Rewriting economic history

by Jerome a Paris Mon Dec 3rd, 2007 at 09:05:56 AM EST

Daniel Gros, of the CEPS, a relatively mainstream thinktank, compares Germany and France's economic performance. As can be expected in an article in the WSJ, one is doing worse than the other. But, while unsurprising, the arguments used show a fascinating attempt at rewriting history. The hard nugget of reality to explain away is that France's growth has been higher than Germany's for every year over the past 10 years - except the last one. Of course, that last tidbit can thus be used to spin everything:

In a nutshell, weak domestic demand over the past eight years has forced German industry to seek its fortunes abroad, whereas the opposite happened in France.

Why was domestic demand so weak in Germany? It basically comes down to a stark difference in the evolution of the two countries' real estate sectors. The key facts here are quite simple: In Germany, real housing prices peaked around 1995 and then declined continuously. France, on the other hand, experienced an unprecedented real estate boom over the last decade. French house prices have doubled relative to those in Germany.

This different evolution of house prices goes a long way to explain the different evolution in domestic demand -- which grew strongly in France, but was stagnant in Germany -- and thus the differences in overall growth rates.

The underlying direct cause for the different growth rates is indeed correct: stronger demand in France than in Germany. Where the subtle revisionism comes in is in explaining where that demand is coming from. Saying that it comes from France's frothy housing market is cunning:

• it moves the discussion away from wages, which have been stagnant in Germany (like in the US) but not in France; the debate on sharing growth between labor and capital is thus sidestepped;
• it allows to put France in the same group as the US and UK as they move towards a housing bubble crash and, again, sidestep the debate about where consumption growth has come from (unsustainable debt in the Anglo economies, income growth in France), and suggest that France will continue to do badly as the US goes down;
• of course, it suggests that French banks have behaved just as "exuberantly" as UK and US ones in lending to the population (which is largely false), and that the financial crisis is not a specifically "Anglo" creature...