A tale of two countries, French Exceptionalism vs. German Stability!

The Organization for Economic Cooperation and Development (OECD) reports that the German economy is and will be going through tremendous difficulties over the next year. In their flagship economic outlook report for June, 2009, they report that in Germany the annual decline in GDP growth is projected to amount to around 6% this year.

France, in the same report, on the other hand, the group reports that Real GDP is projected to fall by about 3% in 2009, with the pace of contraction gradually diminishing through the year. The recovery in 2010 is likely to be slow, with output growing below potential rates throughout the year.

Why is France, a socialist democracy as widely understood (as much of an oxymoron as that sounds), further ahead in this crisis than that of Germany, an economic machine? Also, why is Germany, the third (or fourth depending on the organization reporting) largest economy in the world by country comparison and the largest, by far, in the EU, doing so poorly throughout this crisis?

Is this a case of French exceptionalism? Also, shouldn't the larger economy of that of Germany, suggest that they have more of a capitalist engine, especially when we factor in their population by size and comparison to their GDP?

Hardly is it exceptionalism some may argue on the French part. But, for argument's sake let's say that it is; does this so called exceptionalism actually mean full recovery from the financial crisis?

We can't answer that because we probably have the wrong question with the wrong premise. The question folks should ask is; was France as bad off as the other countries at the same time now and then in this crisis? The answer is no. France was the last European country show a decline in real GDP at the mid-way of the crisis. In fact, they were the only country as of late 2008 to have positive real GDP figures at 1.2%, aside from Germany who has of the start of 2009, began to drop like a stone with regard to productivity and employment.

While France boasts of having rolled out more of its fiscal stimulus- about 26 billion Euros- does this mean that the recovery will be higher than other countries? Perhaps not? Perhaps maybe!

The fact is that France is a heavy welfare state. But, on the other hand, they have responsive labour relations to employment than any other country- including the Nordic countries.

While other social democracies in the Northern Europe are have heavy welfare spending programs as is France, France also has a very vibrant private sector with a high amount of outward capital investment by nationals to compliment their state run benefits.

In fact, aside from the U.S., France, has one of the highest investor classes in the world with regard to outward foreign capital investment by nationals. As reported by the OECD by 2003, French companies invested 57.3 billion USD outside of France, ranking France as the second most important outward direct investor in the OECD, behind the United States (173.8 billion USD of outward FDI), but ahead of the United Kingdom (55.3 billion USD of outward FDI), Japan (28.8 billion USD of outward FDI), or Germany (2.6 billion USD of outward FDI).

While this also should indicate that France should have external variable exposure, to the extent that France has had its financial services sector exposed to US sub-prime debt is something France has not had to worry about. In fact, French firms have been insulated, much like Canada, away from sub-prime and US debt exposure. While, yes, Societe & General has had its issues with a rouge trader, this was an internal anomaly and the trader in question, was working outside of the general financial services protocol within his organization and, for that matter, normal French financial services regulations. When on the other hand, all countries that experienced extreme spillover effects from the US economic crisis were involved in the process as a matter of business as usual and nothing was seen as deleterious to the system when the collapse happened.

In the case of Germany with regard to financial exposure, their coordinated market economic model facilitates greater participation with unions and employee's as well as the social sector, which makes the consumer debt market not as lucrative as it is in other markets. While this too limited the exposure Germany had to external financial markets, this also means too that they don't have the structural capacity to expend and avenue's to absorb fiscal stimulus. Hence, the argument for German Chancellor Angela Merkel was that the fiscal stimulus from the European Central Bank was grossly lopsided within the Euro-zone because other countries had the ability to absorb and utilize the fiscal stimulus, while Germany had challenges with regard to the market net for financing and the facilities to put such fiscal stimulus to proper use.

Another important thing to note is that France can also feed itself. This is crucial. This means that they are not price takers and are not sending their hard earned money overseas, to purchase food items and don't have to at any time. Also, they are the price givers, meaning that they have a very wealthy European block as well as a middle east and Northern African block, which they supply.

France also has diversified its energy portfolio, having nuclear and other forms of energy aside form fossil fuels. While on the other side with Germany, they have shutting down civil nuclear power plants since 2000. This increases the demand on fossil fuels and due to the volatile nature of the oil market, this has worked against the German economy with the alternative energy sector still a non starter.

The French model has placed France as the best bet for coming out of this crisis faster and better, but probably not as fast as the USA and probably better than a heavily indebted Britain. While they will probably never have substantial real GDP growth comparable to the US in the long term, they will fair better than many and be sound in the short and long run.

So, while we bash France on its socialist tendencies, they really have a better- although not as transparent as we would like- system of governance, which has really evolved into a great state over the last century.