Have Europe's Great Powers Given Up?

00:48:05
https://www.youtube.com/watch?v=Q093qpGLRkE

Resumen

TLDRThe video explores the economic challenges faced by Germany, Italy, and France, highlighting their struggles with stagnation, aging populations, and declining industrial dominance. Germany is rethinking its industrial strategy due to rising energy costs and a shortage of skilled labor. Italy has been experiencing long-term stagnation, high national debt, and a shrinking workforce, with many young skilled workers leaving the country. France is grappling with the need to balance strong worker protections with economic competitiveness. The video emphasizes the systemic issues affecting these economies and the necessity for adaptation in a changing global landscape.

Para llevar

  • 🇩🇪 Germany is rethinking its industrial strategy due to rising energy costs.
  • 🇮🇹 Italy faces long-term stagnation and a shrinking workforce.
  • 🇫🇷 France struggles to balance worker protections with competitiveness.
  • 📉 All three economies are experiencing stagnation and declining productivity.
  • 🌍 Globalization has increased competition for these economies.
  • ⚖️ Comparative advantage highlights vulnerabilities in global trade.
  • 💼 The black market significantly impacts Italy's economy.
  • 🔧 Germany's industrial reputation is at risk from rising costs.
  • 📉 Offshoring could undermine Germany's economic system.
  • 🔮 The future of these economies depends on adaptation and reform.

Cronología

  • 00:00:00 - 00:05:00

    Europe has historically been a stable economic pillar, but recent signs of stagnation are emerging. Major economies like Germany, France, and Italy are facing challenges such as aging populations, stalled growth, and declining productivity, leading to a re-evaluation of their economic models.

  • 00:05:00 - 00:10:00

    Germany, once a leader in industrial manufacturing, is now facing pressures that threaten its economic dominance. Despite being the third largest economy globally, challenges such as high labor costs, energy crises, and an aging workforce are prompting a reconsideration of its industrial strategy.

  • 00:10:00 - 00:15:00

    The concept of comparative advantage explains how countries like China and Singapore have specialized in manufacturing and services, respectively. Germany's high-quality manufacturing relies on skilled labor and advanced technology, but rising energy costs and competition from countries like China are threatening its position.

  • 00:15:00 - 00:20:00

    Germany's manufacturing sector has thrived on high-end products and skilled labor, but the aging workforce and rising energy costs are creating significant challenges. The country is struggling to attract skilled migrants, leading to a shortage of workers in key industries.

  • 00:20:00 - 00:25:00

    Italy's economy has been stagnant for over a decade, grappling with high national debt, an aging population, and regional inequalities. The country faces unique challenges, including a large informal economy and a lack of competitiveness in global markets, which have contributed to persistent poverty.

  • 00:25:00 - 00:30:00

    Italy's historical economic cycles of growth and stagnation reveal a pattern of recovery followed by decline. The country has struggled to maintain sustainable growth due to high debt levels, tax avoidance, and a lack of investment in technology and innovation.

  • 00:30:00 - 00:35:00

    France's economic model, characterized by strong worker protections and public services, is under pressure from global competition. The country faces challenges in balancing productivity with quality of life, leading to potential stagnation if necessary reforms are not implemented.

  • 00:35:00 - 00:40:00

    France's historical approach to industrialization has resulted in a unique economy that values workers, but this has also led to inefficiencies. The government has intervened to create state enterprises, but this has contributed to inflation and reduced competitiveness in the global market.

  • 00:40:00 - 00:48:05

    The combined struggles of Germany, Italy, and France highlight systemic issues within the EU economy. As these advanced economies face new realities, the question remains: which countries will adapt to change and which will continue to stagnate?

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Mapa mental

Vídeo de preguntas y respuestas

  • What are the main economic challenges facing Germany?

    Germany is facing rising energy costs, an aging workforce, and a shortage of skilled labor, leading to a rethinking of its industrial strategy.

  • How has Italy's economy been performing?

    Italy has been experiencing long-term stagnation, high national debt, and a shrinking workforce, with many young skilled workers leaving the country.

  • What is France's economic dilemma?

    France is struggling to balance strong worker protections and public services with the need for economic competitiveness in a global market.

  • What common issues do these three economies share?

    All three economies are dealing with aging populations, declining productivity, and the need to adapt to new economic realities.

  • How has globalization affected these European economies?

    Globalization has led to increased competition, forcing these economies to rethink their industrial strategies and adapt to changing market conditions.

  • What is the significance of comparative advantage in this context?

    Comparative advantage explains how countries can benefit from specializing in what they do best, but it also highlights vulnerabilities when global dynamics shift.

  • What role does the black market play in Italy's economy?

    The black market in Italy has been significant, accounting for a large portion of economic output, which complicates tax revenues and economic stability.

  • How does Germany's industrial reputation impact its economy?

    Germany's strong reputation for high-quality manufacturing allows it to charge a premium for its goods, but this is threatened by rising costs and competition.

  • What are the potential consequences of Germany offshoring its manufacturing?

    Offshoring could undermine Germany's egalitarian economic system and lead to job losses, as well as a decline in the quality associated with German-made products.

  • What is the future outlook for these European economies?

    The future is uncertain, with the need for adaptation and reform to address systemic issues and remain competitive in a changing global economy.

