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Rivalry across the rhine. (Market Horizons).

For decades, French presidential candidates made an enticing promise to their voters: During their term, "la grande nation" would finally manage to outperform neighboring Germany both in economic and financial terms.

The great dream has materialized. Last year marked the seventh in a row that France outperformed Germany, which eked out only a meager 1 percent of growth in the second quarter in the midst of labor strikes, high unemployment and stingy corporate investment. Over the past decade, the French economy has grown 20 percent faster than Germany's.

Many American business executives may still perceive France as the country in greater need of change. But Germany may be the country in need of more decisive reforms.

Because of the Maastricht Treaty, both countries essentially operate under the same monetary and fiscal policies. The difference in performance, then, cannot be explained just by traditional macroeconomic policy. Rather, it is rooted in the two countries' respective societies.

Even without the burdens of reunification, the "German system" has always included substantial problems, such as an indecisive approach to public policy and a poorly thought-out relationship between management and labor.

For historical reasons, Germans are understandably wary of centralized authority and decision-making. Germany's answer has been to build complex systems that prevent abuses -- but they also hinder government action. Just look at the glacial pace of reforms: It took Germany 12 years to finally (and timidly) reform labor markets to tackle its massive post-reunification unemployment problem.

On the labor front, German unions fight tooth and nail to win wage concessions that hurt German competitiveness, such as the 4-percent wage increase pushed through by the powerful engineering union IG Metall earlier this year.

Then there's the pivotal issue of national decision-making. Germany's system of co-determination provides for equal participation of managers and employee representatives on companies' supervisory boards. This makes Germany the only European country where corporate bosses, by law, do not have full power.

As a result, heavy union representation on the supervisory board prompts executives to conduct much of their actual business in "back rooms" to protect confidential information. Managers are therefore denied the opportunity to discuss a company's problems frankly in the appropriate forum. This decision-making process puts German companies at a disadvantage in comparison with French and other European counterparts.

In each of these areas, the French are showing their eastern neighbors the way, if Germans would dare to follow. For starters, the French political system seems better suited to manage the transition from the older-style welfare economies of the past. This was spectacularly demonstrated in the French debate over the 35-hour work week.

While French unions ostensibly got what they wanted, employers got something they wanted, too. In exchange for allowing the work week to shrink, costly nonwage benefits and other restrictions were eliminated or at least curtailed. Despite all of their noise, French unions are far less powerful than their German counterparts.

When it comes to national decision-making, the centralized French political system can be a great advantage. For the most part, the French still neatly divide spheres of authority. Employees in the conseils de surevillance are relegated to mere guest status and have no voting rights.

That is why it is a misconception to believe that French socialism hinders corporate management relative to the fairly capitalist Germany.

The irony in all of this is that it was the Allies who first introduced codetermination to Germany after World War II. They did so mainly to satisfy French worries, and to keep German industry in check.

All in all, the French example demonstrates that, despite obstacles, reform is possible - and politically acceptable--in Europe. At the same time, German reform--without the right leadership and institutional framework--will be difficult.

Stephan Richter (markethorizons@chiefexecutive.net) is publisher of The Globalist.com.
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Title Annotation:France outperforms Germany; economics and labor
Author:Richter, Stephan
Publication:Chief Executive (U.S.)
Geographic Code:4EUGE
Date:Oct 1, 2002
Words:628
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