Holiday? They'd rather go to a conference

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The Independent Online

The eurozone leader is finding things tougher, while the laggard has spruced itself up. If things seemed quiet in the French streets and shops this summer, that was the outward sign there has indeed been an economic slowdown there. Germany is not such a popular holiday destination for Britons, but if you have been chatting to German friends recently, you may have found them a touch more upbeat.

We have become accustomed to the notion that Germany is the sick man of Europe, flirting with recession and populated by grumpy consumers who see their standard of living slowly sinking and are about to punish the Social Democratic government in the forthcoming election. By contrast, France has appeared a success story, showing reasonable growth led by a strong hi-tech industrial sector. And if having children is one indicator of confidence in the future, note that France has become the only large European country where fertility is close to replacement rate.

But now things may have changed - not French fertility, of course, but the relative position of the Continent's two largest economies.

The latest French GDP figures have been revised down. These now show that in the second quarter, the economy grew by only 0.1 per cent and would have contracted had there not been a rise in stocks. Both consumption and investment fell quarter on quarter, with the dip in consumption being more serious than at any time this economic cycle (see the left-hand graph above). In fact, this fall was the sharpest three-month decline since 1996.

By contrast, German confidence has turned up. The first quarter showed very good growth; we have to wait until Tuesday for the full second-quarter figures, and they are expected to be in line with the preliminary data, which was flat. But exports and business investment are expected to rise and, looking forward, there does seem to have been a clear turnaround in business confidence (see right-hand graph). That bodes well for future investment and may not be bad for employment, either.

The rise in German confidence, if sustained, will have political implications. We are just four weeks from the general election, and the new-found confidence points to two conclusions. One is that a government led by the Christian Democrats' Angela Merkel is not as absolutely certain as it appeared a few weeks ago. The other is that the winners of the election will inherit a better economic outlook than they would recently have expected.

A number of things have come together. German companies have been very successful in holding down their costs, partly by exporting jobs to Eastern Europe but also by negotiating pay freezes and changes in work practices. The country has also benefited from Italy's difficulty in holding down its pay rates, improving its relative competitiveness.

The result is that Germany has made up much of the cost disadvantage it suffered after adopting the euro - at what, with hindsight, seems to have been too high a rate. This success is one of the forces behind the rise in German share prices in recent months.

Another factor is that exporters seem to have pulled off the trick they have performed so many times before: pushing their products up-market. You may recall that every time the mark had another revaluation, there would be protests from German companies, and every time they would improve their products or their service sufficiently to justify the higher costs. Anecdotally, this is what has been happening again.

It also appears that the rise in oil prices may be harming Germany less than other eurozone economies, as the country is a leader in energy efficiency and in developing alternative sources. Inevitably, any rise in energy prices depresses demand for non-energy products. Extra money spent on fuel is money not available to spend on something else. But every energy-importing nation is pretty much in the same boat. What higher fuel prices do in Germany is to play to the country's commercial advantages.

There has been no sudden leap forward, rather a string of incremental advances. Self-evidently, new and expensive technologies that are not worth investing in with oil at $25 a barrel become worth buying at $50 plus. Germany's capital goods producers have duly seen a sharp rise in global demand.

Then there are the Hartz labour market reforms. These had the effect of raising the headline unemployment rate, and their unpopularity was one of the reasons why Chancellor Schröder was under such pressure to go for an early election. But, anecdotally again, they seem to have helped change the tone of the labour market - frankly, by making job-seekers less picky. This has helped improve business confidence by bringing a subtle change to the balance in pay negotiations.

Finally, there has been strong demand in the main export markets. Germany's two largest non-eurozone markets, the UK and US, have continued to grow reasonably swiftly, though the UK is now slowing. (Good demand from Britain helped rescue the European profitability of Nestlé, the Swiss food group, last week.) Arguably, Germany is overdependent on exports to maintain economic growth. Nevertheless, when world trade does well, Germany does well.

Naturally there are shadows. One obvious one is whether export demand will continue to be strong. Another is the tight German fiscal position, which will make it very hard for the incoming government to do much on the tax front. (Note, though, that Mrs Merkel has brought an advocate of a flat-rate tax on to her economics team. Flat taxes have swept across Eastern Europe.)

Nor can Germany expect any significant cut in eurozone interest rates. In fact, the next move will probably be up, although not until well into next year, and only if the general growth outlook improves. The European Central Bank will publish its next forecasts for the eurozone economy on 1 September, so we will get more of a feeling for the interest-rate outlook then.

Do not expect any new German boom. That is not realistic. It will continue to grow slowly. The fundamental problem remains that Germany needs further economic reforms, but that in the short run these reforms will reduce demand rather than increase it.

But what one can say is that the country, and its people, are starting to catch a sight of the benefits of their decade of relative austerity. The austerity will continue for a while yet. But whoever takes over the government next month will have a slightly stronger hand than seemed likely even six months ago. Now it is France, and of course Italy, rising to the top of the "worry about" league.

The transatlantic divide is widest over the amount of holiday that people take. Europe is slowly grinding back to work after the long, or at least longish, summer break. The US has its brief blink of vacation before rushing back to the job. Two weeks a year is the standard entitlement, but many people don't even take it all.

'Twas not always thus. In the 1960s, Europeans worked longer annual hours than Americans. Now the European working year is anything up to 30 per cent shorter, leading to debates about the impact of European levels of taxation, and whether Americans would - were they able to - like to trade some of their income for more leisure.

Overall tax take and the number of hours worked do seem to be related, which is unsurprising. Have higher taxes and people will choose to take a greater proportion of their wage in untaxed leisure rather than taxed money. High-tax France works fewer hours than low-tax America, with middle-tax Britain in between.

More surprising is some evidence that Americans would be happier taking longer holidays, even at the cost of lower take-home pay, but for cultural and other reasons don't feel able to do so.

A new Harris poll underlines how little time US adults take off work. One-third will have no summer vacation at all. The largest single type of holiday is visiting friends and family, and the proportion going abroad so small that Harris did not bother to ask the question. The work ethic seems to continue on holiday: the largest single item that people said they would pay more for in a hotel was business services, including high-speed internet access. And for 1 per cent the "vacation" was going to a business convention or trade conference.

Mind you, one might look at that last statistic the other way round. For 10 days I was riding (not particularly competently) across a Montana range to discover that the people with us were refugees from a real estate conference at a resort just down the valley. If you do have to go to a real estate conference, there is something to be said for combining the workshops on new building regulations with a cook-out 7,000 feet up in the Rocky Mountains.