West Germany and France have both enjoyed decades of steadily rising prosperity. Today, however, they are afflicted by sluggish growth, mounting social costs, and high unemployment. Within the populations, young and low-skilled workers have been hit particularly hard. More and more French and German citizens are coming to believe that their economic and social systems are in urgent need of reform.

To provide a fact base for this reform, the McKinsey Global Institute compared productivity, employment, and output in France and Germany with global best practice, and investigated the causes of differences in performance.¹ Like earlier studies, this project examined performance both at the economy level and at the level of several key industries: automotive, housing construction, telecom, retail banking, retail, and computer software. It then considered what governments and corporations could do to close gaps in productivity and job creation while maintaining social policy objectives. The principal findings were:

• Weaknesses in economic performance. Comparisons with global benchmarks using purchasing power parity reveal that West Germany produces 30 percent fewer goods and services per capita than the benchmark country and has 20 percent lower labor productivity and 15 percent less employment per capita across the industries studied. France...