## _wp14165

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---

### Demand patterns in France, Germany, and Belgium
- Growth and cyclical performance:
  - Germany: slower average growth than Belgium and France in decade preceding the crisis; sharp contraction in 2009 followed by swift rebound in 2010.
  - France and Belgium: more contained 2009 GDP fall but more muted subsequent performance; France’s output levels only recently reached pre-crisis levels.
- Employment and unemployment:
  - Germany’s unemployment rate: 5.1 percent.
  - France’s unemployment rate: 10.1 percent.
  - Belgium’s unemployment rate: 8.5 percent.
- External sector and competitiveness:
  - Almost half of Germany’s growth over the past decade has come from net exports.
  - Germany’s (National Accounts) current account surplus is around 7 percent of GDP and rising (against around -2 percent in France and zero in Belgium).
  - The current account surplus is now more than three times as high as it was a decade ago.
  - German exports to fast growth emerging economies (mostly machine tools, chemicals, and cars) stronger than those of France and Belgium, aided by restrained wages and strong price competitiveness.
- Domestic demand and investment:
  - German investment as a share of GDP fell from 22 percent in 2000 to 17 percent in 2012.
  - Investment shares in 2012: France 19 percent, Belgium 20 percent.
  - Public investment in Germany constrained by debt ceilings; firms cautious about capital spending (situation noted as rapidly changing).
  - Non-residential business investment more dynamic in France and Belgium despite profit margins growing lower than in Germany (Belgium) or contracting (France).
- Private consumption and household income:
  - Pre-crisis (2000-07) average household real disposable income growth:
    - Germany: 0.7 percent.
    - France: 2.4 percent.
    - Belgium: 1.2 percent.
  - By 2012, average household real disposable income per head:
    - Germany: EUR 1,860.
    - France: EUR 2,015.
    - Belgium: EUR 1,810.
  - Corresponding nominal values in 2012:
    - Germany: EUR 2,052.
    - France: EUR 2,257.
    - Belgium: EUR 2,115.
  - German private consumption lagged behind France and Belgium reflecting lower household income growth; the income shortfall and consumption gap have been gradually shrinking since the start of the crisis.
- Income components and tax/social contributions:
  - Between 2000 and 2007, contribution of labor compensation to households’ real disposable income growth averaged:
    - Germany: -0.3 ppts.
    - France: 1 ppts.
    - Belgium: 1.1 ppts.
  - Rising tax burden and social security contributions weighed on German households’ income; social benefits contributed little to purchasing power in Germany compared with France.

### Confidence and uncertainty indicators
- Consumer confidence and uncertainty:
  - Consumers’ confidence fell sharply in 2008/09 in all three countries; uncertainty reached unprecedented levels.
  - Post-2009 divergence:
    - Germany: consumers’ confidence and uncertainty improved steadily since record lows in 2008/09.
    - France and Belgium: households’ confidence continued to deteriorate and uncertainty increased markedly.
- Business confidence and uncertainty:
  - Business confidence highly correlated across countries; bounced back to historical highs in early 2011, declined through 2011/12, and improved thereafter but remained low by historical comparison.
  - Business uncertainty abated considerably after the sharp increase in 2008 but remained unusually high.
- Measurement:
  - Consumer and business confidence measured as balances of responses to forward-looking questions.
  - Uncertainty measured as dispersion of responses using a Theil’s formula; index ranges between 0 and 0.3/0.4 and is normalized for regressions.

### Estimation methodology and priors
- Long-term relationships estimated using Fully Modified OLS (FMOLS) on quarterly data covering 1995Q1-2013Q3.
- Long-term co-integration specification: Y = c + αX + ε where Y is consumption, investment, or exports; X is vector of fundamentals by economic theory.
- Short-term dynamic equation (estimated by OLS):
  - ΔYt = βΔYt-1 + γΔXt + δΔU t + λECM t-1 + εt
  - Includes changes in long-term determinants, swings in firms’ confidence and uncertainty, and an error correction term.
- Two dynamic equation variants estimated: with and without confidence and uncertainty indicators.
- Inclusion rule: explanatory variable appears only if coefficient is statistically significant at a 10 percent level.
- Priors supported by estimated relationships:
  - Consumption: driven by real disposable income, wealth, interest rates, confidence; modulated by liquidity constraints, precautionary savings, leverage, social benefits.
  - Investment: driven by output (accelerator), profit margins, indebtedness, real cost of capital, spare capacity, credit rationing; low confidence and high uncertainty increase option value of deferring investment.
  - Exports: driven by world demand and relative export prices.

