I am currently working on an estimation of a monetary union model I set up for my PhD thesis. For this, I need quarterly data of the output gap of Germany and France, which is surprisingly hard to come by. So I estimated it myself using real GDP data from Eurostat (unadjusted, chain-linked). For a very first glance, I de-seasonalised the data via moving-averages. After that, I employed the modified Hodrick-Prescott filter (mHP) as suggested by Bruchez (2003). Yes I know, the HP and mHP filters have their drawbacks and weaknesses, but they are nevertheless useful for a first look on the data.
To my surprise, the German output gap is more pronounced that the French one – I would have expected the opposite since rigid economies are prone to be more pro-cyclical. But maybe is France’ fiscal policy far more anti-cyclical than Germany’s, hence smoothing the cycle stronger. Further, Germany’s pre-crisis boom, crisis slump and subsequent rebound are also more pronounced than France’. This seems to indicate that Germany was both more susceptible to financial meltdown and more robust in dealing with the fallout of said meltdown.
A further stylised fact in favour of this interpretation is the kink in French trend output after the crisis, which is profoundly flatter, while Germany’s trend output is basically the same as before. Still the cycles of the EMU’s two biggest economies remain closely synced, but the lower trend growth for French real GDP means that rather sooner than later, France will fall behind Germany in terms of economic power. As a consequence, the monetary and fiscal policy preferences may diverge further and thus increase the political frictions at the European institutions and making it likely harder for the ECB to find the optimal monetary policy – if we’re one day back again in normal-land, mind you.