Jean-Pierre Villetelle

Estimating Potential Output with a Production Function for France, Germany and Italy

This paper discusses the supply conditions for economic growth in terms of potential GDP estimated by the production function approach for France, Germany and Italy for the 1986:2003 period. The aim of this study is twofold: first, we keep a consistent framework as regards national account institutional sectors. Second, after defining Total Factor Productivity (TFP) in the so-called productive sector from the Solow residual, we specify it in a general framework for the three countries as a function of a time trend corrected for the effects of the age of equipments and the capacity utilisation rate (CUR). This framework allows to distinguish temporal considerations: in the medium to long term, the variables that could generate short to medium term fluctuations in potential output growth are assumed to be stable at a structural level. This implies modifications of the functional specifications related to the time horizon.

Convergence and Divergence in External Trade

The evolution of external trade over the last few years has exhibited quite different patterns across Germany, France and Italy. From that point of view, it certainly constitutes one source of asymmetry between the three countries. Over the 2000-2005 period the average annual growth rate of exports of goods and services in value was 5.5 % in Germany, but only 3.0 % in Italy and 1.5 % in France. In real terms and over the same period, exports grew by 5.6 % annually in Germany, 1.5 % in France and remained constant in Italy. After German reunification and weak export performance in Germany in the early 1990s, the 2nd part of the 1990s witnessed a recovery of German trade performance, which accelerated at the beginning of the 2000s, a movement going beyond a simple catching-up process. Conversely, Italian trade performance, in strong progression in the first half of the 1990s, has eroded since the mid-1990s and stabilised only recently. The recent good external performance of Germany has been partly offset by weak domestic demand (see Part 4 on demand side), resulting in GDP growth below the other two countries.2 Nevertheless, it may have structural implications. The question is therefore whether Germany is returning to a development pattern which is mainly export-driven, as already observed in the 1980s, or whether we are observing a different international division of industrial activities among the three countries on top of changes in the distribution between the euro area and the rest of the world in terms of relocation of stages of production. Several explanations have been put forward to explain the most recent German performance and, in contrast, the mediocre external results experienced by France and Italy. A preliminary remark is, however, necessary: one