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  • 00:00:00
    For centuries, Europe was seen as a pillar of stability in the global economy,
  • 00:00:03
    home to some of the richest, most advanced nations in the world.
  • 00:00:06
    Germany's industrial strength, France's social model and Italy's cultural and economic legacy
  • 00:00:10
    have shaped not just the continent, but global economic policy.
  • 00:00:13
    But that stability and the prosperity that came with it is clearly starting to crack.
  • 00:00:16
    Growth has stalled, populations are aging, productivity is lagging and investment is drying up.
  • 00:00:21
    Once considered models to follow, these stagnating powers are becoming cautionary tales to avoid.
  • 00:00:26
    Germany is rethinking its industrial strategy, Italy is grappling with long-term structural
  • 00:00:30
    stagnation and France is struggling to balance social protections with economic competitiveness.
  • 00:00:34
    We have covered these stories individually in the past, but together they reveal a deeper story,
  • 00:00:38
    one of the continent facing problems that's been decades in the making and of three major
  • 00:00:42
    economies trying and often failing to reinvent themselves. This is Europe's economic reality,
  • 00:00:47
    stagnation, fragility and a slow erosion of the power it once took for granted.
  • 00:00:51
    Germany is as famous today for its incredible engineering prowess as it is for big jugs of
  • 00:00:56
    beer, sausages and checkered history. Germany has recently become the third largest economy in the
  • 00:01:01
    world behind China and the USA after overtaking a stagnant Japan. It's also clearly the most
  • 00:01:06
    powerful and influential economy within the European Union and a large driver of that economic
  • 00:01:10
    success has been the country's ability to produce extremely high-end manufactured goods.
  • 00:01:14
    Of course there are the country's cars, but that only makes up a surprisingly small share
  • 00:01:18
    of the country's total manufacturing output and an even smaller share of its exports.
  • 00:01:22
    Germany really does live up to its reputation because it has become a world leader in a vast
  • 00:01:26
    array of different engineered goods from aircraft and medical devices to centrifuges used in nuclear
  • 00:01:31
    energy. Basically if there's something that really needs to be made right there's probably
  • 00:01:35
    a German factory making it. Or at least there was. A long list of internal and external challenges
  • 00:01:41
    have put significant pressure on the German industry to the point where a lot of economists
  • 00:01:44
    and commentators are predicting that the country could lose its industrial dominance entirely.
  • 00:01:48
    That is a big claim that would represent a significant shift in national, regional and
  • 00:01:53
    frankly global trade. But even if it does come true it may not be as bad as it sounds for the
  • 00:01:58
    world's third largest economy and to find out why we must as always answer a few important
  • 00:02:02
    questions. So why are economists predicting the end of Germany's industrial dominance?
  • 00:02:08
    Why is this happening now? And finally why could this actually be a good thing for Germany?
  • 00:02:14
    As the world has opened up to more global cooperation where goods and services are traded
  • 00:02:17
    more freely between countries across the world there's been a general shift towards countries
  • 00:02:21
    doing what they do best. A country like China has an enormous and relatively industrially
  • 00:02:25
    capable population, a decent global position for trade and a political system that has been very
  • 00:02:30
    accommodating a rapid expansion so it has become a global centre of low-cost manufacturing.
  • 00:02:35
    Singapore has a tiny land mass and a relatively small population but it has developed a very
  • 00:02:39
    robust political system and it's right in the middle of the world's busiest trade route so
  • 00:02:43
    it has become a highly competitive business and refuelling destination. These economic
  • 00:02:47
    features lead to something called comparative advantage. No matter how hard Singapore tries
  • 00:02:52
    it just doesn't have enough land mass or manpower to compete with the industrial might of China.
  • 00:02:56
    Likewise without radical changes in the way the country operates no international businesses
  • 00:03:01
    will move their operations to China because it represents significant political risk.
  • 00:03:05
    So this means that China has a comparative advantage in producing basic manufactured goods
  • 00:03:09
    and Singapore has a comparative advantage in producing financial services and operating
  • 00:03:13
    as a glorified servo for the world. So long as these countries remain more or less cooperative
  • 00:03:18
    with one another these strengths and weaknesses are fine because Singapore can buy cheap consumer
  • 00:03:22
    goods from China and Chinese shipping companies can use Singapore as a gas stop or a place to
  • 00:03:27
    manage international finances. On an individual level in our own economies we have grown wealthier
  • 00:03:32
    by specialising in roles that we do really well and letting other people do the same and
  • 00:03:36
    then just trading with one another. Most people don't know how to do surgery on themselves
  • 00:03:40
    but that's okay because they can pay doctors to do it with the money they've made from their
  • 00:03:44
    own specialised job. Free trade and taking advantage of comparative advantage lets entire
  • 00:03:48
    national economies effectively do the same thing which theoretically should be great.
  • 00:03:53
    Highly specialised roles in modern economies are one of the biggest reasons that the world is so
  • 00:03:57
    wealthy today but there can be issues at a national scale. On a personal level within economies
  • 00:04:03
    especially advanced and politically stable economies there are authorities and institutions
  • 00:04:08
    in place to settle disagreements. On a global level there really isn't the same thing.
  • 00:04:12
    There are mediators like the World Trade Organization and the UN but if a country decides
  • 00:04:17
    to cut another country off from trade then short of declaring war on them there really isn't much
  • 00:04:20
    that can be done. This whole issue with holding a valuable place in global trade while not being
  • 00:04:25
    overly reliant on it is especially important in Germany because of its unique advantages.
  • 00:04:30
    Germany has a highly skilled workforce especially in engineering and manufacturing disciplines.
  • 00:04:35
    A decent geographic position within Europe and has over the past few decades had access
  • 00:04:39
    to very cheap energy. This gave it a strong comparative advantage in producing high-end
  • 00:04:44
    industrial goods. Normally when people think of gaining an economic advantage in manufacturing
  • 00:04:48
    they think first to lower the cost of the labour force so factories have to pay their workers
  • 00:04:52
    less so they can make things cheaper overall. This is why places like China produce so much of
  • 00:04:57
    the world's stuff but as wages in China have increased global manufacturers are looking for
  • 00:05:02
    cheaper alternatives in countries like India. Now Germany is home to some of the highest paid
  • 00:05:06
    workers in the world so on the surface it doesn't make sense how it remained competitive with cheaper
  • 00:05:11
    global centres but depending on the type of manufacturing labour costs are not as important
  • 00:05:16
    as one might expect. Most German industry relies heavily on either highly advanced machines and
  • 00:05:21
    tools for siswith production or they are producing something so valuable the difference between
  • 00:05:26
    paying someone $2 an hour to make it versus $50 an hour effectively makes no difference to the
  • 00:05:30
    end price. German car factories use a lot of automated machines with just a few highly skilled
  • 00:05:35
    workers using those machines to make 100 times as many cars per worker as they could with basic
  • 00:05:40
    hand tools. At that scale paying highly skilled German workers more has been competitive because
  • 00:05:44
    the advantage came from having the machines and the experience to use them rather than having the
  • 00:05:48
    workers that would work for the lowest possible price. If this is compared to a type of products
  • 00:05:52
    that countries like China typically produce they tend to be put together with more basic tools and
  • 00:05:57
    a lot of hands on assembly. There are of course German cars that are also made by hand but they
  • 00:06:01
    tend to be extremely valuable where the end consumer is willing to pay a premium to have a car that
  • 00:06:06
    was hand built in Germany and that right there has actually been one of the biggest factors
  • 00:06:10
    contributing to Germany's comparative advantage in manufacturing and that's its global reputation
  • 00:06:15
    An even clearer example of this would be products made by a company like Siemens.
  • 00:06:19
    Okay yes terrible name to put in a YouTube video but still one of the country's largest
  • 00:06:22
    manufacturers. They produce things like nuclear centrifuges and everything that goes along with
  • 00:06:27
    them. These machines cost hundreds of millions of dollars to produce and install and it's the
  • 00:06:31
    type of thing where not only would the reputation of German engineering go a long way it would be
  • 00:06:36
    the kind of thing that only Germany and a handful of other countries around the world would be allowed
  • 00:06:40