### Data and measurement issues
- Data sources listed in national accounts, surveys, and reports: private consumption, non-residential business investment, exports, nominal disposable income, net financial assets, households’ indebtedness, value added, deflators, profit margins, equity to total liabilities ratio, capacity utilization, unemployment (ILO), interest rates, EC Business and Consumer Survey, real housing prices (2013 KBC bank report), Haver for potential export markets.
- Constructed series:
  - Real cost of capital computed as weighted cost of financing (net of depreciation) adjusted for relative price of investment goods (Jorgenson, 1971).
  - Cost of equity computed from National Accounts dividend payments and National Accounts shares and other equity.
  - Confidence indicators: balances of forward-looking survey responses.
  - Uncertainty indicators: dispersion computed with Theil’s formula; for Germany and France also use economic policy uncertainty indicator (Bloom, 2009).

### Results — overview
- Both FMOLS long-term and OLS dynamic equations estimated for private consumption, non-residential business investment, and exports.
- Dynamic equations estimated in two steps: with and without confidence and uncertainty indicators.
- Variables retained only if statistically significant at a 10 percent level.
- Estimated relationships generally support theoretical priors for consumption, investment, and exports.

### A. Private Consumption — long-term relationships and elasticities
- Co-integration between real private consumption and fundamentals validated by Engle-Granger test.
- Income elasticity:
  - Germany: "slightly above one".
  - France and Belgium: "about 0.85".
- Wealth effects:
  - Financial wealth: no evidence in Germany; contributed "0.4 per year" pre-crisis in France; "just a marginal effect" in Belgium.
  - Real estate wealth (housing prices): non-significant in France and Belgium; negatively signed in Germany (pointing to income, rather than wealth, effects).
- Unemployment:
  - A decline in the unemployment rate of one percentage point improves consumption by about 0.3 percent in Germany.
  - In regressions augmented with consumer confidence, unemployment rate and consumer confidence proved simultaneously non-significant, suggesting unemployment rate may incorporate confidence effects.
- Real interest rates and household debt:
  - Real interest rates robustly non-significant in long-term and dynamic equations.
  - Household debt to disposable income ratio (shorter sample): coefficient "significantly positive" in Germany and Belgium, showing some evidence of leveraging.

### B. Contributions to consumption growth — sub-period magnitudes
- Sub-periods:
  - 1998-2007: contribution of real disposable income to consumption growth:
    - France: "2.1 ppts."
    - Belgium: "1.6 ppts."
    - Germany: "0.9 ppts."
  - 2008-12: contribution of real disposable income to consumption growth:
    - France: "at about 0.4 ppts."
    - Germany: "0.8"
    - Belgium: "1.0"
- Faster private consumption growth in France and Belgium over full period owed to greater dynamism in disposable income in these two countries (income elasticity actually higher for Germany).

### C. Short-term dynamics — confidence, uncertainty, and smoothing behavior
- Short-term dynamics indicate confidence and uncertainty explain temporary deviations from fundamentals.
- Pre-crisis (1998-2007):
  - France: consumption considerably less volatile than income, suggesting consumption smoothing via borrowing/lending.
  - Germany: income more volatile and tightly correlated with consumption; consumption fluctuated relatively more.
- Post-Lehman and euro-area sovereign crisis:
  - Consumption became more volatile than income in France and Germany as borrowing/lending to smooth consumption became more difficult.
  - Low confidence dragged down French private consumption throughout this period.
  - Confidence effect in Germany: negative over 2008-09, thereafter turning positive.
  - Uncertainty mattered only for France, pulling down consumption late in 2008 and again by end-2010.
  - Vigorous income growth in Germany and financial wealth effects in France cushioned negative impact of fiscal austerity on household income and helped smooth consumption.

