The FT's headline writers managed to summarize the Eurozone economy in four words.
And unlike much recent commentary, which is based on a pervasive but inaccurate perception that France isn't growing, the FT gets the basic story right.
France is growing and spending because French housing prices are up:
Soaring household durables sales reflected the buoyant housing market and low interest rates, which have encouraged borrowing, said Mathieu Kaiser, economist at BNP Paribas in Paris, who suggested that the European Central Bank's moves to increase borrowing costs were persuading consumers not to wait before shopping. "They are perhaps getting in their purchases in a hurry."
And Germans aren't spending because German housing prices aren't up. And German real wages are down. Falling unit labor costs have increased the profitability of German firms and helped German exports, but they haven't spurred German consumption. German workers fear for the future, so – unlike their American counterparts, they haven't reduced their savings to make up for disappointing wage growth.
In contrast with counterparts in France, German households have been hit by falling real wages and house prices. Germans have also continued to save at a furious pace because of their fears about the future of the welfare state.
My main critique of the proposed plan for reducing global imbalances embedded in the IMF communiqué and the G-7 statement is that both place more emphasis on structural reform in Europe than seems justified, and less emphasis on the oil exporters than seems warranted.
Some structural reforms – letting stores in Germany stay open longer – might increase European consumption. But the impact of the standard set of labor market reforms on domestic demand growth seems rather ambiguous. Germany has done more to reform than France over the past few years. Yet France, not Germany, has enjoyed domestic-demand led growth.
Freeing up labor markets may encourage more investment, and thus spur demand growth.
Or it may encourage more precautionary savings, slowing consumption growth and dragging down demand growth.
I would argue that the world's plan for addressing global imbalances should put far more emphasis on policy changes in the world's oil exporters that would directly affect their savings levels and a bit less on changes to Europe's labor markets. Unless there is better evidence that such changes will support domestic demand growth, labor market norms strikes me as primarily a matter of domestic concern. Global adjustment requires more savings in the US, and more demand growth elsewhere.
Consequently, I was disappointed that the IMF communiqué didn't call for greater exchange rate flexibility in the oil exporters – even though dollar pegs have led the real exchange rate of the Gulf countries to depreciate over the past few years (2005 only made up for some of the 02-04 depreciation) even as oil prices appreciated. The G-7 statement was a bit better: It explicitly called for more exchange rate flexibility in the oil states, not just in Asia. And the IMF's call for more oil state spending (the communique calls for "efficient absorption of higher oil revenues in oil-exporting countries with strong macroeconomic policies") seemed rather hesitant. Sure some oil states may be spending too much (i.e. lack strong policies), but the big ones are not: the increase in Gulf imports has lagged the expectations of the IMF's model …
Indeed, I would replace the standard US save more/ Europe reform more/ Asia appreciate trinity with a US save more/ oil states spend and appreciate more/ Asia appreciate and consume more trinity. The Gulf states overly conservative budgets and dollar pegs strike me as a bigger impediment to global balance of payments adjustment than Europe's labor market institutions. Right now, the big surpluses are found in the oil states and Asia, not in the Eurozone.
Speaking of European labor market institutions, David Howell and John Schmitt (sorry, no link yet) highlight a data point that I found interesting. US employment growth from 2000 through 2005 barely outpaced French employment growth (3.5% v 3.1%), despite French labor market rigidities and US labor market flexibility. And since US population growth exceeds French population growth, the US employment to population ratio presumably has gone down slightly while France's employment to population ratio has done up slightly.
Sure, any comparison has trouble. The US labor force participation was arguably unusually high at the end of the tech bubble. And France's low labor force participation rate could imply that it has greater capacity to generate rapid job growth than the US.
But in some sense, the comparison is fair. Both France and the US have enjoyed relatively strong domestic demand growth. Both have booming housing markets. Both have seen strong corporate profit growth. And in both countries – despite big differences in their labor market institutions – job growth has been somewhat disappointing recently. And in many ways, the failure of the more flexible US economy to generate substantially stronger job growth than France strikes me as a more interesting story than France's reported stagnation.
Here too, I am more struck by the similarities between France and the US than the differences.