Why France is outperforming Germany in economic growth

Not long ago, France was described as "the sick man of Europe," due to its lack of economic reform and high unemployment.

But that title would now seem far-fetched. The French economy grew by 0.1% in the third quarter of 2023, following a 0.6% growth in the April-June quarter. On the other hand, Germany reported a drop in output in the third quarter, raising risks of a prolonged economic recession.

Experts are praising France for its swift action over the past few years.

"French companies have made several billion euros selling cruise ships and planes this year, which is reflected in our growth figures," says Philippe Crevel, economist and head of Paris-based think tank Cercle de l'Epargne.

Structural difference between France and Germany

Speaking to DW, Crevel noted that the "ad hoc effect" came on top of a structural advantage. "France has a large service sector, which has achieved good results recently, especially in the area of tourism," he explained, adding that Spain's economy was currently growing for the same reason.

The German economy, he explained further, has traditionally relied upon a strong industrial sector and exports, and is now feeling "the impact of the stagnating international commerce and a trade row between China, the US and the EU, which has all sides set up trade barriers."

Another burden is high energy prices, which have increased production and transport costs for the German industry, he added. Berlin used to rely heavily on Russian pipeline gas that it now no longer imports due to Moscow's invasion of Ukraine which started in February 2022. France, in contrast, has access to cheap nuclear energy which represents roughly 70% of its electricity production.

Climate policy and its effects on the German auto industry is also playing a role. "That sector hasn't adapted to the transition towards electric cars yet — most of their batteries, which are the lion part of electric cars' added value, are produced in China," he said.

France reacted faster to multiple crises

Anne-Sophie Alsif, chief economist at Paris-based auditing consultancy BDO, mentions yet another factor playing in France's favor. "The country's economic performance largely relies on household consumption," she told DW. "And although the crises of the past few years have had an impact on domestic demand, the latter hasn't plummeted."

Apart from the Ukraine war, the world has also had to face the global COVID-19 pandemic, which started in 2020.

Christopher Dembik, investment advisor at the Paris subsidiary of Swiss-based Pictet Asset Management, said France navigated through these crises comparatively well.

Apart from handing out large-scale subsidies and loans during the pandemic for households and companies to be able to maintain their consumption and investments, "France also reacted incredibly fast to the energy crisis and shielded the whole economy through government support," Dembik told DW. "It had a one-year head start compared to Germany. That made a real difference, even though Berlin spent more money in terms of its GDP."

This lack of reactivity exasperates Armin Steinbach, a German professor of law and economics at Paris-based HEC University and nonresident fellow at Brussels-based think tank Bruegel. He thinks Germany should "cut a slice off France's top-down presidential system" and make its decision mechanism in times of crisis "more efficient."

"While Germany was discussing forever due to its consensual system bringing in decision-makers from the central and regional government, France had long since implemented its measures," Steinbach told DW.

'Macron's reforms are paying off'

And yet, France's current economic overperformance also has more profound reasons, Steinbach thinks. "President Emmanuel Macron is reaping the fruit of the ambitious reforms he has implemented since first coming to power in 2017. He has lowered corporate tax, liberalized the labor market, reformed unemployment insurance and pushed through a painful pension reform."

Macron's reform agenda, he added, is also having an impact on the country's unemployment rate which now stands at 7% — the lowest in 20 years.

But Catherine Mathieu, an economist at Paris-based Sciences Po University's economic observatory OFCE, thinks the French economy is "not a model student." It's rather that Germany has been "performing particularly badly" over the past three years, she told DW. "On average, the eurozone's GDP has grown by 3.1% since the end of 2019. France is mid-table with 1.7%, but Germany is at the very bottom with only 0.2% growth."

Downsides to the French success

And yet, the five experts agree these figures are not putting a question mark on Germany's industry-orientated economic structure.

"France is actually following in Germany's steps and has been pushing for a renewed industrialization," Alsif stressed. "What's more, it's important for the eurozone to include differently structured economies so that not all of them are in recession at once."

However, France's success story does have its downsides. The country's public debt has skyrocketed to more than €3 trillion ($3.16 trillion) — 112.5% of GDP compared with less than 100% in 2019. The annual budget deficit amounts to roughly 5%, way above the 3% deficit ceiling set by Brussels.

According to the economists, that won't lead to France going bankrupt anytime soon. But its accumulated debt will eventually have an impact.

"If a country uses a lot of its money to service its debt, it can't put that money into more important purposes," HEC's Steinbach underlined. "At one point, austerity measures will be needed, which can lead to political instability. And there will no longer be any money left for generous public subsidies."