How to analyse heterogeneity in EMU : the case of
Transcription
How to analyse heterogeneity in EMU : the case of
How to analyse heterogeneity in EMU : the case of French/German economic policies Paper prepared for the Foutth Pan-European Conference on EU Politics 25-27 September 2008, Riga, Latvia. Homogeneity of national economic policies within a monetary union is necessary in order to build a robust economic growth for all members. However, the French-German example of the past decade underlines the fact that, in spite of strong and long-time economic links, non-cooperative economic policies can still appear in EMU, leading to potentially gloomy economic performances for the whole monetary union. This article uses a political economy analysis’ framework based on four criteria (stemming from the OCA’s theory) to reveal the depth of heterogeneity between the French and German economic policies. This situation finally emphasizes the need to reform the present EMU economic and institutional framework, in order to take this heterogeneity into account, and to avoid non cooperative economic policies. Author : Damien TRESALLET Research fellow Fondation pour l’innovation politique, 75007 PARIS [email protected] Acknowledgement This paper was made possible by the OFCE’s (Observatoire Français de Conjoncture) authorization to use GTAP data. 1 I – Introduction: What history tells us for a sustainable EMU The last years have seen a debate engaged in several Eurozone countries to know if it was desirable or not to leave EMU. It especially took place in France and Italy, where consumers have been subjected to high inflation rates and poor economic growth. For them, the Euro was the only one to blame for it, because it does not allow national economies anymore to use competitiveness devaluation in order to artificially regain price-competitiveness. Apart from being absurd, this debate1 on leaving EMU or not shows how difficult it is to shape a monetary union that would be convenient to every country. Consequently, it is strongly needed to reflect on possibilities to improve the functioning of EMU. Whatever good would be the economic performances of the Eurozone at the European macroeconomic level, it is important to keep in mind that past monetary union experiences on the continent did not last that long, and therefore to explore the reasons for their failure. The Latin Monetary Union (LMU) began in 1865 and included Belgium, France, Greece, Italy and Switzerland. The first difficulty appeared when nobody could agree on whether to choose bimetallism (gold and silver) or monometallism (only gold). The second one was the non-cooperative economic policy of Italy, whose Central Bank emitted new bills to replace old silver coins, without preparing their neighbours to it. As a consequence, the four other LMU countries were flooded with Italian coins. The diplomatic tensions arising from these events, along with World War I, finished strengthening divisions that led to the end of the monetary union in 1925. An other famous experience of monetary union is the Scandinavian Monetary Union (SMU), which began in 1873 and comprised Denmark, Sweden and then Norway in 1877. Problems arose with World War I, showing wide diplomatic differences between the three neighbours. During the War, Denmark traded much more with Germany than Sweden did, preferring to remain neutral. Contrary to Denmark, Norway helped the British with their navy fleet. Afterwards, the two latter speculated intensively on the Swedish money, which was much 1 Leaving EMU implies political as much as economic consequences, for a country as much as for the whole monetary union. Therefore, the accession to eurozone can be considered as irreversible. See for example Eichengreen (2007). 2 stronger after the conflict than Danish and Norge ones. This finally led to a progressive monetary divergence and to the end of the monetary union in 1931. Non-cooperation is at the origin of the rupture of the LMU and SMU (Olszak, 1996). As a consequence, facing the critics over EMU, it is necessary to pay a careful attention at possible non-cooperative economic policies, and a reflection on EMU economic framework. This paper is aimed at trying to create a useful framework in order to analyse heterogeneity. In the next part, we will present the main theories dealing with adjustment and sustainability in a monetary union. Then, we will study an example of economic divergence in EMU, taken from the German and French economic policies of the last ten years, and the responsibility of the economic and institutional framework of EMU in these policies. Finally, considering this worrying example, we will conclude with a presentation of some solutions for the economic and political sustainability of EMU. II – Sustainability, and how to adjust to country specific shocks in a currency union: theories 1. Review of the literature about adjustment in a Currency Union, theoretical and empirical Joining a currency union (CU) implies its own benefits, as Robert Mundell ever set in 1961 in his primary article. These are the decrease of transaction costs, the improvement of prices transparency, the stimulation of competitiveness, the elimination of exchange rates uncertainties and the soar of Foreign Direct Investment (FDI). But the American economist also found a great difficulty for a country in joining an OCA: adjusting to country-specific (asymetric) shocks. Leaving the monetary policy independent, national economies can only use taxation to prevent and adjust to economic disruptions. That is why Mundell asserted the necessity for economies to increase wage flexibility and labour mobility. After this famous article, many economists studied currency unions, developing OCA’s theories, i.e. the number of criteria a country has to match before entering a currency union, in order to minimize potential asymmetric shocks to occur. 