The Daily Update - France and Germany

Today France celebrates la fête nationale (or Bastille Day) and Emmanuel Macron is hosting Donald Trump at the celebration: Perhaps in another demonstration of his intent to make a mark in international affairs as well as domestic policy.  Once the festivities end the focus will no doubt return to Macron’s domestic agenda and how much of his policy rhetoric he is able to execute.

Last week, the Prime Minister Edouard Philippe committed to reducing the budget deficit within the 3% ceiling that the EU target and tax reform is seemingly still on the agenda for 2018: in spite of limited scope for budget ‘giveaways’ some reform of onerous property and wealth taxes is expected.  However, reform of the labour market remains a key challenge: in Q1 the unemployment rate was 9.6%, which is 2% above the pre-crisis low suggesting significant scope for improvement.

The French labour market is highly regulated: collective wage agreements cover most employees but only 8% of workers are members of a union.  Moreover, company level agreements can only differ from higher-level agreements if they favour the employee.  Macron’s reforms aim to go further than his predecessor’s and cap severance payouts and deregulate temporary contracts.  Over time these reforms should boost employment although it is a contentious area and is likely to be met with resistance.

Germany seems to have tackled this area to good effect in that its unemployment rate was higher than France in the early 2000s but it now it is much lower at only 3.9%.  Thomas Piketty suggests that France has been weak in investing in vocational training; less effective in its industrial specialisation and that the complex and onerous tax and wage burden has constrained employment growth in the private sector.

Interestingly, France and Germany’s productivity levels are not dissimilar.  Work by Piketty using OECD data, which takes GDP per hours worked in purchasing power parity (euros 2015), shows that for 2015 France (at €55) was practically at the same level as Germany and the United States.  It is also higher than the UK and Italy and higher than countries of comparable size and economic structure.  That said, in France a higher rate of unemployment is likely to exclude some of the least well qualified but even when Piketty adjusts for this (using the post 2005 German trend in hours worked and new jobs having productivity 30% lower than present jobs) the French productivity estimates fall but they still remain close to Germany.  Average hours worked per job are lower in Germany than France but the number of individuals employed per capita is higher reflecting France’s high level of youth unemployment in particular. 

While Germany has a positive employment backdrop its large trade surplus can be seen as a significant imbalance. Germany was effective in maintaining competitiveness post unification through wage freezes and taking advantage of Central and Eastern European countries entering the EU to boost its trade.  Its situation is also exacerbated by the euro: Germany, a strong creditor nation, has become locked into a relatively weak euro exchange rate (than had it retained the deutschmark).  The IMF’s 2016 External Sector Assessment noted that the German REER is undervalued by 10-20 percent and using their current account regression model with standard trade elasticities it is 10-15 percent undervalued.  But even factoring in an ageing population the German surplus (~8% of GDP) can be deemed excessive, especially so for a non-oil producing country of its size.  The European Commission’s own Macroeconomic Imbalance Procedure notes Germany’s ‘persistently high current account surplus’ remains an issue and ‘addressing the surplus has implications on the rebalancing prospects of the rest of the euro area’.  Policy remedies include measures to boost domestic consumption and investment.

But given Germany’s May trade surplus reached EUR22bn (released earlier in the week) the issue is likely to be hotly debated in coming months, especially with the Trump administration.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.