    to produce without causing geopolitical tensions. The labor costs and machines like this are barely
  • 00:06:45
    a rounding error so the high cost of German workers isn't really a problem. Other input costs
  • 00:06:50
    especially energy are more important for the highly mechanized industry taking place in Germany.
  • 00:06:55
    Now in the past this has actually been one of the country's biggest strengths since the mid 1990s
  • 00:06:59
    it's been able to pump very cheap natural gas directly from Russia and Norway which have some
  • 00:07:03
    of the largest reserves of this energy source in the world. Now clearly there have been troubles
  • 00:07:07
    with this in the last two years and higher energy costs are having a bigger impact on German
  • 00:07:11
    manufacturing than higher wages ever really could and that's only the first thing pushing the shift
  • 00:07:16
    away from Germany. The energy crisis hit a lot of German businesses particularly hard because the
  • 00:07:21
    country is still so dependent on cheap fossil fuels to power factories that use an incredible
  • 00:07:26
    amount of energy but German manufacturing has been in decline well before that already and this
  • 00:07:30
    trend too can be explained by carefully exploring what contributed to the country's comparative
  • 00:07:35
    advantage to begin with. It's incredibly talented and highly skilled workforce is aging and thanks
  • 00:07:39
    to generous retirement benefits that are a key feature of the country's economic system people
  • 00:07:43
    are leaving the workforce earlier than they might need to. Of course on an individual level this is
  • 00:07:48
    fantastic people shouldn't sacrifice the quality of their life for the sake of economic metrics
  • 00:07:52
    but businesses within Germany are struggling with this. Now normally advanced economies can
  • 00:07:57
    compensate for this by bringing in skilled migrants from countries with lower standards of living
  • 00:08:01
    but Germany has struggled with this too. Skilled workers just aren't as drawn to Germany as they
  • 00:08:05
    are to places like Australia, Canada, the UK and especially the USA. Now part of this is just
  • 00:08:11
    the language. English is a far more widely spoken first and second language than Germany's but
  • 00:08:16
    there are other factors as well. The high training standards that have contributed to Germany's strong
  • 00:08:20
    manufacturing reputation means that even workers that want to move into low skilled roles often
  • 00:08:24
    have to sort through bureaucratic training certifications that can take years before they
  • 00:08:28
    start working. Whatever the root cause the results are the same. Germany is desperately short on
  • 00:08:33
    manpower with over 750,000 job vacancies in some of the country's core industries going unfilled.
  • 00:08:39
    Daining a comparative advantage for the quality of its manufacturing has also meant that it was
  • 00:08:43
    only a matter of time until other countries caught up. Today Chinese manufacturing is not
  • 00:08:48
    merely as far behind German manufacturing as it once was. China is building cars, batteries,
  • 00:08:53
    aircraft and advanced machinery that is genuinely rivaling the stuff coming out of Germany. Of course
  • 00:08:57
    China still produces a lot of garbage products which is why it still has bad reputation for
  • 00:09:01
    producing subpar goods but it has demonstrated that it can genuinely compete in the advanced
  • 00:09:06
    manufacturing space as well. Today there are more BMWs produced in China than there are produced
  • 00:09:12
    in Germany and despite that metric perhaps being a bit of a national embarrassment it ironically
  • 00:09:16
    enough highlights how one of Germany's greatest opportunities is being hidden behind this seemingly
  • 00:09:21
    bad news. German companies can charge a premium over companies from other countries for their
  • 00:09:26
    manufactured goods because consumers perceive German made goods as a high quality alternative.
  • 00:09:30
    Whether that's true well just I've seen anyone that's tried to maintain a Volkswagen
  • 00:09:34
    but reality doesn't matter. What also doesn't matter is where the goods are actually made.
  • 00:09:39
    People just see a German company and assume the goods were made in Germany. If the predictions
  • 00:09:44
    of German industrial decline are correct then what the country could do is leverage its advantage
  • 00:09:48
    of having a fantastic reputation for producing goods that are worth paying a premium for without
  • 00:09:53
    any of the disadvantages of actually having to produce them in Germany. Germany scaling back
  • 00:09:58
    on its manufacturing is in many ways kind of overdue. Compared to other advanced economies
  • 00:10:02
    even those that have their own large domestic automakers and high end manufacturers Germany
  • 00:10:06
    has about 50 percent more of its people working in industrial jobs. These jobs can be made more
  • 00:10:11
    productive by giving people working them more advanced tools and technology to leverage how
  • 00:10:15
    much work they are doing but there is an eventual limit. A worker building a car by hand might take
  • 00:10:20
    a month to put one unit together whereas a small team overseeing large industrial presses and robotic
  • 00:10:25
    assembly arms could produce a thousand a day and since they produce more there's more room to pay
  • 00:10:30
    them more which is why salaries in advanced economies are higher but eventually it becomes
  • 00:10:35
    better for these workers to just move into service roles where instead of overseeing the
  • 00:10:38
    manufacturing themselves they spend their time setting up infrastructure and training teams
  • 00:10:42
    in other countries to do it for them. The USA is the largest economy in the world today in large
  • 00:10:47
    part because it's home to companies that do most of their operations overseas but still bring in the
  • 00:10:52
    wealth generated from these activities back on shore. Germany has for the last three decades
  • 00:10:56
    decided to do stuff more in-house but the shift away from domestic manufacturing is not so much
  • 00:11:02
    a failure of its industries as it is taking the next logical step for their advanced economy
  • 00:11:07
    but that doesn't mean that there won't be major problems. If this shift away from local
  • 00:11:11
    manufacturing does continue it would represent a major shift in a major economy and any change
  • 00:11:16
    that big is going to have consequences. Workers across Germany are already protesting government
  • 00:11:22
    changes to energy subsidies and tax rules and while this is mostly directed towards agriculture
  • 00:11:26
    and transport for now it's a symptom of a shift in the way that business has been done in the country.
  • 00:11:31
    Germany has historically had very harmonious relations between workers and companies but
  • 00:11:35
    that's because German workers are represented well by very powerful unions and the economy
  • 00:11:40
    itself is managed in such a way to protect workers rights. This works while German companies
  • 00:11:44
    need German workers but if they can offshore a bulk of their operations then it could undermine
  • 00:11:49
    the highly egalitarian economic system that modern Germany has been built on. Even from the
  • 00:11:53
    perspective of a purely cold-hearted macroeconomist only concerned with headline economic figures
  • 00:11:58
    the shift away from domestic industry still could present risks. The work force could move into more
  • 00:12:03
    productive and value-adding service roles that make the country even wealthier but the move from
  • 00:12:08
    a role where a worker is directly installing engines into a car to something like a role
  • 00:12:11
    where they're training a foreign team to install an engine takes a different set of skills. There's
  • 00:12:15
    also no guarantee that this shift would directly lead to better jobs for Germans instead of just
  • 00:12:20
    less jobs for Germans. Installing engines may not be as valuable as training a new team to
  • 00:12:25
    install engines but it does provide something to do so long as there are cars to be made.
  • 00:12:29
    Once a foreign team has been trained on how to do a German's job they don't really need the German
  • 00:12:33
    worker anymore. Beyond that the reputation of a country is a lot like the reputation of a company,
  • 00:12:38
    individual or anything really. If German companies don't maintain their standards while setting up
  • 00:12:43
    international operations they will very quickly lose the large group of consumers who are willing
  • 00:12:47
    to pay a premium for a good that is at least theoretically German. Germany's slowdown has
  • 00:12:52
    shocked many because for decades it was the economic anchor of the EU but while Germany's
  • 00:12:57
    problems are relatively new Italy has been struggling with stagnation for far longer.
  • 00:13:01
    From weak growth to persistent inequality in a shrinking workforce Italy's economy reflects
  • 00:13:05
    the deeper challenges facing parts of Europe that never fully recovered from past crises.
  • 00:13:10
    Italy is one of the most fascinating economies in the world because it is facing most if not all
  • 00:13:15
    the major economic challenges that other countries around the world are experiencing but
  • 00:13:19
    it is somehow dealing with them all at the same time. Italy has some of the highest levels of
  • 00:13:23
    national debt in the world, it has an aging population, an exodus of what few young skilled
  • 00:13:28
    workers it still has, it's also dealing with regional inequality, sluggish growth,
  • 00:13:31