3 In 1963, Robert McKinnon proved that the opportunity to create a CU depends on the degree of economic openness between two economies. The more they trade with each other, the weaker asymmetric shocks will be. Six years later, Peter Kenen (1969) emphasized the importance of product diversification. Obviously, each country has to develop a diversified production, not a specialized one. If a sector experienced a disruption, the centralised monetary policy could succeed much better than if this type of production was settled in only one country. Finally, Cooper in 1977 and Kindleberger in 1986 published articles that dealt with homogeneous preferences. They explained that a high level of international trade between two countries reveals common economic preferences and that in case of a monetary union, the closer the economic preferences are, the easier both countries face economic shocks. In Kindleberger’s article, economic preferences are defined as economic policies based on similar concepts/theories (the way two countries face unemployment/inflation dilemma). Homogeneity of preferences is linked with cultural and geographical integration. In fact, for the economists of OCA’s theories, joining a currency union is possible only for the countries respecting some specific criteria, in order to cover the risks of future potential country-specific shocks. Obviously, the longer the list of criteria is, the harder it is for a country to join a currency union. After several decades of completing the OCA theory, economists turned the currency union’s theory upside down, thanks to Jeffrey Frankel and Andrew Rose. Their 1998 original article explains that countries first had to enter a currency union before complying to a list of criteria, which anyway would never be complete. Actually, the surplus of trade and economic interdependence given by accession to CU makes the optimality endogenous. Consequently, the economic cycles of countries inside the CU become synchronised and, in a theoretical vision of economics, asymetric shocks disappear. Frankel and Rose’s research, based on the gravity model, paved the way to numerous other articles like Smith (2002) or Frankel and Rose (2002) that tried to calculate the impact of monetary integration on international trade. The results are balanced. On the one hand, they succeeded in proving that a “trade effect” exists indeed and they even could quantify it. But on the other hand, the results are so different across the studies that it is impossible to consider a single or an average figure for this “trade effect”. Results go from 1,46 for Smith 4 (2002) to 3,9 for Frankel and Rose (2002) ! The figures are even smaller in studies relying only on EMU2. Moreover, regarding business cycles, this is not clear whether empirics are getting the same way as theories. Several studies demonstrated that European national cycles were synchronising (Bordo and Helbling, 2003; Hanaut and Mouhoud, 2003; Darvas and Szapary, 2005; De Lucia, 2008). However, the beginning of the convergence is very different along with the study. Some economists emphasize the synchronisation during the 1970’s, whereas some others prefer to concentrate on the period after the Maastricht treaty signature. On the contrary, many other articles stress the fact that it’s hard to detect any homogeneous European cycle (Artis, Krolzig and Toro, 1999; Artis, 2007). Furthermore, it may be worrying to read articles concentrating on German economic cycle. Fichtner (2003), for instance, shows that the German asymmetric shocks may be closer to the American than to the European member states ones. Flaig, Sturm and Woitek (2003) exhibit a weak correlation between the German cycle and the one in other Eurozone member states. De Bandt (2006) emphasizes the importance of German reunification as a major cause for the remoteness of the German cycle from the other European ones. Conclusively, adjustment to country specific shocks is still a matter of concern in EMU, and needs to be studied. 2. Our theoretical framework: sustainability, country specific shock and heterogeneity For OCA economists, a country specific shock occurring within a CU stems from a lack of economic integration. This lack of integration comes from heterogeneity, and that is why the latter must be reduced before the entry of a country inside a currency union. The problem of OCA theories is that they never analysed how economic optimality can evolve (i.e. the ability for countries in a CU to face asymmetric shocks) after the creation of a CU – if we suppose that all OCA criteria are come up by all the applicant countries, so that optimality can exist. They do not answer the question of sustainability. Frankel and Rose 2 See for example Micco, Stein and Ordonez (2003), or Mancini-Griffoli and Pauwels (2006). 5 answered this question by showing that integration endogenously created optimality, but their estimation was not verified by empirical studies of business cycles. Therefore, we can not consider trade integration to induce optimality. On the contrary, we consider that a currency union, even if it’s a far advanced stage of trade integration, can still lead to non-cooperative policies, when common mechanisms are not strong enough to correct national policies. Even after several years of economic integration, heterogeneity could still lay under common regional mechanisms, and we need a framework to understand and make them visible. As some economists ever managed (Torres, 2007), we base our analysis on the same basis as OCA theories: heterogeneity (asymmetric shocks appear because of a lack of integration). Consequently, we apply the four original criteria of OCA theories to study economic heterogeneity: • Wages flexibility (basis : Mundell, 1961) • Economic openness (Mc Kinnon, 1963) • Sectoral diversification (Kenen, 1963) • Economic preferences (Kindleberger, 1986) We focus on an empirical case of economic divergence during the 1997-2007 period of time: German specific shock and its consequences for France, its first economic partner. III – Frankel and Rose discussed: the evidence lying under the France/Germany economic policies (1997-2007) In the lack of empirical studies verifying Frankel and Rose’s intuition for the EMU experience, it is important to consider how Germany’s (the largest economy of the Euro area) economic policies evolved and what consequences it had on France. Let us focus on the three shocks that lead the German economy towards several years of sluggish economic growth during the nineties’ decade: the reunification, globalization and the accession to the euro (Bilger and Rurgraff, 2004). The combination of these three shocks created an asymmetric disruption of the German economic structures. 