Summary:
– Domestic demand is the factor that contributes most to French GDP.
– Non-price competitiveness (exchange rate effect) is the major structural challenge for France’s export strategy.
According to the European Commission’s winter 2013 forecasts, exports contribute 27% to France’s GDP in value terms, compared with 81% for private consumption. In 2014, the trade balance (the difference between exports and imports) will see annual growth of -0.2% compared with +1.4% for domestic demand, even though exports will increase by 4.7% and imports by 5%.
Should we therefore favor a reduction in import costs (appreciation of the euro) or a reduction in our price competitiveness on exports (depreciation of the euro)?
A first approach is to consider that consumption is the factor that contributes most to GDP (57% private consumption and 24% public consumption). An increase in the real effective exchange rate would increase the attractiveness of goods imported and produced outside the euro zone compared to goods produced within the euro zone.
A more pragmatic growth strategy would focus on positive growth in domestic demand factors (increased purchasing power, lower imported energy costs), meaning that the appreciation of the euro would be more favorable to the French economy.
A second approach is to consider that our export capacity is not based on our price competitiveness but on our non-price competitiveness. Otherwise, it would be difficult to justify why Germany’s exports contribute 50% to GDP compared with 27% for France. France’s international sectoral specialization in the mid-range market makes companies more sensitive to price competition than to non-price competition. This characteristic has led these companies, since the 2000s, to reduce their margins by 30% and then to reduce their self-financing rate from 85% to 64%. These two factors limit research and development activities, which are sources of investment in productivity. The lack of non-price competitiveness is the result of sectoral specialization that exposes French industry too heavily to price competition and therefore to exchange rate effects, which explains why exports are more sensitive to euro-dollar exchange rate movements in France than in Germany. An appreciation of the euro accentuates the lack of competitiveness of exports on international markets, while a depreciation will not bring about any structural improvement.
The competitiveness of exporting companies must therefore focus on non-price competitiveness: changes in the real effective exchange rate are not necessarily a determining factor in France’s long-term competitiveness.
References:
European Economic Forecast, European Commission, Winter 2013.