    unreliable tax revenues and it's once world leading industries have been outcompeted across
  • 00:13:36
    the globe. Italy also serves as an amazing case study as a country that has dealt with
  • 00:13:40
    problems like globalization, French shoring and restricted trade which is causing a lot of concern
  • 00:13:45
    between countries such as the USA, Russia, China, the Gulf States and of course Europe itself.
  • 00:13:49
    A lot of these unknowns are something that Italy has been dealing with for at least the past two
  • 00:13:53
    decades and that's part of the reason why the country has been an economy in decline for 15 years
  • 00:13:58
    now which sounds bad but it's strangely something that on one hand the economy is taking in its
  • 00:14:03
    stride and on the other hand has made it home to some of the highest rates of poverty in the
  • 00:14:07
    European Union, a collection of countries that people normally associate with relative wealth
  • 00:14:12
    at least compared to most of the world. Even if the similarities are not perfect there is still
  • 00:14:17
    a lot that economists can learn from these challenges. Beyond just being a great insight
  • 00:14:20
    into what the future of our own economies may look like, Italy just has some truly fascinating
  • 00:14:24
    economic features that are worth exploring individually even if for no other reason than
  • 00:14:28
    they're just really interesting. Italy together with Germany and France makes up over half of
  • 00:14:33
    the total economic output of the European Union, a union which collectively forms the second largest
  • 00:14:37
    operating economy in the world. Despite this already quite impressive scale Italy's economy
  • 00:14:42
    might really be much bigger than its government would like to admit. In recent years the black
  • 00:14:47
    market has been responsible for as much as a quarter of Italy's total economic output and
  • 00:14:51
    while the logical assumption here would be to think about the godfather the reality is even
  • 00:14:56
    stranger and more interesting. So to understand all that Italy's economy can teach us we must
  • 00:15:01
    as always answer a few simple questions. How did one of the fastest growing advanced economies
  • 00:15:06
    in the world just stop growing almost instantly not once not twice but three times? What has the
  • 00:15:12
    country done right and wrong when dealing with its long list of challenges? Who was really to blame
  • 00:15:16
    for the country's economic stagnation? How has Italy been impacted by a unique form of destructive
  • 00:15:21
    inequality? And finally is the country's economic model just incompatible with the new global
  • 00:15:26
    environment it finds itself in. Italy as an economy peaked in 2008. Since then it's been mostly
  • 00:15:32
    stagnant with an overall slow decline losing about 20% of its nominal economic output over the past
  • 00:15:37
    decade. Looking further back in history reveals however that this is not really anything new for
  • 00:15:42
    Italy and its economy today is the continuation of a trend that's been repeating itself in the
  • 00:15:46
    country since the end of the Second World War. The country has had decades of rapid growth broken
  • 00:15:51
    up by decades of almost complete stagnation and in many cases negative growth before it gets right
  • 00:15:56
    back to growing again. Economic output is just one measurement of the health of an economy but
  • 00:16:00
    even a chart as basic as this tells us a really interesting story about how Italy got into the
  • 00:16:05
    situation it finds itself in today. Italy was historically the most powerful industrial economy
  • 00:16:11
    in all of Europe before it was overtaken by the Netherlands and England as they became global
  • 00:16:15
    colonial powers. Even after that and despite industrializing slower than other major European
  • 00:16:20
    powers like France and Germany Italy in its various forms has remained within the top five
  • 00:16:24
    European economies for effectively thousands of years. Its strong geography protected by mountains
  • 00:16:29
    in the north but with easy access to the Mediterranean for fishing and trade in every other
  • 00:16:33
    direction has meant it naturally became a great place for civilizations to flourish and that's
  • 00:16:37
    as true for its economy today as it was in 500 BC. The economy of Italy as it exists today really
  • 00:16:43
    got started during the aftermath of the Second World War. The country was rebuilt in many cases
  • 00:16:47
    from the literal rubble as wartime industries were converted back into domestic industries
  • 00:16:51
    with assistance from and under the watchful eye of the USA. The USA through the Marshall plan was
  • 00:16:56
    investing billions of dollars into the reconstruction of Western Europe and this was back in the 1950s
  • 00:17:01
    when billions of dollars actually mattered to government budgets. The motivation for this
  • 00:17:05
    spending was partially to build out a new customer base that could buy all of the goods
  • 00:17:08
    that the US industrial sector could produce but it was mostly to redevelop strong dependent allies
  • 00:17:13
    to stop the spread of communism from the Soviet Union. The USA also carried out similar rebuilding
  • 00:17:18
    efforts in Korea and Japan to stop the spread of communist influence coming from the People's
  • 00:17:22
    Republic of China. It wasn't starting from a great position but these rebuilding efforts
  • 00:17:26
    did lead to a long sustained period of growth. However under the surface there were still
  • 00:17:30
    political tensions causing a range of very serious domestic issues like the 1980 bombing
  • 00:17:35
    of the Bologna railway station which still to this day remains one of the deadliest attacks
  • 00:17:39
    ever carried out in Europe. These political tensions were in many ways the cause of and
  • 00:17:43
    was simultaneously accelerated by other economic problems in the country. Just by economic output
  • 00:17:48
    figures it looked like Italy was doing very well but it's relatively easy to grow an economy by
  • 00:17:53
    just taking on a lot of debt to fund major development projects especially when the
  • 00:17:57
    major power in the world was more than willing to loan money to stop the spread of communism.
  • 00:18:01
    The challenge is taking that development and using it to sustainably produce value for the
  • 00:18:05
    domestic economy and export markets which Italy was struggling to do. Once construction and
  • 00:18:10
    rebuilding efforts had slowed down or couldn't get any further funding Italy's economy fell
  • 00:18:14
    into its first modern decade of stagnation although this first one really only lasted about six years.
  • 00:18:19
    During this time the Italian government simultaneously had to deal with mass unemployment,
  • 00:18:23
    a large debt burden, high inflation and external challenges like rising energy costs for the fossil
  • 00:18:28
    fuels its young industries had become heavily dependent on. Now despite not being good things
  • 00:18:32
    to live through economic slowdowns do serve as a good opportunity for a country to change policies
  • 00:18:37
    and cut down on industries that caused the problems in the first place. During this first
  • 00:18:41
    stagnation that's exactly what happened. The country restructured away from just building
  • 00:18:45
    infrastructure and turned its attention more towards using that infrastructure to create
  • 00:18:49
    things that it could sell all around the world. It also enacted reforms like giving independence
  • 00:18:53
    to its central bank which was then allowed to raise interest rates to fight off inflation.
  • 00:18:57
    At the same time the laws around index wages were relaxed. Wage indexation is not very common
  • 00:19:02
    today mainly because of the market problems it causes but it's a rule that means that wages
  • 00:19:06
    keep up with inflation no matter what even if it's not what was agreed to in an employment
  • 00:19:10
    contract. On the surface this sounds fair. If inflation is high it's perhaps not right that
  • 00:19:14
    workers effectively get paid less because they agreed to a salary when that same amount of money
  • 00:19:19
    could buy a lot more. The problem though is that automatic wage indexation accelerates one of the
  • 00:19:24
    most dangerous processes in economics, a wage price spiral. If inflation is high workers will
  • 00:19:29
    demand higher wages to keep up with the rising cost of goods and services that they need to buy.
  • 00:19:33
    If businesses agree to pay these higher wages they will have to increase their prices to maintain
  • 00:19:38
    profitability and higher prices cause more inflation all over again. The one thing that
  • 00:19:43
    saves a lot of economies from this is the lag between inflation happening and people demanding
  • 00:19:47
    higher wages. If inflation is low there are a lot of people that won't even know that their wages
  • 00:19:52
    aren't keeping up which is terrible for them but does act as a moderating force in the economy.
  • 00:19:57
    If wages are automatically kept up with inflation like they were in Italy at this time
  • 00:20:00
    then it just makes this process known as the wage price spiral much faster and much harder
  • 00:20:05
    to correct. The stagnation was undoubtedly painful for Italy but by forcing some necessary changes
  • 00:20:10
    it came back as one of the fastest growing economies not only in the world but in history.
  • 00:20:15
    In just seven years between 1985 and 1992 Italy tripled its economic output in an export led
  • 00:20:21
    industrial boom. The country has a major advantage in this regard that's hard to tell from looking