6 1. Reunification, Euro, Globalization: road to recession for the German economy The Berlin Wall’s fall on the 9th of November 1989 has often been analyzed as “the end of history” (Fukuyama, 1993), and more specifically the start of a new era for reunified Germany made of freedom, economic growth, etc. On the contrary, following Lallemant (2004) we prefer to talk about the reunification as the beginning of economic problems for this country. In fact, the transfer of the economic, monetary and social model from the Federal Republic to the former Democratic Republic was not enough prepared, as would later recognize Wolfgang Wiegard, president of the Economic Experts Council (sometimes called as the “Five Wise Men Council”). Preparing the German unification, Helmut Kohl decided with his finance minister to choose the 1:1 parity to convert East-Mark into Deutschmarks. The openness of new financially solvent markets in East Germany had to spread new waves of investment in the whole country, to absorb unemployment in the West and to engage economic catching up in the East. But this virtuous cycle never happened. Because of the conversion of East-Marks into Deutschmarks, the wages were artificially over evaluated, mainly because of the very weak productivity in East Germany (coming from under qualified workers and obsolete fixed capital). This phenomenon dragged down the competitiveness of East German companies, and the fall of industry output. In a second phase, West German companies anticipated the cost of reunification, and decided to relocate elsewhere in Europe. The German public debt expanded from 42 % in 1989 to 61,3 % of GDP in 1997 (Gougeon, 1998), at the same time that companies were leaving the country and that fiscal outcomes were decreasing. Therefore, the part of German trade in international trade diminished gradually, from 11,7 in 1989 to 9,8 % in 1997 (Husson, 2005). The vicious circle was on its way, and had a strong impact on the German economic performances during the past years. For the European Commission (2002), the reunification caused two thirds of the growth difficulties Germany has been suffering since the end of the nineties. The second shock we must consider is the effect of economic globalization on the German economy. 7 Some of the most famous characteristics of the German model were strongly questioned in the nineties. The “join management” method, or the traditional research of a consensus inside the company, was reconsidered by economists and journalists in a period where rapid decisions had to be taken. Workers and companies had to adjust to globalization, so the past German managerial methods have to evolve towards Anglo-Saxon strategies. In this context, a new generation of managers emerged and took the power in companies that were the symbol of the German power: Jürgen Schremp in Daimler-Benz, Jürgen Dormann in Hoechst. Then, German companies started to relocate some parts of their production outside Europe, and to fire lots of people: from 20 000 in the automobile sector between 1990 and 1996, to 40 000 in Hoechst between 1994 and 1998 (Husson, 2005). Globalization also deeply affected the way to finance investments. Whereas there was a strong traditional link between German companies and national banks, the liberalisation of capital movements, as much as the development of stock exchange, completely transformed economic financing. Gauer and Scriba (1998) calculated that the investment rate was abated from 27.5 to 25.5 % of GDP between 1982 and 1994. The authors also proved that there exists a negative correlation between stock exchange capital and private investment, in the majority of developed countries. As a consequence, the loss of German competitiveness during the nineties cannot only be explained by the reunification, but also by changes induced by globalisation. The third shock Germany has been confronted to is the accession to the eurozone. EMU has been a dilemma for the Germans. Losing a symbol of German power in order to create a symbol of European construction? Some considered it as loss for the German identity, whereas other insisted on the source of wealth coming from the creation of an EMU. Unfortunately, 1999 (Euro on financial markets) and 2002 (Euro in paper money) destabilized the German economy and this for three reasons. First of all, the convergence of interest rates on a low level reduced the German price-competitiveness compared to its European partners, who maintained lower interest rates (Bourgeois, 2005). Secondly, the Deutschmark has been replaced by the Euro on an over evaluated conversion rate, which diminished the pricecompetitiveness of German products. Thirdly, a very strict instrument, the Stability and Growth Pact, was created by Germany and supported by France in 1997 to supervise fiscal policy from “traditionally expanding economies”. Actually, two of the Eurozone biggest countries feared the increase of inflation from countries like Italy or Greece, where public debt was particularly high and that needed incentives to reduce their public expenses. The 8 problem is that this instrument has turned into a drawback of European economic framework for its creators. Even if they did not formally respect it, the SGP has always been a burden for France and Germany economic policies and still is to this day. These three shocks taken together can be seen as one big asymmetric shock, because of their interdependence and their responsibilities for Germany’s bad economic performances. It is not to say that they were properly country specific shocks and that they touched no other European country. They did hit France economy too, but not to the same extent. For example, France did not face relocations, a drop of investment, and a rise of its public expenses as did Germany because of reunification. On the contrary, the three shocks (reunification, globalization and adoption of the euro currency) induced the collapse of German competitiveness. 