How France Fell So Far Behind Germany

france baguette

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Lately, it seems like the whole world is finding fault with the French.Ratings agency Moody has downgraded France and the International Monetary Fund, the organisation for Economic Cooperation and Development, and the European Commission have all acknowledged that the country needs to undertake critical economic reforms to avoid decline.

The so-called “Five Wise Men” who advise the German government on economic policy issues (the German Council of Economic Experts) are also anxiously making plans for their neighbour.

French pride has taken a hit. German media are also pointing the finger at France, saying that the success or failure of the euro zone lies with Paris, not with Madrid or Rome.

France used to rule the world, so what happened?

For decades, successive French governments have always – in private – considered Germany as a rival. France though, has a tough time competing with Germany.

In this competition, romantic French socialism has repeatedly been defeated by the German capitalism. Since the birth of the euro 13 years ago, it has become even harder for France to compete with Germany without the adjustment tool of currency devaluation. According to Goldman Sachs, the French have to reduce their price levels by 20% to be able to compete with Germany.

One of the most important factors in France increasingly losing its competitiveness is due to the implementation of the 35-hour work week 12 years ago.

According to the French Institute of Economic and Social Research, French employees work on average 1679 hours annually whereas their German counterparts work 1904 hours, six more weeks.

Were the French really efficient, the working hours would maybe not be so critical. However, the 35-hour week is the result of a long struggle by the workers’ unions, rather than the product of their high efficiency.

French companies also face the headache of a rigid labour market. The chief economist at the Commerzbank, Jörg Krämer, told me that “The minimum wage is nearly 50 per cent of the average wage, so it destroys jobs in an extensive way.

That, in part, explains the very high unemployment rate in France.” Currently, France has an 11% unemployment rate, twice as high as Germany. One in four French people under the age of 25 is unemployed.

According to the European Commission, more than 750,000 jobs in the manufacturing industry have been cut over the last 10 years. At 12.5 per cent, it is only half as high as in Germany.

The German economy’s secret weapon is its thousands of mid-sized companies across the country. They are much more resilient and flexible than the konzern, the big multinationals, while at the same time possessing significant capital as well as research and development advantages over small businesses.

France’s corporate structure is like a pyramid with a few global corporations on top, a large number of small firms at the bottom, but without sufficient companies in the middle. Part of the reason is that once a company has more than 50 employees, it is subject to strict protection against dismissal.

This means companies are rarely willing to hire more than 50 employees. On the other hand, small companies are more susceptible to the impact of the economic downturn. That is why the bankruptcy rate in France is twice that of Germany.

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