### D. Confidence and uncertainty indicator findings for consumption
- Augmenting dynamic equation with confidence and uncertainty indicators improves regression fit.
- Specific insights:
  - For France, coefficients of consumer confidence and policy uncertainty indicators are not simultaneously significant (policy uncertainty may capture confidence effects).
  - Size of confidence and uncertainty indicators (from EC Business and Consumer Survey) comparable to Balta and others (2012) for a panel of nine euro-area countries.
  - Introduction of confidence and uncertainty reduces short-term elasticity to disposable income for France but leaves it unchanged for Germany.
  - For Germany, uncertainty seems to matter while the consumer confidence question addressed to households and 0.4 for question addressed to firms (question-weighting detail preserved as in source).

### E. Methodological robustness for consumption
- Engle-Granger co-integration tests support long-term relationships.
- For Belgium, disposable income excludes property income to obtain a co-integrated relationship; income elasticity for Belgium not fully comparable with France and Germany.
- Time dummies used to account for level shifts/outliers.
- Absolute t-statistics reported in parentheses in tables; superscripts indicate significance levels.
- Breusch-Godfrey LM statistics used to assess residual autocorrelation.

### B. Non-residential Business Investment — empirical findings and drivers
- Co-integration:
  - Confirmed for Belgium; for France and Germany Engle-Granger null of no-cointegration cannot be formally rejected at usual significance levels, but co-integration residuals are fairly stationary.
- Long-term elasticities of investment to private value added (FMOLS, long-term equation):
  - France: 1.382 (27.33)***
  - Germany: 1.395 (5.60)***
  - Belgium: 1.351 (9.98)***
- Cost of capital (long-term equation):
  - France: log(1+real cost of capital) = -0.915 (4.01)***
  - Germany: not significant in long-term equation
  - Belgium: log(1+real cost of capital) = -0.794 (4.37)***
- Profit margins / gross operating surplus (long-term elasticity):
  - France: 0.983 (4.83)***
  - Germany: 0.612 (4.08)***
  - Belgium: 0.220 (1.70)*
- Corporate leverage (log(Equity liabilities/total liabilities), lagged):
  - France: 0.162 (4.19)***
  - Germany: 0.184 (3.07)***
  - Belgium: 0.268 (4.31)***
  - A one-percent decrease in the ratio of equity liabilities to total liabilities dampens investment by 0.2 in France and Germany, and up to 0.3 in Belgium.
- Time trends:
  - Negative time trend in co-integration equations for Germany and Belgium capturing drag on investment (off-shoring, relocation to Central and Eastern Europe).
  - Trend coefficients (long-term equation):
    - Germany: -0.004 (4.19)***
    - Belgium: -0.003 (5.31)***
- Short-term dynamics and error-correction:
  - Error-correction coefficients (dynamic equation, long-term residuals (-1)):
    - France: -0.281 (7.05)***
    - Germany: -0.306 (4.78)***
    - Belgium: -0.595 (5.54)***
  - Implies system is brought back to equilibrium within one to two years.
- Role of confidence and uncertainty (dynamic equation augmented):
  - Belgium: both business confidence and changes in uncertainty significant; two indicators contributed to drop in investment rate over 2009-10.
  - Germany: only business confidence significant; improved adjusted R-squared and contributed to investment recovery in 2011.
  - France: base model already fits well; confidence and uncertainty indicators not statistically significant.
- Additional notes:
  - Lack of National Accounts data for dividend payments of NFCs: cost of capital for Belgium excludes cost of equity.
  - Credit-rationing variable based on EC survey financial-constraints questions tested but insignificant for all three countries.