  • 00:20:26
    at economic figures alone. International customers pay a premium for Italian made goods
  • 00:20:31
    because the country had and still has a strong reputation for high quality craftsmanship
  • 00:20:35
    and skill in producing everything from fast cars to luxury handbags and even things like olive oil.
  • 00:20:40
    If an exported good has a made in Italy logo on it the price of that good can be higher than a
  • 00:20:44
    competitor good from most other countries in the world and a lot of consumers would still be willing
  • 00:20:48
    to pay a premium for it. Some countries have to go to extreme measures to undercut a long
  • 00:20:53
    list of international rivals at every possible opportunity to supply the cheapest and therefore
  • 00:20:58
    most competitive goods to the global market. The fact that Italy can add as much value if
  • 00:21:02
    not more by simply producing stuff within its borders is a huge advantage that is only really
  • 00:21:07
    enjoyed by a handful of other countries around the world. These good times unfortunately didn't
  • 00:21:11
    last forever because the rapid period of growth yet again led to underlying problems in the Italian
  • 00:21:15
    economy. Debt started to creep back up again as both the government and its people began to borrow
  • 00:21:20
    irresponsibly to bet on even more future growth. The country also had problems with tax avoidance.
  • 00:21:25
    The small industries that formed the backbone of the Italian export miracle were notoriously hard
  • 00:21:29
    attacks and taking advantage of weak government controls and poorly planned loopholes in order
  • 00:21:33
    to pay little to no tax almost became a national pastime. Now overall whether willingly or not
  • 00:21:39
    reducing taxation and government restrictions while increasing spending through debt is a
  • 00:21:43
    classic expansionary economic policy. Even if the government doesn't necessarily mean to do it
  • 00:21:48
    this is probably what the country needed to get out of the rut it found itself in in the 1980s.
  • 00:21:52
    But in order to get into the Eurozone and be allowed to use the European Union's new currency
  • 00:21:57
    Italy was forced to clean up its act. It had to reduce its debt load and do a better job of
  • 00:22:01
    getting its people to pay their taxes. Increasing regulation, reducing debt and raising taxes all
  • 00:22:06
    works to take money out of the economy which even if it was the right thing to do still put the
  • 00:22:11
    brakes on economic growth. For the rest of the 1990s the economy of Italy once again entered
  • 00:22:16
    an almost decade long period of stagnation. Fortunately for the country the adoption of
  • 00:22:20
    the Euro in 1999 created something of a golden opportunity for Italy to start growing again.
  • 00:22:25
    After a brief lull the country in what was becoming a recurring theme more than doubled
  • 00:22:29
    its economic output in less than a decade once again becoming one of the fastest growing
  • 00:22:33
    advanced economies in the world. Entering the Eurozone made it easier to attract foreign
  • 00:22:37
    investment, foreign workers and foreign buyers of its goods. Its trading partners also didn't
  • 00:22:41
    have to worry about foreign exchange risk of the notoriously unstable era. The advantages
  • 00:22:46
    of the Eurozone also coincided with the further general development of Italian manufacturing
  • 00:22:50
    and the rise of industries like tourism. Then of course the country was hit by the GFC and the
  • 00:22:54
    Eurozone crisis and ever since it's fallen into yet another period of stagnation only this time
  • 00:23:00
    instead of lasting less than a decade it's gone on for almost 15 years now. The reason that we
  • 00:23:06
    have spent so long exploring the details of Italy's unique economic histories of booms and plateaus
  • 00:23:11
    is because it raises an obvious question for the nation, can it do it again?
  • 00:23:15
    Obviously no one can predict the future least of all economists but if history repeats itself it
  • 00:23:20
    looks like Italy is overdue to take another step up in this weird staircase of economic output.
  • 00:23:25
    Unfortunately of course it's not that simple and there are a range of new challenges that are
  • 00:23:29
    combining with some of the old historic challenges that are making a trademark Italian turnaround
  • 00:23:33
    unlikely. The first is simply an ageing population. Italy has one of the oldest populations in the
  • 00:23:39
    world and a lot of its workforce is getting close to retirement. This wouldn't be a problem by itself
  • 00:23:44
    except for the fact that it has a low birth rate so young people are not joining the workforce to
  • 00:23:48
    make up for the people leaving the workforce who will ultimately, and unfortunately there's no
  • 00:23:52
    nice way to put this, become a drain on resources. This problem has also been accelerated by the fact
  • 00:23:56
    that Italy has one of the highest rates of young graduates moving to other countries where they
  • 00:24:00
    can earn more money for their skills. Earlier this year we were lucky enough to talk to Professor
  • 00:24:04
    Billery from the University of Bocconi in Italy. As both a very well respected economist and someone
  • 00:24:09
    who has first-hand experience training some of Italy's brightest students he gave us a fantastic
  • 00:24:13
    insight into this problem. Actually Italy is a net sender of graduates rather than a net receiver
  • 00:24:20
    and that's one of the parts that the country is complaining about so we'd love to attract more
  • 00:24:26
    people with a degree rather than let them live to other countries so I think from the country
  • 00:24:33
    perspective it is a problem especially if you are one of the sending countries. However let me say
  • 00:24:41
    two things on this one is that from the individual level perspective having more freedom of movement
  • 00:24:49
    is certainly giving the right incentive to individuals. You want to build a good life you
  • 00:24:55
    have good ideas it's fantastic for the world to let these people move. The second point of view
  • 00:25:04
    is that we have to understand from the competition for talent perspective that countries that are
  • 00:25:10
    losing these individuals maybe because they tend to be over-educated for the level of the economy
  • 00:25:15
    in that country should think seriously about the opportunities that in a specific country or region
  • 00:25:22
    are given to these individuals. Membership in the EU has only heightened this problem because
  • 00:25:27
    Italian students who want to go to work in places like Germany France the Netherlands or even Luxembourg
  • 00:25:32
    don't even need to apply for a visa thanks to the EU's policy of allowing workers to work
  • 00:25:36
    anywhere within the member states. Raising wages could help to stem this exodus of skilled young
  • 00:25:40
    Italians but the country's industries can't afford to compete anymore with their largest
  • 00:25:44
    European rivals because they are simply not as productive. The average size of an Italian business
  • 00:25:50
    is significantly smaller than the average size of a business in other advanced European economies.
  • 00:25:54
    Italy on average has 3.6 workers per company where the average for western Europe is 15 so
  • 00:25:59
    effectively four times as many workers per organisation. In industrialised economies
  • 00:26:04
    size does matter and larger companies are able to produce more specialised and more value added
  • 00:26:08
    items. In most highly advanced industries the marginal advantage of adding an additional worker
  • 00:26:13
    is positive because it lets workers in the business focus on one aspect of production and do it really
  • 00:26:18
    well. Given that automobiles are one of Italy's biggest industries and also probably the first
  • 00:26:22
    thing that people think of when they think of Italian manufacturing it makes for a great example.
  • 00:26:26
    10 companies that each have one employee that makes cars from scratch will produce fewer cars
  • 00:26:30
    in a year than one company that has 10 employees that each focus on one part of putting a car together.
  • 00:26:36
    If one employee just builds the engine they can get really good at doing just that. The company
  • 00:26:40
    with 10 employees can also spend 10 times as much on tools for those workers which even though it
  • 00:26:45
    still works out to be exactly the same amount of cost for each individual employee means that the
  • 00:26:49
    tools can be more specialised. The worker who just makes engines can be given tools that are just
  • 00:26:53
    made for working on engines whereas a worker that has to make the entire car will need to spread out
  • 00:26:57
    their budget for tools over everything that's needed to make the car making them less specialised
  • 00:27:02
    and ultimately less efficient. Now tools to build cars are one thing but something that Italian
  • 00:27:07
    firms have really failed to invest in is technology. Computers and related technologies have massively
  • 00:27:12
    increased how much economic value one worker can produce in a given day. The classic example of
  • 00:27:17
    this is that one accountant with something basic like excel can produce the same amount of financial
  • 00:27:21
    reports as 10 accountants using abacus. Italy's small firms have lagged behind the rest of Europe
  • 00:27:26
    in the adoption of technology and Western Europe itself has lagged behind the USA and a lot of
  • 00:27:31
    economies in Asia. Besides making investments into industries more efficient technology has become a