2. The German response to the asymmetric shock: non-cooperative policy burdening France’s performances (1997-2007) German competitiveness was hit by three shocks during the last thirty years. As a consequence, unemployment developed and the economic growth was sluggish (with recession in 2003). The response of the government – the non cooperative policy – has been engaged since 1998 under the Schröder government and has continued by the coalition between the CDU/CSU and SPD parties since 2005. Supported by the political consequences of the weak economic growth during the early nineties, the Schröder government undertook to reform the German model. The first measures aimed at increasing the flexibility of the labour market. The Hartz I and Hartz II laws created a new part-time employment agency, which helped companies to adapt their number of employees with their needs. Unemployment benefits were reduced and income taxes dropped from 25.3 (minimal bracket) and 53 % (maximum bracket) in 1998 to 15 and 42 % in 2006 (Rugraff, 2006). This supply policy was strengthened by the measures included in the 2010 Agenda. Thanks to this program, several new rules enlarged the room for manoeuvre for German companies. For example, the necessity for them to fire the youngest employeee before the oldest one was cancelled. Then, the laws Hart III and IV made 9 unemployement benefit harder to get and reduced their amount. As Metchild Veil explained3 : “[…] the new protection system means a clear deterioration compared to the previous situation [concerning people benfiting from this type of income], as much in financial terms as by the inflection of the system”. The results of legislative elections of September 2005 put Angela Merkel new chancellor of Germany. The most disputed reform its government implemented was the rise of Value Added Tax (VAT) in January 2007, from 16 to 19 %. Analysed as an isolated measure, this rise enabled the government to reduce public expenses which was one of the major priorities during the electoral campaign. But replaced in the whole political program of the coalition, the competitiveness aspect appears more clearly. Indeed, this measure was accompanied with a fall of employer’s contributions of 1.6 point. This adjustment method which is based on libertarian theories favours German companies selling products abroad (they pay less taxes) instead of foreign ones selling products in Germany. Consequently, the countries suffering the most from this non-cooperative strategy are Germany’s first trading partners: France, Italy and Spain. Actually, one of the leaders of the European construction uses its tax system to allow German companies to regain the competitiveness lost because of the three shocks described above. It is an artificial way to rise German exports and to win market shares on the back of its major trading partners. Following Creel and Le Cacheux (20064), we can call this particular economic policy a competitiveness disinflation. Figure 1 below shows the incredible ascencion of German exports during less than ten years, compared to the modest evolution of French and Italian exports. 3 Veil M., (2005), « Les lois Hartz : plus qu’une réforme du marché du travail ? », Chronique internationale de l’IRES, n°92, janvier, p.10. 4 For the theoretical litterature on competitiveness, see for example Blanchard and Muet (1993) or Lordon (1997). 10 Figure 1: Evolution French, German and Italian exports (1998-2006) Source : Cancé R., Montornes J. et Ourliac B., (2006), « Zoom sur l’économie allemande : l’Allemagne se qualifie pour la reprise », INSEE, division synthèse conjoncturelle, juin, p. 33. This non-cooperative strategy also induces negative effects for economic growth in neighbour countries. If German companies get market share abroad, and harms internal demand inside the country, it may have two kinds of drawbacks for neigbour economies: first, German companies take market shares on European ones, inside the single market (and even outside on international markets on which they are in competition); Secondly, European economies selling a large part of their production on German markets may face a slump in the external demand of their companies. Both of these effects may involve serious consequences for the economic growth in Germany’s first trading partners. We can see on Table 1 below the consequences of the German strategy on the four largest economies of the Euro area, calculated by the French research institute the Observatoire Français de Conjoncture Economique (OFCE). In the middle term, advantages are substantially positive for the German growth and negative for its first trading partners, especially France. 11 Table 1 : Consequences of the German strategy on the four largest economies of the Euro area Market Shares Imports competitiveness Internal demand Total Germany 0.7 (-) -0.2 0.5 France -0.3 0.0 -0.1 -0.4 Italy -0.1 -0.1 0.0 -0.2 Spain -0.1 -0.1 0.0 -0.2 Source : OFCE, (2006), « France : le coût d’outre-rhin – Perspectives 2006-2007 », Présentation pour la conférence de presse, mardi 25 avril. Our purpose is not to prospect if this economic policy would be good or not for Euro area’s long term economic performances. The main interest here is that the German noncooperative policy emphasizes and is supported by heterogeneity between France and Germany. This strategy can be analysed thanks to the four heterogeneity criterias presented below. Heterogeneity of economic preferences (on EMU economic framework) The non-cooperative economic policy implemented by German government since 1998 has to be understood with German historical economic preferences. This country has built its prosperity during the 20th century on a particular capitalist model. The latter is defined by different elements, including the “join management” system, and a strong Welfare State that coexists with competitive markets (Albert, 1991; Rugraff, 2006). The participation of federal economic policy in managing the business cycle is limited by the importance of the “Länder” and the national constitution, which prevent the negociations between trade unions and businesses from the participation of the Federal State (unless in particular situations). 