### C. Exports — determinants, contributions, and country differences
- Main drivers: world (potential export) demand and export price competitiveness.
- Long-term export elasticities (FMOLS, long-term equation):
  - Potential export markets:
    - France: 0.851 (16.31)***
    - Germany: 0.754 (19.86)***
    - Belgium: 0.699 (89.25)***
  - Export prices relative to competitors:
    - France: -0.782 (11.95)***
    - Germany: -0.247 (4.83)***
    - Belgium: -0.341 (5.79)***
- Trend components in export equations:
  - France: Trend = -0.006 (7.69)***
  - Germany: Trend = 0.003 (4.46)***
  - Belgium: Trend not significant/absent
- Contributions 1997-2012:
  - External demand contributed most to overall export growth for France, Belgium, and Germany.
  - Euro area crisis negatively impacted exports via lower demand from euro-area trading partners in 2008-09.
  - Adjustments in relative export deflators mattered; France benefitted most from decline in its export deflator relative to trading partners.
- Country-specific factors and GVCs:
  - Germany’s deeper integration in GVCs and strong links to China and extra-area markets provided additional export gains relative to peers.
  - France’s export performance weak even after accounting for lower GVC integration; shift-share analysis indicates exporter effects have dragged on French exports.
  - Belgium has lowest elasticity to potential export markets among the three, indicating competitiveness issues.

### D. Demand patterns and cross-country elasticity tests
- Equality (z-)tests on long-term regression coefficients:
  - Most common coefficients not statistically different across France, Germany, and Belgium, with notable exceptions:
    - Consumption elasticity to disposable income: significantly higher for Germany than for France and Belgium.
    - Investment elasticity to profit margins: significantly lower for Belgium than for France and Germany.
    - Exports elasticity to relative export prices: absolute value significantly higher for France relative to Germany and Belgium.
- Empirical implication: many behavioral elasticities similar across countries; divergence largely reflects differences in fundamentals, trends, and country-specific factors (GVC integration, off-shoring).

### V. Concluding remarks — policy-relevant implications
- Macro challenge:
  - Domestic and external demand developments are key to growth and adjustment; the Euro area faces dual challenge of correcting intra-Euro area imbalances while reviving area-wide growth.
- Germany:
  - German household disposable income weak prior to crisis but now strongest among large Euro area economies.
  - With economy near full capacity and unemployment at 5.1 percent, strong employment growth and rising wages should continue to boost labor income in coming quarters.
  - Healthy public finances suggest drag on household income from taxes should diminish over time, supporting private consumption and Euro area growth.
- France and Belgium:
  - Household income growth has held up, largely owing to resilient wage growth, which may prove untenable over time given need for fiscal and external adjustment.
  - Both countries require improvements in cost and non-cost competitiveness to achieve external sustainability.
  - Structural reforms recommended as better approach than outright declines in wages and prices.
  - Shifting production from sheltered/domestic sectors to export-oriented sectors would help facilitate adjustment.

*Source: _wp14165 - Section V concludes.*

### Section V concludes.

### Section V concludes.

### Demand patterns in France, Germany, and Belgium
- Germany grew, on average, at a slower pace than Belgium and France during the decade preceding the crisis, but since the start of the crisis Germany’s economy has performed much better with a sharp contraction in 2009 followed by a swift rebound in 2010.
- France and Belgium experienced a more contained 2009 GDP fall but more muted subsequent performance; France’s output levels only recently reached pre-crisis levels.
- Employment and unemployment:
  - Germany’s unemployment rate: 5.1 percent.
  - France’s unemployment rate: 10.1 percent.
  - Belgium’s unemployment rate: 8.5 percent.
- External sector and competitiveness:
  - Almost half of Germany’s growth over the past decade has come from net exports.
  - Germany’s (National Accounts) current account surplus is around 7 percent of GDP and rising (against around -2 percent in France and zero in Belgium).
  - The current account surplus is now more than three times as high as it was a decade ago.
  - German exports to fast growth emerging economies (mostly machine tools, chemicals, and cars) have been stronger than those of France and Belgium, aided by restrained wages and strong price competitiveness.
- Domestic demand and investment:
  - German investment as a share of GDP fell from 22 percent in 2000 to 17 percent in 2012.
  - Investment shares in 2012: France 19 percent, Belgium 20 percent.
  - Public investment in Germany has been constrained by debt ceilings and firms were cautious about capital spending (noting that situation is rapidly changing).
  - Non-residential business investment in France and Belgium has been more dynamic despite profit margins growing lower than in Germany (Belgium) or even contracting (France).
- Private consumption and household income:
  - Pre-crisis (2000-07) average household real disposable income growth:
    - Germany: 0.7 percent.
    - France: 2.4 percent.
    - Belgium: 1.2 percent.
  - By 2012, average household real disposable income per head:
    - Germany: EUR 1,860.
    - France: EUR 2,015.
    - Belgium: EUR 1,810.
  - Corresponding nominal values in 2012:
    - Germany: EUR 2,052.
    - France: EUR 2,257.
    - Belgium: EUR 2,115.
  - German private consumption lagged behind France and Belgium, reflecting lower household income growth; the income shortfall and consumption gap have been gradually shrinking since the start of the crisis.
- Income components:
  - Between 2000 and 2007, the contribution of labor compensation to households’ real disposable income growth averaged:
    - Germany: -0.3 ppts.
    - France: 1 ppts.
    - Belgium: 1.1 ppts.
  - Factors suppressing German labor compensation pre-crisis included rising unemployment, effects of the Hartz IV labor reform, and off-shoring pressures.
  - A rising tax burden and social security contributions weighed on German households’ income; social benefits contributed little to lift households’ purchasing power in Germany compared with France.