  • 00:27:36
    massive industry in its own right with the majority of the largest companies in the world being tech
  • 00:27:40
    companies. Italy of course in some ways benefits from these cottage industries because it helps them
  • 00:27:45
    to maintain their reputation as a place where businesses focus on quality over quantity when
  • 00:27:49
    producing luxurious goods but countries like the UK France and Germany achieve the same thing without
  • 00:27:55
    actually making the trade off for size. Mercedes from Germany employs a similar amount of workers
  • 00:28:00
    to feed it in Italy but Mercedes is far more premium and generates far higher export markups
  • 00:28:05
    than economy cars. A large amount of small companies is also harder to tax than a small
  • 00:28:09
    number of large companies which also highlights another problem that the Italian economy has.
  • 00:28:14
    The black market in Italy is exceptionally large for an advanced economy and despite the
  • 00:28:18
    reputation most of that isn't thanks to the mob it's just unofficial businesses operating in
  • 00:28:23
    grey markets to skirt around regulations and avoid tax. In the past as much as 25 percent of the
  • 00:28:29
    nation's economy was made up of black market industries that figure is more like 12 percent
  • 00:28:33
    today which is an improvement but it's still pretty bad and it's not only costing the nation
  • 00:28:38
    potential tax revenues it's also contributing to social problems. Part of the reason the informal
  • 00:28:43
    economy remains so large is that people don't have many other options. Italy is an advanced
  • 00:28:48
    economy but it has some of the highest poverty rates in all of Europe and that is particularly
  • 00:28:52
    severe in the south of the country which is significantly poorer than the north which as
  • 00:28:56
    we've already explored is still struggling itself. Unfortunately today Italy finds itself
  • 00:29:01
    in a position with high unemployment, stagnant economic output, an aging population, uncompetitive
  • 00:29:06
    industries, low tax revenues, high debt and increasing interest payments on that debt
  • 00:29:09
    all while having less control than it did in the past with its own currency. If it raises
  • 00:29:14
    taxes and lowers spending to try and reduce its debt burden it will crush its local industries
  • 00:29:17
    that are already struggling. If it borrows more it risks bankrupting itself and if it does nothing
  • 00:29:22
    the situation is probably only going to get worse. There is the assumption in economics in most
  • 00:29:27
    sciences for that matter that we're moving towards an idealised version of the future
  • 00:29:31
    because for the last two centuries that's exactly what's been happening. The world today is
  • 00:29:36
    thousands of times wealthier than it was at the beginning of the industrial revolution
  • 00:29:39
    but that's been the exception rather than the norm. Italy is just another in a long list of
  • 00:29:44
    advanced economies that are finding it increasingly hard to compete in an increasingly competitive
  • 00:29:48
    global economy and just because we've enjoyed growth for all of living memory doesn't guarantee
  • 00:29:52
    it into the future. While Italy's problems are deeply tied to political instability and industrial
  • 00:29:57
    decline France presents a different case altogether. France's crisis is more philosophical
  • 00:30:02
    it's about how a country balances economic productivity with quality of life. The French
  • 00:30:06
    model built on strong worker protections and public services is starting to crack under global
  • 00:30:10
    economic pressure but its citizens aren't giving up without a fight. Here's why France's economic
  • 00:30:15
    model is reaching a breaking point. France has been one of the most successful economies in history
  • 00:30:20
    but in the last decade alone it has in many ways lost what made it special in the first place
  • 00:30:24
    for a number of unfortunate albeit necessary reasons. France is one of the first countries in
  • 00:30:30
    the world to kick off the industrial revolution but it did it a bit differently from its European
  • 00:30:34
    rivals preferring a slow and steady approach that favoured more small artisanal industries
  • 00:30:39
    over the large factories that were coming to dominate the world. Some of this was by choice
  • 00:30:43
    and some of this was because they lost their most skilled workers years before they realized just
  • 00:30:47
    how important they would be. The better or worse this slower development during a period of rapid
  • 00:30:51
    global wealth creation meant that France built an economy that valued its workers just as much
  • 00:30:55
    as other countries valued the factories that put them to work. This is a historical trend that has
  • 00:31:00
    clearly carried through to the modern day where French workers more so than any others in the
  • 00:31:04
    world are famous for demanding exactly what they want in the most spectacular ways imaginable.
  • 00:31:09
    But this unique past has given the country an equally uncertain future. Today France is between
  • 00:31:14
    a rock and a hard place on one hand it can't afford to keep running its economy like it currently
  • 00:31:19
    due to a variety of unfortunate national and global issues but on the other hand it can't make
  • 00:31:24
    the necessary somewhat radical changes it needs to where else its very active citizens could just
  • 00:31:28
    leave in a bitter case of history repeating itself. The compromise the country is making is
  • 00:31:33
    almost the worst of both worlds. France once famous for balancing a relatively egalitarian
  • 00:31:38
    lifestyle with advanced industry is now home to one of the richest men in the world who made
  • 00:31:42
    his fortune with basic leather bags and trinkets. One man and one industry are obviously not the
  • 00:31:47
    entire story of a national economy but they are a sign of change and by losing its unique
  • 00:31:52
    economic principles the country could find itself in position where it's just a less
  • 00:31:55
    competitive copy of every other advanced western economy. But to understand these challenges and
  • 00:32:00
    difficult choices you must as always answer a few simple questions. Why does France need to
  • 00:32:05
    so radically reshape its economy? Why can't it effectively do it? And finally what will
  • 00:32:10
    happen to the country if it continues to stagnate? The industrial revolution was one of if not the
  • 00:32:16
    most important thing to happen to humanity. Over the course of just a few centuries the
  • 00:32:20
    blink of an eye by historical standards the development of machinery and technology that
  • 00:32:24
    could increase how much stuff a single worker could produce took societies around the world from
  • 00:32:28
    being primarily peasant farmers to rich comfortable consumers. The development of machines and
  • 00:32:33
    technology that could make even more machines and technology which could make even more stuff for
  • 00:32:37
    everybody to enjoy was really what economists call capital development. Before these machines
  • 00:32:41
    economies ran almost exclusively off land and labour the only way to grow an empire was to
  • 00:32:46
    have more land to farm and more people to work on those farms. But the development of capital the
  • 00:32:51
    third factor of production meant that even sprawling global empires would be challenged by whoever
  • 00:32:56
    had the best technology. The people that could develop that capital the capitalists would go on
  • 00:33:00
    to become wealthier than land owning lords and kings could ever dream to be while also king
  • 00:33:04
    off exponential growth of the human population global wealth and it also must be recognised
  • 00:33:08
    utilisation of limited resources. That's the story as it happened for most countries
  • 00:33:13
    but it was a little bit different in France. The industrial revolution was not like flicking a
  • 00:33:18
    switch where one second everyone was peasant farmers and the next they were all working on
  • 00:33:22
    production lines it was a slow gradual transition to basic automation. In France even though the
  • 00:33:27
    country was one of the first to embrace industrialisation that transition was a fair bit slower
  • 00:33:31
    than its other European peers. Historians have a few theories as to specifically why but broadly
  • 00:33:37
    it was all stability and confidence. France in the decades of the outset of the industrial
  • 00:33:42
    revolution was busy having its own revolution and after that it was at the epicentre of a number
  • 00:33:47
    of regional wars which meant that most of its local industries transportation networks and
  • 00:33:51
    even political systems were built around fighting rather than innovating. France also suffered from
  • 00:33:56
    an exodus of skilled workers and lead up to the industrial revolution. These people were mainly
  • 00:34:01
    Protestants fleeing religious persecution but a large share of them were early mechanics and
  • 00:34:05
    engineers skills that would become highly valuable to a country that wanted to build steam engines
  • 00:34:10
    and mechanised factories. Now while these people weren't fleeing the country for better economic
  • 00:34:14
    opportunities at the time this may be one of the first cases of brain drain in history something
  • 00:34:19
    that is still plaguing the nation of France today. The history is fascinating but the economic outcome
  • 00:34:25
    was that while other countries in Europe were starting to form the shape of modern economies
