As the ailing French economy continues to struggle, the gap between France and Germany appears set to grow.
The divergence between the two could threaten economic policymaking in the eurozone, according to a report from the economics consultancy Capital Economics.
Germany and France are the two largest drivers of the eurozone. While the German economy has flagged a bit in recent months, it is in recovery and GDP has grown steadily over the last 15 months.
France, on the other hand, has not enjoyed sustained growth over the last two years and there are fears that the country could revert to recession.
"The health of the German economy will add to the Bundesbank’s inherent fear of inflation and make it resist quantitative easing more strongly, while French politicians’ calls for any action to weaken the euro exchange rate are set to grow louder," it said, adding that France may also try to resist Germany's calls for austerity measures.
The agency pointed to France’s inflexible labour market and higher taxes as “fundamental” problem areas which hamper growth. The country is mired in high unemployment
Germany reformed its labour market in the early 2000s making it easier for employers to offer only short hours and low wages. This flexibility enabled Germany to cope better than many in the financial meltdown as consumer spending continued, unlike France.
Still, Germany responded to the crisis by cutting government spending on social security and unemployment benefits and axing some 10,000 public sector jobs.
France’s strategy instead was to hike up taxes.
The report believes that the “relatively competitive, flexible German economy” will outpace France in the foreseeable future as France now has a harder and longer job to catch up.