12 The independance of the Central Bank, which is a particular element of the German constitution, compels governements not to rely on competitive devaluation in order to stabilisize the economy when disruptions appear. Concurrently, the Bundesbank built its authority on mainly two elements during the last decade: a strong currency (the Deutschmark) and price stability. To have a strong currency is a symbol of power for this country, as Angela Merkel repeated during the winter 2007/2008, whereas price stability is a heritage of the post-war hyperinflations era. In fact both come from German history (Kogej, 2007). The hyperinflation periods left a durable mark on the society. Naturally, the fear of inflation was then incorporated in German economist’s theory (ordo-liberalism) and in political and economic leaders, which were strengthened, in turn, by the failure of the Weimar Republic and the Thrid Reich (Nicholls, 1994). Ordo-liberalism theory was developed during the postwar period, in particular the Freiburg School. This theory considers the State only as a regulator, aiming at developping freedom in the market and a reduced but efficient social balance. Ludwig Ehrard, the first Economics Minister of the post-war era, was influenced by them. This dominant domestic ideology conditioned and constrained the way key policy makers negociated and influenced the Maastricht conference (Dyson, 2000) and supply side reforms as long as market liberalization constituted the basis of German economic policies during the eighties and the nineties (Gougeon, 1998). As a consequence of these two elements (tradition of Ordo-liberalism and Price stability/Strong currency) and in the context of the European Monetary Union (Independence of the ECB), the German economic policy could neither face the three shocks by relying on an active monetary policy nor on an expansion of fiscal deficit. The French monetary policy has never been so focused on price stability and strong currency. During the 20th century, France used the monetary tool to devaluate the Franc in order to maintain the competitiveness of its industry, in 1977 and 1981. The role of economic policy was to stimulate activity, and not to prevent from inflation. Increasingly, economic policy in France has always been marked by a centralisation of power, sometimes called “tradition républicaine” (Maes, 2002). For example, after World War II, the creation of the “Commissariat Général du Plan”, a national planning office, was aimed at reducing uncertainty by fixing orientations to economic actors, based on medium-term previsions. Moreover, whereas in Germany economic policy was strongly influenced by liberalism, France was rather concentrated on applying Keynesianism principles during the first decades 13 of the post-war period (Rosanvallon, 1987). The French preference for an active monetary policy as long as a centralisation of power, shaped the French model and widely influenced the French positions during the Maastricht treaty negotiations. As a contrary, Germany was influenced by a different model: ordo-liberalism (Maes, 2002). Today, divergences between the French and German visions of economic policy continue to live, though they are the two first trading partners in the European Union. For about two years, French economic and political leaders have strongly desired ECB to use its interest rate as an economic tool, evolving with inflation and economic growth, as the Fed does in the USA. Critics against the ECB came with the first rise of the Euro in 2006. Then, during the presidential campaign, both left wing and right wing candidates criticized the European monetary policy for its rigidity and the importance it attached to price stability. These critics did not stop following the election of M. Sarkozy. For example, Mr Fillon, his prime minister, proposed to organize a meeting during the 2008 summer with Economic and Financial aiffairs ministers of the Euro area, in order to improve the Eurogroupe functionning. During the French presidency of the EU, President Sarkozy as much as Mrs Lagarde, the minister of Economic affairs, advanced in many speaches the need to strengthen coordination between ECB and Economic and Finance ministers within the Euro area, proposals to which the German governement is firmly opposed. The difference of opinion between France and Germany concerning the management of monetary policy is not recent. At the beginning of the nineties, “ordo-liberals were on the whole unhappy with debates about EU-level economic policy ‘co-ordination’, preferring ‘dialogue’ and ‘co-operation’. Their particular suspicion was directed at French talk of an ‘economic government’, at references to a more active exchange rate policy for the euro […]5”. Today, the deate is still living. It is easy to note a deep and lasting heterogeneity between France and Germany concerning what Charles Kindleberger called “economic preferences”. In Germany, the inflation/unemployement dilemma finds its answer in the importance given to inflation and the need of a rigid monetary policy, because of several events in German history. In France, monetary policy is rather used as an economic tool. This preference may come from the tradition of centralising economic policy, where this is the opposite in a Federal State like Germany. Since the tradition of a independent monetary policy is firmly rooted in 5 Dyson K., « Germany and the Euro : Redefining EMU, Handling Paradox, and Managing Uncertainty and Contingency », Queen’s Papers on Europeanisation, No.6/2000, p.3-4. 14 German’s political and economic consciousness, and because of the inability to use fiscal policy (in the end of the nineties, public deficit was too close to the Stability and Growth Pact thresholds), governments decide to rely on wages lever to help its industry to regain its competitiveness. Flexibility of real wages Competitiveness disinflation is leant uppermost on the decrease of prices, given by the deterioration of wages conditions. Germany deregulated its labor market thanks to political measures taken between 1990 and 1998. This situation was allowed and amplified by the particular wage setting system in Germany. Now, this German model is far from the French one. Beyond the heterogeneity analysis between both countries, related to the wage element, it is possible to emphasize the possible differences of economic responses in case of a country specific shock, thanks to the German example of the last decade. Within the German system of co-decision, Welfare state cannot intercede in wage bargaining, except in some particular cases, « as a last resort ». The wage setting system depends, like professional training, on branch unions bargaining, which establish collective agreements. At a national level, incentives can appear, depending on the political context, but whatever may be the willingness of the unions, they are not judiciary able to engage in bargaining, outside the sectoral level (Bosch, 2002). At the same time, strikes are strictly