### Confidence and uncertainty indicators
- Consumers’ confidence fell sharply in 2008/09 in all three countries and uncertainty reached unprecedented levels.
- Post-2009 divergence:
  - Germany: consumers’ confidence and uncertainty improved steadily since record lows in 2008/09.
  - France and Belgium: households’ confidence continued to deteriorate and uncertainty increased markedly.
- Business confidence:
  - Highly correlated across countries.
  - After the trough of the crisis, business confidence bounced back to historical highs in early 2011, then declined through 2011/12, and improved thereafter but remained low by historical comparison.
  - Business uncertainty abated considerably after the sharp increase in 2008 but remained unusually high.
- Measurement notes (survey-based):
  - Consumer and business confidence are measured as balances of responses to forward-looking questions (see Section III.B for details on questions).
  - Uncertainty is measured as dispersion of responses using a Theil’s formula; index ranges between 0 and 0.3/0.4 and is normalized for regressions.

### Estimation methodology and priors
- Long-term relationships for consumption, investment, and exports estimated using Fully Modified OLS (FMOLS) on quarterly data covering 1995Q1-2013Q3.
- Long-term co-integration specification:
  - Y = c + αX + ε where Y is consumption, investment, or exports, and X is a vector of fundamentals by economic theory (e.g., disposable income, net financial wealth, lending rates, unemployment for consumption; private sector value added, profit margins, real cost of capital, leverage indicators for investment; relative export prices and world demand for exports).
- Short-term dynamic equation (estimated by OLS) links first differences of the dependent variables to:
  - Changes in long-term determinants.
  - Swings in firms’ confidence and uncertainty about future economic conditions.
  - Deviation from long-term value (error correction term).
  - Dynamic specification: ΔYt = βΔYt-1 + γΔXt + δΔU t + λECM t-1 + εt (notation per Section III).
- Two variants of dynamic equations estimated: with and without confidence and uncertainty indicators.
- Inclusion rule: explanatory variable appears in an equation only if coefficient is statistically significant at a 10 percent level.
- The estimated relationships generally support the priors summarized in Table 1:
  - Consumption priors: driven by real disposable income, wealth, interest rates, confidence; effects modulated by liquidity constraints, precautionary savings, leverage, and social benefits.
  - Investment priors: driven by output (accelerator), financial and financing conditions (profit margins, indebtedness, equity-to-liabilities), real cost of capital, spare capacity, and credit rationing; low confidence and high uncertainty increase option value of deferring investment.
  - Exports priors: driven by world demand addressed to country and relative export prices.

