French and German economy must come closer, economists urge

BRUSSELS - Failure by the eurozone’s largest economies, traditionally EU allies, to act together risks plunging the currency bloc into a “stagnation trap” a report published Thursday (November 27) by Henrik Enderlein, of Germany's Hertie School of Governance, and Jean Pisani-Ferry, of the France Strategie government think-tank.

”In France we fear lack of boldness for decisive reforms. In Germany we fear complacency,” states the report, which was commissioned by Emmanuel Macron and Sigmar Gabriel, the French and German economy ministers.

Its main proposals balance French labour market reforms with new investment programmes in Germany and the eurozone as a whole, an attempt to bridge the gap between the two countries’ economic agendas, which have appeared to be at loggerheads in recent years.

"Germany and France have never been in situations so far apart," said Macron at a joint news conference with Gabriel on Thursday. "We need an agenda for convergence."

The report also advocated the creation of a European grant fund to support public investment in the euro area, similar ideas to that outlined by European Commission chief Jean-Claude Juncker i earlier this week.

The report argues that the labour market and welfare reforms pushed through by Francois Hollande i’s government have “not broken with the piecemeal approach of the past” reinforcing a perception that the country is reluctant to reform.

However, it also singles out German parsimony for criticism, accusing the Merkel government of an “incomplete public finances framework that... neglects promoting investments within the remaining fiscal space.”

”Passing on a worn-down house to future generations is not a responsible way of managing wealth,” it adds.

But Gabriel was quick to rule out the report’s proposal that Germany should increase public investment by €24 billion over the next three years, more than double the €10 billion proposed by finance minister Wolfgang Schaeuble earlier this month.

“I really can't see that happening," Gabriel told reporters.

Berlin says that the €10 billion investment plan for infrastructure projects will allow it to keep to the Merkel government’s promise to run a balanced budget for the first time in over 40 years in 2015.

On Friday (November 28), the EU executive is set to give its verdict on national budget plans. It is expected to give France a March deadline to implement further measures to reduce its budget deficit or risk facing fines for failing to implement the bloc’s economic governance rules.

But despite the perception of German economic strength and France as a laggard, the eurozone’s two largest are expected to have similarly sluggish growth rates between now and 2020. The Commission forecasts that Germany’s economy will grow on average by 1.2 percent per year with the French economy expanding by 1.0 percent per year.

“In France, short-term uncertainties reduce long-term trust, but the longer-term outlook looks better. In Germany, longer-term uncertainties reduce short-term trust, but the short-term situation looks relatively good,” the economists contend.