regulated and rarely happen. As a consequence, wage flexibility partly comes from the lack of judiciary institutionalism at the national level (Mazier, 1999). The decentralization of wage policy, which is a strong element of the Renan Capitalism, is based on high unionization rate. Along with the globalizing economy and the evolution of management standards, several researchers predicted a collapse of the German wage setting system during the 1990s (Streeck, 2001). On the contrary, it seems that even if syndicalism rate is decreasing, German companies and trade unions are still clearly attached to this traditional system (Thelen, 2000). After the reunification, « the German system adapted itself 15 to the new economic framework but preserved its ability to define compromises based on mutual concessions »6. Wage flexibility resulting from this system is based on a constant adaptation to short term economic evolutions, thanks to decentralized branch agreements (Boyer, 1986). Since the end of the 1990s, in the context of the search for competitiveness in Germany, trade unions in exporting sectors found a consensus on a wage freeze and on a increased flexibility. German companies being composed of thousands of small and average size exporting companies, wage freeze touched a large part of the German industrial sector. The Figure 2 below underlines the fact that German companies got the possibility to diminish the wages after the recession of 2003, whereas everywhere else in the European Union, they increased or stayed the same. Figure 2 : Evolution of wages in France, Germany, Italy and in the EU Source : Hans Blöcker Stiftung Institute, 2006 (Graph is reproduced from Drouin, 2007). 6 Mazier J., (1999), « Les grandes économies européennes », Repères, La découverte, Paris, p.34-35. 16 Even if the two countries are geographically close to each other, the French system is far from the German one. In France, the wage setting system is characterized by centralization, ie the place of the State. Following Mazier (1999): « Due to the break-up of social relationships, the State exerted a strong influence on the management of wages relations »7. This centralization comes from the French governments efforts to combine social and economic planning after the World War II, with instruments like the Commissariat Général du Plan. For example, the place of the State during the 1960s was so strong that, under the Fifth Plan, the framework for public sector wage negotiation caused controversy, « because trade unions had played no part in negotiating this ». After the social break-up of 1968, governments tried to rebuild labour market regulation, and politics and laws continued to determine the framework for social and industrial decision during several years (Barrat, Chaput, Naboulet and Wolff, 2007). Since 1970, a minimum wage, the SMIC, has been institued, initiated by the socialist government which concluded an agreement with social partners. Thanks to this instrument, wages are theoretically less flexible than in Germany and the risks for a poor workforce to appear are minimized. The special feature of trade unions/companies relationships in France seems to come from the centralization of power in the country, the place of the State and from its economic history, in which reaching a consensus has a weaker place than in the German model of codecision. It is paradoxical to observe the easiness with which German trade unions accepted a freeze wage, and the much more rigid model of bargaining in France. The competitivness disinflation implemented in Germany during the last decade would not have been transposable in France, all the more that French trade unions still keep in memory the competitivness disinflation which durably weakened France’s economy. There exists a strong heterogeneity between the two neighbours’ economies concerning wage flexibility, in spite of fifty years of European construction. These structural differences can induce an antagonism when adjusting to an economic country-specific shock. Indeed, recommendations from the European Commission indicate that European countries have to use labour market flexibility to adjust to a country specific shock or to gain competitivness. Nevertheless, the Germany/France example indicates that this is not possible in the same way 7 Mazier J., (1999), ibid., p.36. 17 for every country. Germany adjusted to a country specific shock by using the flexibility instrument whereas, it would not have been possible for France to use it to the same extent. More worrying, Germany used the flexibility instrument recommended by the European Commission, but engaged at the same time in a non-cooperative policy, gainning market shares on its neighbour countries, reducing their future potential GDP. Economic openess of France and Germany, and the importance of appearing small The German strategy would not have been a success if the country were a closed economy. Indeed, economic openess is an essential element of a competitive disinflation policy (Le Cacheux, 2005). In the case of a very opened economy, the slump of incomes in the domestic economy (coming from the rise of VAT or the lack of investment, for example) can be compensated by the additional competitiveness provided by flexibility on the labour market and freezing of wages (coming from competitive disinflation policy). In the case of a closed economy, this may not be certain, if the competitiveness gains rising from labour market flexibility are inferior to the provided additional external demand. We voluntary enlarge the definition given by Kenen (1969). In his article, economic openess was defined as the ratio of tradable goods to non-tradable ones. We prefer to add GDP in this measure, because we link economic openness to economic size (see further). As a consequence, economic openness rate of country i is calculated with the following expression: ORi = Xi + Mi 2 • GDP Where Xi and Mi respectively stand for exports and imports of country i. Economic openness is not equal in every country, and largely depends on the size of the economy. Unfortunately, there does not exist a precise definition of this concept yet in the theoretical economic litterature. Economic size can be appraised by superficy, GDP or population criteria (Archer and Nugent, 2006). We will rely on Laurent and Le Cacheux (2004) for its definition: a “small” country is defined as less than a quarter of the largest one 18 (in terms of GDP), an “average” country counts for less than a half of the largest, and the rest being the larger ones. To that extent, the eurozone includes three large economies (France, Germany, Italy), an average one (Spain), and eleven small economies (other countries). Traditionaly, smaller economies are always considered more open than large ones (Archer and Nugent, 2006; Rose, 2006). This can be easily explained by the necessity for a small economy to import a large part of the needed products. Since smaller economies are more open than larger ones, it would be less costly for them to undertake a competitiveness disinflation strategy, benefiting from the advantages of size. Empirically, this hypothesis can be partly verified in the Eurozone, thanks to table 2 below. The larger economies (France, Italy) are more opened than the smaller ones (Belgium, the Netherlands). The only exception is Germany. It would be logical for Germany to be as open as Franc, considering their very similar economic size in terms of population and GDP. However, paradoxically, Germany is relatively more open than France, with about the same rate as Finland. This element is structural, coming from the traditional preference of the country for international trade, with a very strong industry. From the second part of the 19th century to the 1970’s, Germany asserted itself as the global leader of special manufactued goods, products defined under the needs of the buyer, with minimum stocks8 (Piore and Sabel, 1989). Since this period, the German economic policy has been constantly oriented toward acquiring market shares all over the world, except during World War II9. For example, German exports grew up from 8.3 to 15.1 % of national industrial production between 1950 and 1960, and the part of West Germany in international trade expanded from 3.5 in 1950 to 7.3 % in 1957 to 10.9 % in 1965. The European construction strengthened this position, allowing the German industry to benefit from a market of more than two hundred millions of consumers. 8 The construction of the specialization comes from several historical events. After the failure against Napoleon, Germany settled a powerful military industry, with whom it will defeat France and Austria during the two World Wars of the 20th century. A second occasion shaped the famous Rhenan Capitalism and its industry. In the end of the 19th century, the appearance of American products on German markets activated a reaction of protectionnism in the country, a law favoring German trust in 1897 and strong links entrenched between industry (machinery, military industry), the Federal State and the banking sector. 9 Adolf Hitler prefered to build its German empire on autarky economy rather than international trade. 19 Table 2: Economic openness rate of Euro area countries, in 2005 Country Openness rate Belgium 109,00 Netherlands 78,57 Luxembourg 71,74 Ireland 59,77 Austria 50,46 Finland 37,68 Germany 37,09 Portugal 35,30 Spain 29,43 France 27,97 Italy 27,78 Greece 16,44 Source : OECD Database Therefore, Germany’s economic openness is a structural element. In a competitive disinflation, this element is consistent and useful. Wages reduction in Germany allowed competitiveness gains and an increase of trade performances, whereas the same strategy in France would not have been consistent with economic size. Indeed, France is comparatively much less open than Germany, which can explain the disaster of competitiveness disinflation in France during the 1980’s (Blanchard and Muet, 1993). Face to a weak economic growth, the French government decided after two inefficient programmes (1975 and 1981) to implement a competitiveness disinflation policy. Inflation sharply decreased immediately, and trade balance surplus appeared in 1992. However, the assessment of this policy is far from positive. It entailed a long period of unemployment, with hysteresis effects on the workforce; economic growth was inferior to the one within its European partners from 1983 to 1987. Finally, market shares were conquered abroad but 20 mostly in European coutrnies, because the Franc was too high to generate an increase of market shares outside Europe (Atkinson and al., 1993). Heterogeneity between France and Germany can be also analyzed through the concept of economic openness. The latter has important consequences on the strategies a eurozone country can put in place if encountered to an asymetric shock. This element is perfectly compatible with a competitiveness disinflation strategy for smaller countries, or countries with a high openness rate. Heterogeneity of production structures Structural differences in economic preferences between France and Germany appear more clearly recently with the quarrels between the two governments on the optimal euro exchange rate. These divergences induce a willingness to implement a different treatment of the exchange rate policy (active for French, inactive for Germans). At the same time, these divergences imply an important potential of country-specific shock to occur. This element is emphasized by the heterogeneity of production between the two countries. Industrial specialization mirrors the productive choices of a country. It expresses the extent to which a country produces one category of goods more than another. Considering the French/German example, both countries production structures are widely different all along the 20th century. The German specialization comes from the end of the 19th century (Piore and Sabel, 1989). The industry was concentrated on manufactured heavy materials and equipment and did not change much during the 20th century. The France specialization is broadly different. Before the French production structure progressively looked like the US one (producing office equipment, low manufactured products), whereas the German became more specialized (Piore and Sabel, 1989). Then, with planarization, France became competitive on other sectors (energy, aircraft, for example), whereas Germany did not really change its production structure, simply including innovation in its traditional sectors. Thus, following Leblanc 21 (2007), we consider Germany to have a more stable specialization than France during the 20th century. What is the current specialization of these two countries? To