France a ‘better option’ than Germany as trade war uncertainty hits Europe

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They are two of the biggest economies in the euro zone and since the sovereign debt crisis emerged in 2011, Germany has always been seen as the most resilient.
France has a much higher public debt pile and has been more exposed to the financial distress taking place in countries, such as Italy.
However, the tables have turned.

The U.S.-China trade war has changed how economists look at France and Germany, two of Europe’s largest economies.

The French economy is now more resilient and more attractive than Germany, three analysts told CNBC, in what marks a clear shift in the way both economies compare.

They are two of the biggest economies in the euro zone and since the sovereign debt crisis emerged in 2011, shaking the foundations of the region, Germany has always been seen as the most resilient. France has a much higher public debt pile and has been more exposed to the financial distress taking place in countries, such as Italy. However, the tables have turned.

“France is the better option. It is less exposed to the downturn in global manufacturing caused largely by (the) trade war,” Holger Schmieding, chief economist at Berenberg bank told CNBC via email Thursday.

The ongoing trade war between China and the United States has started to shift the economic picture in Europe. Germany, the largest European economy, is largely dependent on exports and on its manufacturing sector, which makes it more exposed to the vulnerabilities in global trade.
The French-German axis remains extremely important for Europe but at the same time, the last years have shown that this axis functions best when both countries are on equal footing.
Carsten Brzeski
Economist at ING Germany

Germany’s share of manufacturing in gross domestic product (GDP) is almost 25%, according to recent data from UBS. In comparison, manufacturing in France represents less than 15% of its GDP.

“Global trade tensions inevitably mean that export-dependent countries are under greater pressure than economies where domestic consumption plays a greater role. That’s why Germany is really feeling the heat from (President) Trump and China, while France might still be in a somewhat more comfortable place,” Carsten Nickel, managing director of the research firm Teneo, told CNBC.

In a report published Thursday, UBS analysts have also said that, “longer-term,” they favour France over Germany. They argued this was because French demographics are more growth friendly; French investment and growth rates are above those of Germany; and long-term policies on structural reforms are more substantial in France.

Data released in August showed that the German economy contracted 0.1% in the second quarter of this year compared with the previous three-month period. On the other hand, France grew at 0.2% in the same period.

Forecasts from UBS point to a growth rate of 1.2% in France this year and of 1% in 2020 – above the euro zone’s average. In comparison, Germany is expected to grow 0.5% this year and 0.6% in 2020.

However, it will be important to monitor the coming quarters.
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“I would not be surprised if France will actually follow the downswing of the German economy in the coming quarters. It will be hard to escape trade conflicts, Brexit and the global manufacturing slowdown,” Carsten Brzeski, economist at ING Germany, warned in an email to CNBC this week.
What does this mean for the future of the EU?

The relationship between France and Germany is critical for the future of Europe. They are two of the largest European economies, two of the founding members of the European Union – the political and economic partnership that brings together 28 European nations, and often they define the agenda at the EU level.

“In general, the French-German axis remains extremely important for Europe but at the same time, the last years have shown that this axis functions best when both countries are on equal footing,” Brzeski said.

He explained that the ideas that France has for further European integration may not advance if Germany struggles economically.

“When France was in economic doldrums, Berlin killed many proposals. In case positions might reverse now, France would face a Germany which is confronted with a stagnating economy and the least thing they will think about is further European integration,” Brzeski said.

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