  • 00:34:28
    with large corporations dictating huge industrial empires France's economy remained largely dominated
  • 00:34:33
    by lots of small artisanal industries. The result of this was that while human labour and other
  • 00:34:38
    industrial economies was often thrown into the literal meat grinder of early industry
  • 00:34:42
    France's workers maintained a lot more power over their employers because they were far more
  • 00:34:47
    much smaller companies driving industry. If only one company dominates an industry that's called
  • 00:34:52
    a monopoly and typically in economics this isn't seen as an ideal situation because that company
  • 00:34:57
    can raise its prices and lower standards and there isn't anything that can be done about it
  • 00:35:00
    because there is no other option. The alternatives to a monopoly are a duopoly where two companies
  • 00:35:05
    dominate an industry and oligopoly where only a handful of companies dominate an industry
  • 00:35:09
    all the way down to a perfect competition where almost limitless companies are all competing
  • 00:35:13
    amongst one another. Now typically when assessing the problems with oligopolies or monopolies
  • 00:35:18
    most people even most economists will focus on the issues that limited competition can cause for
  • 00:35:23
    consumers. If only one company makes computers then whatever they charge that computer is what
  • 00:35:28
    the consumer will need to pay if they want to buy it and that company would have no incentive to
  • 00:35:31
    spend money on R&D to make a better computer because customers have no other option. Now this is a
  • 00:35:37
    problem but an even larger problem is what it does to workers. If people have to spend a little bit
  • 00:35:42
    more on a subpar computer that's not as bad as someone who has trained in building computers
  • 00:35:46
    only having one potential employer. If one company dominates an entire industry they can push down
  • 00:35:51
    the wages of their workers because there is nowhere else for them to go. Again the exact
  • 00:35:55
    opposite of this is perfect competition with lots of small firms that are competing with one
  • 00:35:59
    another for customers and workers which is the situation that France found itself in during the
  • 00:36:04
    industrial revolution. The French economy developed slower than other European powers with highly
  • 00:36:08
    focused industrial centres but it built the foundation of a more egalitarian culture that has
  • 00:36:13
    served the country quite well through to today. The trade-off has been that French industry has
  • 00:36:17
    always been slightly less productive than countries like Germany, the UK and especially the USA
  • 00:36:22
    which means that even though France is a highly industrialised advanced economy
  • 00:36:26
    wages have always been slightly lower. This was especially true in the post-war period where
  • 00:36:31
    French workers and most European workers for that matter actually worked longer hours than
  • 00:36:35
    workers in the USA while still producing less overall. Obviously today that is no longer the
  • 00:36:40
    case and France has again sacrificed absolute economic output for a more balanced lifestyle.
  • 00:36:44
    But with more of a focus on good working conditions, strong worker protections and secure retirements
  • 00:36:49
    it was a trade-off that most French workers were pretty happy with. In fact for most of the
  • 00:36:54
    country's modern history following rebuilding efforts after the Second World War any attempt
  • 00:36:58
    to challenge those working conditions and protections was met with well let's just say the
  • 00:37:02
    kind of resistance that would have served them well in 1940. This all led to the formation of
  • 00:37:06
    another vitally important element of the French economy as it exists today, the strong hand of
  • 00:37:10
    the government. France has had a capitalist economy for the better part of two centuries now but in
  • 00:37:16
    that time it's reigned in the influence of the free market in certain sectors with a strong
  • 00:37:19
    involvement of the government in certain industries. Lots of small companies may have been great for
  • 00:37:24
    workers but there are benefits to having some big organisations in an economy as well because they
  • 00:37:29
    can simply operate at scales and in industries that small companies cannot. France after the Second
  • 00:37:34
    World War realised this weakness and the government took an active hand in rectifying the situation
  • 00:37:39
    by basically saying if large operations don't exist we'll make them ourselves. This was an
  • 00:37:44
    economic policy that went on to be known as Derogism. Sorry to any French speakers for butchering
  • 00:37:48
    that pronunciation. Anyway this roughly translates to direction as in the government directs the
  • 00:37:53
    economy through the formation of industries that it thinks are important but still welcomes private
  • 00:37:58
    industry to grow alongside it or even outcompete government operations if that becomes possible.
  • 00:38:02
    The government created state enterprises like national banks, national high-speed rail services,
  • 00:38:07
    air France and even Minotel which was basically the internet before the internet. In simple terms
  • 00:38:12
    this was really a compromise between the two major competing ideologies in the world at the time.
  • 00:38:17
    Communism where the state owned all industry and pure market capitalism where the only role
  • 00:38:21
    of the state in the economy was to regulate competitive private industry. By creating state
  • 00:38:26
    enterprises within a free market France tried to get the best of both worlds. The existence of
  • 00:38:31
    these companies was funded by the government not only because they could be genuinely good
  • 00:38:34
    investments but because it was deemed important that the country have these services provided
  • 00:38:38
    by an organisation that could deliver them at appropriate scale. Despite the benefits that
  • 00:38:42
    having lots of small companies competing with each other has for workers and consumers
  • 00:38:46
    a service provider like an airline wouldn't be able to operate effectively with just 10 employees.
  • 00:38:51
    To provide a comprehensive network of routes and all the infrastructure that goes with it it needs
  • 00:38:55
    thousands of workers and billions of dollars in investment which was provided by the government.
  • 00:39:00
    Now from a purely macroeconomic perspective there's nothing particularly special about a
  • 00:39:05
    government in a way it can be thought of as just another monopoly that provides certain goods and
  • 00:39:09
    services just with a small difference. When a private company is deciding what to produce and
  • 00:39:14
    how to produce it it's going to look at what it can sell and if it can produce that thing in such a
  • 00:39:19
    way that the sale price is greater than the cost to produce the good or service then it will do it.
  • 00:39:23
    Governments also exist to provide goods and services to participants in an economy
  • 00:39:27
    but they have a different motivation. They don't have to worry about the specific demand for a
  • 00:39:32
    good or service because they don't make their money by selling it. They make their money by just
  • 00:39:36
    taxing people. This is a very effective way to provide goods and services that are not easily
  • 00:39:41
    transactable. Something like national defence, emergency services and even a functioning legal
  • 00:39:46
    system all take resources to provide but it would be difficult to get an individual person to pay
  • 00:39:51
    for them voluntarily because they are only effective collectively. Now some fringe economists will
  • 00:39:57
    argue that all these services can be provided by the private sector but realistically a government
  • 00:40:02
    structure that doesn't have to worry about direct profits from these goods is a much more effective
  • 00:40:06
    way to provide something like a police force. The sales and marketing department of a government
  • 00:40:10
    is their taxation office and a set of handcuffs for anybody who doesn't want to pay their subscription
  • 00:40:14
    to society and it's very effective and it's very effective at providing certain goods.
  • 00:40:19
    Now on the other hand there are certain goods and services that are more efficiently provided
  • 00:40:24
    by the private sector through a free and competitive marketplace. Things like national airlines,
  • 00:40:29
    national banks and national manufacturers can run into problems of inefficiency because they
  • 00:40:33
    dominate their markets and even if private industries are technically allowed to compete with them
  • 00:40:38
    it can be difficult to break into a market where their competitor has the financial backing of an
  • 00:40:42
    entire country. These state enterprises also tend to behave slightly differently in how they
  • 00:40:47
    produce their goods and services. While a regular private company will try to reduce costs as much
  • 00:40:52
    as possible in order to maximize profits, state enterprises are often given other objectives
  • 00:40:56
    as well that may not be the most efficient use of their resources but instead do some public good.
  • 00:41:02
    The obvious example of this is that while a private company will try to minimize its workforce as
  • 00:41:06
    much as possible to reduce expenses, a state enterprise will look for reasons to hire more
  • 00:41:10
    people because high employment is politically popular. They can also be tasked to produce
  • 00:41:14
