately, trading slightly up at just over 1.05 against the dollar. It was stronger against the dollar a month or so ago, but much of the change since then reflects the re-election of Donald Trump, not France and Germany’s problems. It is early days, but there is no sign of a new eurozone crisis yet.
What happens now? Looked at from this side of the Channel, it is easy to see the EU and eurozone, with both Germany and France struggling, as akin to a twin-engine plane with the warning lights on for both engines.
There is something in this. France’s gross domestic product (GDP) accounts for 16.6 per cent of the EU economy and 18.3 per cent of the eurozone economy. For Germany, the figures are 24.2 per cent and 26.6 per cent respectively.
The Franco-German axis thus accounts for just over 40 per cent of the EU economy and almost 45 per cent of the eurozone. But Germany, with its slow growth rate, has had to be pulled along by the rest. The French outlook, of which more in a moment, is uncertain.
In this context, the eurozone, which currently has 20 members, has been performing surprisingly well. Eurozone GDP grew by 0.4 per cent in the third quarter, employment rose by 0.2 per cent and the unemployment rate was a low (by its standards) 6.3 per cent. The UK’s third-quarter growth rate was 0.1 per cent and the unemployment rate 4.3 per cent. Germany, the Netherlands and Poland have lower unemployment rates than the UK, France and Spain significantly higher.
The eurozone has grown by 11.1 per cent since the second quarter of 2016, the time of the UK’s Brexit referendum, and by 4.6 per cent since the pre-pandemic final three months of 2019. In both cases, this exceeds UK growth — of 9.6 per cent and 2.9 per cent respectively. The performance since late 2019 is quite impressive given the drag from near-zero German growth.
The eurozone now faces headwinds, however, and not just from the difficulties in France and Germany. The latest purchasing managers’ index (PMI) for the euro area fell to a ten-month low of 48.3 last month — suggesting, according to the index’s compiler, S&P Global, that it “fell back into contraction”, so ending the year in a weak spot.
• Europe’s tragedy is a big problem for us too
That is concerning. The big picture, highlighted by a new regional assessment from the International Monetary Fund, is that the EU and eurozone need a growth boost similar to that provided by enlargement 20 years ago in order to “to narrow Europe’s persistently large income gap with the US”. That means, the IMF said, deepening the single market and pushing forward with capital markets union.
• Europe’s hamsters are no match for American grizzly bears
In September, “The future of European competitiveness”, a Brussels-commissioned report by Mario Draghi, the former European Central Bank (ECB) president and Italian prime minister, called for a series of actions. As it said: “Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines … This lack of dynamism is self-fulfilling.”
Europe needs reform, and reform will be difficult with France operating in a political vacuum and Germany having its own domestic political priorities. That is perhaps the most serious consequence of the current problems in both countries. There can be no new assembly elections in France until July and Macron appears determined to hang on as president until 2027, the end of his term as president.
• Michel Barnier ousted as French PM but Macron refuses to resign
It will be a case of muddling through. The ECB is set to reduce official interest rates by a further quarter-point, 25 basis points, this week, with several more rate cuts pencilled in for next year. The loss of economic momentum in Europe provides the central bank with a green light. There is a clearer path to lower interest rates on the Continent than in the UK, where the Bank of England’s own decision-making panel has highlighted the risk of somewhat higher inflation arising from the budget.
France, rudderless, is also set to continue to muddle through, albeit without meaningful action to tackle a budget deficit of 6 per cent of GDP and government debt of 110 per cent.
Even before the ink was dry on a new forecast from the Paris-based OECD of 0.9 per cent GDP growth in France next year, and 1 per cent in 2026, forecasters were revising down their numbers in response to the political crisis. The French economy is unlikely to collapse but will have to pull out the stops to grow by 0.5 per cent next year.
With both France and Germany hobbled, the rest of the EU and eurozone will do well to make up the difference.
Politically, France and Germany’s difficulties have come at an unfortunate time. The timing is not great in economic terms either.
PS
Economics can be difficult, as I know from the many emails that you send me every week. It is easy for people like me to assume knowledge that isn’t there.
So I was encouraged to hear about a new initiative from the charity Discover Economics, in association with the Royal Economic Society, to make basic economics part of the national curriculum.
The government is currently undertaking a curriculum review and several organisations, including the Bank of England, the Financial Conduct Authority and the Royal Academy, have expressed a willingness to back the proposal. I am too.
As a Discover Economics spokesperson puts it: “Getting A-level economics into more schools is challenging; there is a massive teacher supply problem. Building basic economics literacy into citizenship seems like a practical way forward. It also seems blindingly obvious that any citizenship education should include understanding the economy!”
Most people I come across who have succeeded in business have an instinctive knowledge of economics, even if they have never been taught the subject — though I have heard the occasional howler. Productivity, one of the most important economic concepts, is widely confused with production and profitability, for example.
I won’t leave it dangling. Labour productivity is the amount we produce, or the value-added, from every person employed, or hour worked — and productivity growth, lacking in recent years, is the increase in it.
There is much more that everybody should know, so I hope that this initiative succeeds.
Anyway, before I go, you will be aware that Christmas is coming, though I have no information on whether the geese are getting fat. As far as this column is concerned, Christmas means two things: my annual quiz and some terrible jokes. The quiz will be in two weeks’ time, on December 22, and I will give you a generous time to respond to it. I should be able to offer prizes that improve basic economics literacy.
The jokes depend on you. I have already been sent one or two but there is room for improvement. Please send some more, to avoid me having to raid the Christmas crackers.