understand their position, we calculate their production structures thanks to the Lafay index, extended to take into account of world exports. In 1990, Gerard Lafay published an article in which he analyzed the specialization of several national economies with a relative new index, far from the ones used in production structures analysis10, including for example GDP values. In 1999, this instrument will be improved in Lafay, Freudenber, Herzog et Ünal-Kesenci’s book to include world exports. The index takes the following form: X − M ik X wk + M wk LAFik =1000 • ik − GDP X w + M w X i − M i • GDP Where Xik is exports of product k from country i, Xi is total imports from country i, Xw is total world exports and M are imports. We apply this index to the two economies thanks to the GTAP database, providing disaggregated data for 2001. The results, which are consistent with other studies on specialization (Peridy, 2006 ; Leblanc, 2007, for example) are detailed in the table in Annex. Database providing 41 categories of goods, we chose only to represent in the Figure on page 23 the results for the 15 most traded categories of products within international trade. It is easy to note a strong specialization of Germany on motor vehicles and machinery products, and to a lesser extent in the category of chemical industry (including rubber and plastic). On the contrary, we only observe for France a weak comparative advantage in the chemical sector, and no comparative advantage in motor vehicles and machinery. Conversely, the French economy shows a weak specialization on vehicles and transport equipment, whereas Germany exhibits a comparative disadvantage in these categories. Increasingly, 10 See for example Index used by Balassa (1965) or by Vollrath (1991). 22 specializations of the two countries are dissimilar on the sector contributing the most to international trade: machinery, chemical products, transport vehicles, motor vehicles and business services. Considering heterogeneity of production structures, the conditions for adjustment to countryspecific shock will be different between the two countries, when a country-specific shock occurs. German specialization is consistent with a competitiveness disinflation strategy. Indeed, the economy is widely open and specialized on sector contributing the most to international trade. Consequently, each competitiveness surplus for German companies is strongly optimized by them, all the more that the German economy is characterized by the important number of exporting firms compared to the French one (Lallemant, 2004). Germany can use its specialization patterns within the EMU economic and institutional framework, in order to adjust to adjust to an country-specific shock, by implementing an noncooperative economic policy. As a consequence, production structures as much as wage flexibility, economic openness and economic preferences, indicate a potent and structural economic heterogeneity between France and Germany. This heterogeneity must be taken into account to avoid countries to implement non-cooperative economic policies when they are confronted to a country-specific shock. 23 Figure 3: Distribution of French and German Specialization on 15 sectors (Lafay Index, 2001) 20 15 10 France Allemagne 5 0 -5 Mach. and Eq. Elec. Eq. Chem. Transp. prod. Veh. Motor veh. Bus. serv. Oil Transp. Textiles Manuf. Eq. (others) Source : GTAP database 24 Trade Agr. Prod. Wearing ap. Metals nec Paper prod. Conclusion: Learning the lesson from the German/French policies to reform economic framework The “Germany/France” example of the last ten years shows that heterogeneity between two countries is underlying in the long as much as in the short term, even if the two countries are historically the most integrated in a regional construction such as the European Union. In a context of country specific shock (in Germany, here), if long term heterogeneity criteria meet short term ones, it pushes countries to engage in non-cooperative policies, as Germany did during the last decade. This non-cooperative policy makes EMU less sustainable, and can create political and economic tensions between all the countries. Obviously, this example does not mean that any economy will never be able to create a CU with its neighbours, but that more than convergence criteria, the most important element of a homogeneous currency area is its economic and institutional framework. It would be ridiculous to explain Germany’s decision to implement a competitive disinflation by saying that it deliberately choose to undermine French economy. The problem comes partly from the heterogeneity of the two economies, but to the same extent from the uncompleted economic and institutional framework of the Euro area, which does not take structural heterogeneity into account. For our purpose, optimality is not endogenous. The sustainability of EMU is linked to the economic and institutional framework built above national economies, at the European level. This framework is not complete for the moment and needs to be reformed. If it is not, EMU may not be able to avoid non-cooperative policy from member states confronted to country specific shocks. Moreover, the purpose of this paper was to build a framework to study economic heterogeneity in EMU. We based our analysis on criteria stemming from OCA theories, and then focused on an empirical case (the three economic shocks in Germany). This framework correctly fit the German/French example, but obviously need to be improved. Paradoxically, there is not much theoretical economic literature dealing with heterogeneity in currency unions, whereas EMU is constantly growing, including 15 member states at the moment. The general aim would be to prevent Euro area from non-cooperative economic 25 policies, in order to make Euro area sustainable. 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Rubber and 3,805 plastics) 6,360 9,86 Transport vehicles 1,117 -4,421 7,69 3,890 16,774 7,44 Motor vehicles -0,073 -4,438 5,10 Business services -4,741 -4,225 3,20 Oil 2,042 1,104 2,40 Transport equipment -0,902 -1,091 2,73 Textiles Manufactured products (others) -0,644 -0,829 2,59 Trade 0,233 -2,543 2,53 Agri-indus. products -0,901 -0,795 2,40 Wearing apparel -2,027 -2,742 2,19 Metals nec -1,011 -0,379 2,18 Paper products, publishing -0,772 0,193 2,08 Total X X 78,3 Source : GTAP Database. 33