    goods and services that wouldn't be economically profitable like a national airline flying a low
  • 00:41:19
    demand route that connects the country but wouldn't otherwise pay for itself. Now it must be
  • 00:41:23
    recognized that most countries do this in one form or another. With this example even the USA which
  • 00:41:28
    doesn't have a national airline still has a program that pays private airlines to fly low
  • 00:41:33
    demand routes. In France this system was taken to the extreme and derogism that placed a heavy
  • 00:41:38
    emphasis on state enterprise led to an economy that once again fell behind in efficiency and
  • 00:41:42
    output. Now in isolation this may not have been a problem. This might shock some macroeconomists
  • 00:41:48
    but not everything needs to be done in absolutely the most efficient way and sometimes unprofitable
  • 00:41:54
    public services are worth paying for because they increase the living standards of the people.
  • 00:41:57
    But France is not an economy that exists in isolation and now that the global economy is
  • 00:42:02
    more intertwined than ever that is causing the country some major challenges. And also obvious
  • 00:42:07
    side effect of a large number of state-owned enterprises operating in an economy is that
  • 00:42:10
    it drives up inflation. When it's very easy for workers to get jobs at large state-owned companies
  • 00:42:15
    that want to employ as many people as possible this naturally reduces unemployment. Now normally
  • 00:42:20
    that's a good thing but if it goes too far it can cause problems. Economists talk about the
  • 00:42:25
    natural rate of unemployment as the ideal outcome for an economy but natural unemployment is not
  • 00:42:30
    zero unemployment. In most advanced economies it's actually around two to three percent
  • 00:42:35
    and unemployment rate any lower than that causes inflation. This is also sometimes referred to
  • 00:42:40
    as the NAIRU or the non-accelerating inflation rate of unemployment which can be charted out on
  • 00:42:44
    a graph like this where the lower unemployment gets the higher inflation gets up to an inflection
  • 00:42:49
    point where the economy starts to experience hyperinflation for only marginal gains in
  • 00:42:53
    employment. Now as always just because something looks good on a theoretical graph doesn't mean
  • 00:42:58
    that it always works in reality and for the sake of France's economy it's important to explain
  • 00:43:02
    exactly why this happens. If more people are working there will be more income going to households
  • 00:43:07
    which means more people have more money to create more total demand for everything in that economy.
  • 00:43:12
    It also means that if companies want to hire new employees they're going to find it harder to do
  • 00:43:15
    so because there are just less people looking for a job so they'll have to offer more money to try
  • 00:43:19
    and get people who already have a job to come and work for them instead. If all companies are doing
  • 00:43:24
    this they'll be forced to raise their prices to maintain their profit margin which means people
  • 00:43:28
    will demand higher wages to keep up with inflation which will drive companies to increase their prices
  • 00:43:32
    all over again in a vicious cycle known as a wage price spiral. Now this wouldn't necessarily need
  • 00:43:37
    to happen if the increases in worker pay were matched by increases in worker productivity.
  • 00:43:42
    If there were 10 people in an economy and 9 of them were employed and paid $1 each to make
  • 00:43:46
    9 baskets of goods then each basket of goods should sell for $1. If the 10th person also
  • 00:43:52
    gets a job paying $1 and they make a 10th basket of goods then that basket will stay at $1 but
  • 00:43:58
    very quickly these 10 workers will realise that they are the only people that can make these
  • 00:44:02
    goods in an economy and demand higher wages of $1.50 since they will still only be producing
  • 00:44:07
    10 baskets all that will do is increase the price of those baskets so really they're no better off
  • 00:44:12
    overall. And that's assuming that the 10th worker is just as good as the first nine. A high level
  • 00:44:17
    of employment also generally means that workers are overall less productive because it's hard to
  • 00:44:22
    replace them and there's just not much pressure to upskill or work hard to secure limited jobs.
  • 00:44:27
    Of course this was an incredibly oversimplified example but out of our 10 basket makers there
  • 00:44:31
    might have been a reason that the 10th worker didn't have a job to begin with. This issue is
  • 00:44:36
    normally compounded in the case of a state-owned enterprise where efficiency and productivity
  • 00:44:39
    is not always the top priority. So an exceptionally high level of employment above the natural rate
  • 00:44:44
    will drive up wages faster than total output which means that there'll be more money chasing
  • 00:44:48
    fewer goods which is inflation which is exactly what happened to France when deersism was in
  • 00:44:53
    full swing in the 1980s. The government pulled back on this in many ways but even today France
  • 00:44:58
    is facing a reality that its workers are vehemently insisting on maintaining a standard of living
  • 00:45:03
    that their productive capacity can't provide. Things like very generous retirement conditions,
  • 00:45:08
    low working hours and generally strong worker protections have combined with companies that
  • 00:45:12
    have lost their global competitive edge after decades of strong government protection. Its
  • 00:45:16
    population is also aging meaning that young workers are left needing to be more productive to
  • 00:45:20
    support a growing number of elderly French workers who expect strong support in retirement.
  • 00:45:24
    On one hand the government could try and make this work by doubling down on high levels of taxation
  • 00:45:29
    and direct control in the economy but beyond potentially running into issues with the EU
  • 00:45:33
    which insists that member countries trade freely with one another it could just force out more
  • 00:45:37
    of the young workers that it has left. Young skilled French workers can already make more
  • 00:45:41
    money in places like Germany, the UK and especially the USA and already France has one of the highest
  • 00:45:47
    rates of brain drain of any advanced economy in the world. If they raise taxes to keep the system
  • 00:45:51
    of strong protections and strong benefits more people are going to leave. Likewise if they remove
  • 00:45:57
    those systems and introduce a more competitive dynamic to their economy then beyond just annoying
  • 00:46:01
    economic participants who are promised they could retire at 55 on a healthy pension it's going to
  • 00:46:05
    give workers even less reason to stick around because their wages would fall and their working
  • 00:46:09
    conditions would be worse. What is actually happening is a weird combination of both strategies
  • 00:46:14
    where France is trying to increase its overall productivity or desperately cutting down on
  • 00:46:18
    unsustainable and uncompetitive systems. France still has some advantages, their international
  • 00:46:24
    perception as a place of artisanal craftsmanship has carried over from the days where they took
  • 00:46:27
    the slow and steady approach to industrialization and today some of their largest industries are
  • 00:46:32
    just selling goods that are profiting off that perception. A lot of the handbag might cost $100
  • 00:46:36
    to make but if it's made in France they could easily be sold for a hundred times that amount
  • 00:46:41
    and in terms of evaluating industry it doesn't get much better than that. But even still France
  • 00:46:46
    is a country that has been living beyond its means for a bit too long. It's allowed its workforce a
  • 00:46:50
    lot of protections and a strong quality of life that honestly a lot of economies could learn something
  • 00:46:55
    from but now it's just getting outcompeted by places that are willing to work harder in ways
  • 00:46:59
    that are more economically competitive. Nobody can predict the future least of all economists but in
  • 00:47:04
    response the country is acquiescing and slowly changing its economy to run more like other advanced
  • 00:47:09
    global superpowers. In the long term this will hopefully pay off for them but inevitably the
  • 00:47:14
    debt of living beyond one's means needs to be paid off eventually even for a national economy.
  • 00:47:19
    So unfortunately there is probably more difficult but necessary changes in store for France into
  • 00:47:23
    the foreseeable future. As we've mentioned the pushback over these issues is one of the things
  • 00:47:28
    that makes France so interesting as an economy. Even if the changes aren't necessary French
  • 00:47:32
    workers do a damn good job of making sure their disappointment is heard. Germany, Italy and France
  • 00:47:37
    together make up more than half of the entire EU economy. Their struggles aren't just national
  • 00:47:42
    they're systemic. Aging workforces slowing productivity political gridlock and while each
  • 00:47:47
    country has a unique story the common thread is clear. Europe is entry and era where growth
  • 00:47:51
    can't be taken for granted. These are advanced economies that helped define modern prosperity
  • 00:47:56
    and now they're showing us what happens when old systems meet new realities. The question is who
  • 00:48:00
    adapts and who stagnates.
Etiquetas
  • Germany
  • Italy
  • France
  • economic challenges
  • stagnation
  • aging population
  • industrial strategy
  • globalization
  • comparative advantage
  • black market