### Data and measurement issues
- Data sources:
  - National Accounts: private consumption, non-residential business investment, exports, nominal disposable income, net financial assets, households’ indebtedness, value added of the private sector, consumption and investment deflators, profit margins (share of gross operating surplus and mixed income in gross value added), equity to total liabilities ratio (computed from NA financial balance sheet).
  - Capacity utilization: national quarterly business surveys.
  - Unemployment rate: Labor Force Survey (ILO concept).
  - Interest rates: financial statistics of respective national central bank.
  - Financial constraints variable: European Commission Business and Consumer Survey (percent of respondents listing financial constraints as factor limiting production).
  - Real housing prices: 2013 KBC bank report.
  - Potential export markets (weighted average of trading partners’ imports based on geographical orientation): Haver.
- Constructed series:
  - Real cost of capital computed as the weighted cost of different sources of financing (net of depreciation) adjusted for relative price of investment goods, following neo-classical theory (Jorgenson, 1971). Equation (3) specifies real cost of capital as function of investment goods deflator relative to private value added deflator and weighted nominal cost of short- and long-term debt and equity.
  - Cost of equity computed from National Accounts dividend payments and National Accounts shares and other equity.
  - Confidence indicators: balances of forward-looking survey responses (e.g., “how do you expect your production to develop over the next three months?”; “how do you expect the financial position of your household to change over the next 12 months?”).
  - Uncertainty indicators: dispersion of forward-looking survey responses computed with Theil’s formula. For Germany and France, also use the economic policy uncertainty indicator (Bloom, 2009), constructed from newspaper coverage and mixing policy-induced confidence and uncertainty.

### Results (overview)
- Both long-term (FMOLS) and dynamic (OLS) equations were estimated for private consumption, non-residential business investment, and exports.
- Dynamic equations estimated in two steps: with and without confidence and uncertainty indicators.
- Variables retained in each equation only if statistically significant at a 10 percent level.
- Estimated relationships generally support the theoretical priors for consumption, investment, and exports as laid out in Table 1.

*Source: _wp14165 - Section V concludes.*

### 1. Demand developments in these countries are therefore driven by common, well-

### 1. Demand developments in these countries are therefore driven by common, well-

### A. Private Consumption — long-term relationships and elasticities
- Co-integration between real private consumption and fundamentals is validated by the Engle-Granger test for each of the long-term equations.
- The stability of the income elasticity coefficient throughout time implies stability of saving rates in all three countries over the past three decades.
- Income elasticity:
  - "slightly above one in Germany and stands at about 0.85 in France and Belgium."
- Evidence on wealth effects:
  - No evidence that financial wealth effects matter for consumption in Germany.
  - Financial wealth "played a role pre-crisis in France, where it contributed to lift consumption growth by 0.4 per year."
  - Financial wealth had "just a marginal effect in Belgium."
  - Real estate wealth (proxied by housing prices) "plays a role in none of the countries: either it is non-significant (France, Belgium) or is negatively signed, pointing to income, rather than wealth, effects (Germany)."
- Unemployment:
  - "A decline in the unemployment rate of one percentage point is found to improve consumption by about 0.3 percent" in Germany.
  - The unemployment rate and consumer confidence proved simultaneously non-significant in a regression augmented with the latter, suggesting the unemployment rate may incorporate confidence effects.
- Real interest rates and household debt:
  - Real interest rates using different maturities and deflators were tested but were found robustly non-significant in both the long-term regression and the dynamic equation.
  - Due to data limitations, the ratio of household debt to disposable income could only be tested on a shorter sample. Its coefficient appeared as "significantly positive in the case of Germany and Belgium," showing some evidence of leveraging.

### B. Contributions to consumption growth — sub-period patterns and magnitudes
- Two sub-periods distinguished in the sample:
  - 1998-2007:
    - Contribution of real disposable income to consumption growth:
      - France: "2.1 ppts."
      - Belgium: "1.6 ppts."
      - Germany: "0.9 ppts."
  - 2008-12:
    - Contribution of real disposable income to consumption growth:
      - France: "at about 0.4 ppts."
      - Germany: "0.8"
      - Belgium: "1.0"
- The faster growth in private consumption in France and Belgium relative to Germany over the full period owes to "greater dynamism in disposable income in these two countries (the income elasticity is actually higher for Germany)."

