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France/Germany/Competitiveness gap

Published on January 25, 2011
Submission of the Coe-Rexecode report – Speech by Eric Besson, Minister responsible for Industry, Energy and the Digital Economy (excerpts)

Paris, January 20, 2011

(…)

FRANCE/GERMANY/COMPETITIVENESS GAP

First of all I’d like to thank the Coe-Rexecode Institute [economic think tank] and its President, Michel Didier, for the quality of the work done. The aim of your mission was to assess and analyse different factors explaining the competitiveness gap between France and Germany over the past 10 years or so. This goal has been achieved.

Your mission also consisted in proposing broad policies to improve the competitiveness of French industry. I’d like to thank you for the care you’ve put into identifying five broad policies, all of which, it seems to me, should be studied closely. (…)

To begin with, why should we compare ourselves with Germany?

For simple and objective reasons first of all – because Germany is our main customer, our main supplier, our main partner and our main competitor. The 20,000 French businesses which export to Germany account, alone, for 16% of our exports.

Germany is also the Euro Area economy which has succeeded best in retaining a competitive industry. Germany recorded growth of 3.6% in 2010, a record level since its reunification in 1990. So we must compare ourselves at the best level of economic and industrial performance, in order to raise the level of our economy. (…)

A few figures seem to me particularly striking:

- The ratio of French to German exports has declined from 54% in 2000 to 40% today;
- in 20 years, the gap between the German surplus and the French deficit has increased from €10 billion to €200 billion – 10% of our gross domestic product! Put into employment rate terms, the gap between France and Germany would represent two million jobs.

(…)

France has, since 2000, experienced a negative competitiveness gap with Germany, and this is increasing. (…)

STRUCTURAL FACTORS

The structural factors are the ones we all know, often attributed to Germany’s “industrial culture”, although this term always surprises me, because behind this “culture” there are often concrete measures and specific initiatives on the part of the State or companies.

I remind you that the structural factors are:

- the degree of cooperation between businesses to win markets and maintain the productive fabric, which relates closely to the industrial policy we’re now conducting in the Etats généraux de l’industrie [high-level industry conference], itself inspired by the German model;
- the German employers and unions’ “ability to work together” at all levels, which generally leads to better negotiation within companies;
- the close links between research, education and industry, stronger in Germany than in France, with better supported development in applied research, which leads to three times more patents per inhabitant in Germany than in France;
- non-cost-related competitiveness - particularly design, the quality of products and associated services, which often lead to German businesses being “price-makers” rather than “price-takers”.

WAGE COSTS

But what the Coe-Rexecode study highlights is also – and above all – that the gap which has grown between us since the 1990s is linked to a significant divergence between France and Germany as regards wage costs.

Total wage costs – salaries paid to employees plus social security contributions – have in fact increased more quickly in France than in Germany. So the hourly cost of work in the manufacturing industry rose by 28% in France between 2000 and 2008, as opposed to only 16% in Germany.

Above all, this evolution of labour costs must be set alongside that of productivity, in order to arrive at unit wage costs.

Because labour productivity moved ahead more in Germany than in France over the same period, total unit wage costs, as a result of this twofold evolution, increased by a little under 10% in France, whereas they fell by more than 15% in Germany.

This unfavourable evolution in unit wage costs obviously had major consequences on our industry, which – because it couldn’t pass this entire differential onto its prices – was forced to chip away at its edges, its profits and future investments.

In addition, there’s a big difference between France and Germany in terms of the labour cost structure. The element of social taxes on wages is in fact markedly higher in France – 44% of gross salary in France as opposed to 30% in Germany.

The result is that giving an employee a €100 net pay rise costs the employer €175 in France, as opposed to “only” €155 in Germany.

In his study, Michel Didier therefore proposes to us an overarching observation: structural reasons explain our competitiveness gap with Germany, but they’ve been heightened, since the start of the millennium, by a differential in unit wage costs, as well as in the structure and breakdown of labour costs.

INDUSTRIAL COMPETITIVENESS PACT

What recommendations should be drawn from your report?

On the basis of this observation, Michel Didier’s study proposes an “industrial competitiveness pact” centred on five priorities:

- taking into account the competitiveness imperative in any tax reform;
-  improving our “ability to work together”;
-  improving the cyclical management of employment;
-  focusing the training and research effort on the research-industry partnership;
-  taking strong, urgent steps to readjust our industrial costs.

Because these are bold and formative proposals involving significant consequences, work on the subject can progress only after consultation.

So I’d like to inform you that, together with Xavier Bertrand, I’m going to organize a consultation on this industrial competitiveness pact in the framework of the National Industry Conference (CNI). Xavier Bertrand and I will chair the first plenary session at the beginning of February. (…)./.

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