### C. Short-term dynamics — confidence, uncertainty, and smoothing behavior
- Short-term dynamics suggest a role for confidence and uncertainty in explaining temporary deviations of demand variables from long-term fundamentals.
- Pre-crisis (1998-2007) patterns:
  - France: private consumption was "considerably less volatile than income," suggesting households smoothed consumption over time by borrowing/lending.
  - Germany: household income displayed higher volatility than in France and was tightly correlated with private consumption, so German private consumption fluctuated relatively more.
- Post-Lehman and euro-area sovereign crisis period:
  - "Consumption became more volatile than income in the two countries" (France and Germany) as financial market disruptions likely made borrowing/lending to smooth consumption more difficult.
  - Low confidence "dragged down French private consumption considerably throughout this period."
  - Negative contribution of confidence to German consumption was "more muted over 2008-09, thereafter turning into positive territory."
  - Uncertainty "only mattered for France, pulling down consumption late in 2008 and again by end-2010."
  - "Vigorous income growth in Germany and financial wealth effects in France cushioned the negative impact of fiscal austerity on household income and helped smooth consumption."

### D. Specific findings on confidence and uncertainty indicators
- Augmenting the dynamic equation with confidence and uncertainty indicators improves the regression fit relative to the specification without them.
- Additional insights:
  - (i) "for France the coefficients of the consumer confidence and policy uncertainty indicators are not simultaneously significant (policy uncertainty may actually capture confidence effects, if partially)."
  - (ii) "the size of confidence and uncertainty indicators (as computed from the EC Business and Consumer Survey) is comparable to the ones obtained by Balta and others (2012) for a panel of nine euro-area countries."
  - (iii) "the introduction of confidence and uncertainty indicators in the dynamic equation reduces the short-term elasticity to disposable income for France but leaves it unchanged for Germany."
  - (iv) "for Germany, uncertainty seems to matter while the [consumer confidence] question addressed to households and 0.4 for the question addressed to firms" (note: question weighting details appear in the source).

### E. Methodological notes and robustness
- Engle-Granger co-integration tests support long-term relationships for consumption and fundamentals.
- In the long-term equation for Belgium, disposable income excludes property income to obtain a co-integrated relationship; therefore "The income elasticity for Belgium is thus not fully comparable with those obtained for France and Germany."
- Timedummies to account for level shifts or outliers are used but not displayed in the table.
- The absolute value of the t-statistics is reported in parenthesis in the tables; superscripts indicate significance levels.
- Breusch-Godfrey LM statistics are used to assess residual autocorrelation; acceptance levels are indicated by superscripts.

*Source: IMF staff calculations and analysis as presented in the supplied content.*

### introduction of consumer confidence turns the unemployment rate in the base model non-

### _wp14165 - introduction of consumer confidence turns the unemployment rate in the base model non-

### B. Non-residential Business Investment — empirical findings and drivers
- A long-term relationship between investment and fundamentals is confirmed for Belgium; for France and Germany the Engle-Granger test null of no-cointegration cannot be formally rejected at usual significance levels, but the residuals of the co-integration equation are fairly stationary.
- Long-term elasticities of investment to private value added (FMOLS, long-term equation):
  - France: 1.382 (27.33)***
  - Germany: 1.395 (5.60)***
  - Belgium: 1.351 (9.98)***
- Cost of capital (long-term equation):
  - France: l og (1+real cost of capital) = -0.915 (4.01)***
  - Germany: (not significant in long-term equation)
  - Belgium: l og (1+real cost of capital) = -0.794 (4.37)***
- Profit margins / gross operating surplus (long-term elasticity):
  - France: 0.983 (4.83)***
  - Germany: 0.612 (4.08)***
  - Belgium: 0.220 (1.70)*
  - Text summary: an almost one-to-one relationship in France; 0.6 for Germany; 0.2 for Belgium.
- Corporate leverage:
  - l og (Equity liabilities/total liabilities) (long-term, lagged):
    - France: 0.162 (4.19)***
    - Germany: 0.184 (3.07)***
    - Belgium: 0.268 (4.31)***
  - A one-percent decrease in the ratio of equity liabilities to total liabilities dampens investment by 0.2 in France and Germany, and up to 0.3 in Belgium.
- Time trends and country-specific factors:
  - Negative time trend in co-integration equations for Germany and Belgium, capturing additional drag on investment (off-shoring and relocation of production to Central and Eastern Europe cited).
  - Trend coefficients (long-term equation):
    - Germany: -0.004 (4.19)***
    - Belgium: -0.003 (5.31)***
- Short-term dynamics and adjustment:
  - Error-correction coefficients (dynamic equation, long-term residuals (-1)):
    - France: -0.281 (7.05)***
    - Germany: -0.306 (4.78)***
    - Belgium: -0.595 (5.54)***
  - These magnitudes/statistical significance imply the system is brought back to equilibrium within one to two years.
- Role of confidence and uncertainty indicators (dynamic equation augmented):
  - Belgium: both business confidence and changes in uncertainty are significant and improved the fit; the two indicators contributed to the drop in the investment rate over 2009-10.
  - Germany: only business confidence is significant, improving adjusted R-squared and contributing to investment recovery in 2011.
  - France: base model already fits well; confidence and uncertainty indicators not statistically significant.
- Additional notes:
  - Lack of National Accounts data for dividend payments of NFCs: cost of capital for Belgium excludes the cost of equity.
  - A credit-rationing variable based on EC survey financial-constraints questions was tested but its coefficient was insignificant for all three countries.

### C. Exports — determinants, contributions, and country differences
- Exports driven mainly by conventional determinants: world (potential export) demand and export price competitiveness.
- Long-term export elasticities (FMOLS, long-term equation):
  - Potential export markets:
    - France: 0.851 (16.31)***
    - Germany: 0.754 (19.86)***
    - Belgium: 0.699 (89.25)***
  - Export prices relative to competitors:
    - France: -0.782 (11.95)***
    - Germany: -0.247 (4.83)***
    - Belgium: -0.341 (5.79)***
- Trend components in export co-integration equations:
  - France: Trend = -0.006 (7.69)***
  - Germany: Trend = 0.003 (4.46)***
  - Belgium: Trend not significant/absent
- Contributions over 1997-2012:
  - External demand contributed most to overall export growth for France, Belgium, and Germany.
  - The euro area crisis negatively impacted exports via lower demand from euro-area trading partners in 2008-09.
  - Adjustments in relative export deflators mattered; France benefitted most from a decline in its export deflator relative to trading partners.
- Country-specific export drivers and global value chains (GVCs):
  - Germany’s deeper integration in GVCs (and strong links to China and other extra-area markets) provided additional export gains relative to peers.
  - France’s export performance is weak even after accounting for lower GVC integration; shift-share analysis indicates exporter effects (innovation, customer service, etc.) have dragged on French exports.
  - Belgium has the lowest elasticity to potential export markets among the three, indicating competitiveness issues.

### D. Demand Patterns and cross-country elasticity tests
- Equality (z-)tests on long-term regression coefficients find most common coefficients are not statistically different across France, Germany, and Belgium, with notable exceptions:
  - Consumption elasticity to disposable income: significantly higher for Germany than for France and Belgium.
  - Investment elasticity to profit margins: significantly lower for Belgium than for France and Germany.
  - Exports elasticity to relative export prices: absolute value significantly higher for France relative to Germany and Belgium.
- Empirical implication: many behavioral elasticities appear similar across the three countries; observed divergence largely reflects differences in fundamentals, trends, and country-specific factors (e.g., GVC integration, off-shoring).

### V. Concluding remarks — policy-relevant implications
- Domestic and external demand developments are key to growth and adjustment; the Euro area faces the dual challenge of correcting intra-Euro area imbalances while reviving area-wide growth.
- Germany:
  - German household disposable income was weak prior to the crisis but is now the strongest among large Euro area economies.
  - With the economy near full capacity and unemployment standing at 5.1 percent, strong employment growth and rising wages should continue to boost labor income in coming quarters.
  - Healthy public finances suggest the drag on household income from taxes should diminish over time, supporting private consumption and Euro area growth.
- France and Belgium:
  - Household income growth has held up, largely owing to resilient wage growth, which may prove untenable over time given the need for fiscal and external adjustment.
  - Both countries require improvements in cost and non-cost competitiveness to achieve external sustainability.
  - Structural reforms are recommended as a better approach than outright declines in wages and prices.
  - Shifting production from sheltered/domestic sectors to export-oriented sectors would help facilitate adjustment.

*Italic: IMF Working Paper content unit _wp14165 - introduction of consumer confidence turns the unemployment rate in the base model non-*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14165.pdf_