Journal Issue

Staff Report for the 2010 Article IV Consultation

International Monetary Fund
Published Date:
July 2010
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1. This supplement provides an update of economic and policy developments since the release of the staff report (7/14/10). The thrust of the staff appraisal remains unchanged.

2. Recent data confirm a continuing gradual recovery. Industrial production in May increased more-than-expected by 1.7 percent and exports expanded further, but new orders declined. In June, household consumption of manufactured goods fell with durable goods consumption shrinking by 1.8 percent (month-on-month and seasonally adjusted). House prices appear to have broadly stabilized in recent months as the demand for new dwellings has increased. Business confidence further improved in July, reaching its highest level since a year ago, but consumer confidence moved sideways amid concerns about the high unemployment rate.

3. The pension reform is moving ahead. The draft law on pension reform passed the Social Affairs Committee of the National Assembly on July 21, with debate in the full National Assembly slated immediately after the summer recess in early September. The Committee made no material changes to the government’s reform proposals, including the gradual raise of the retirement age. This is a welcome step towards implementation of this important and difficult reform that aims to re-establish financial equilibrium in the pension system by 2018.

4. The working group on fiscal rules presented a proposal for a new, strengthened multi-year budgetary framework, enshrined in the constitution.1 A new multi-year budget framework law would include a binding trajectory towards a zero structural deficit and reinforce national ownership of the fiscal objectives set forth in France’s Stability Programs. The budget framework law would define both a revenue floor and an expenditure ceiling for the central government and the social security administrations, also encompassing operations of some general-government entities currently off-budget. The revenue and spending rules set in the budget framework law will be enforced by the Constitutional Council and would be binding for the annual budget laws. A system of notional accounts, as in Germany, would help the adjustment over two subsequent budget years in case of deviation from the rules. In parallel, limits would be set on the resources transferred to the constitutionally independent local governments that are already subject to a golden rule. Moreover, a constitutional amendment would cement recent administrative measures to prohibit any revenue-reducing initiatives outside of the respective budget laws for the central government and the social security administration. The working group also calls for the creation of an independent fiscal council, in order to increase the realism of the macroeconomic assumptions underlying the budgetary framework and to strengthen the government’s accountability. Staff supports the recommendations of the working group which, if implemented, would be instrumental in restoring balance in public finances.

5. The EU-wide stress test results released on July 23 have confirmed the resilience of French banks. The four major banking groups participating in the stress test represent about 80 percent of the French banking system. The French benchmark macroeconomic scenario assumes real GDP growth of 1.2 percent in 2010 and 1.5 percent in 2011, both below staff’s baseline scenario. The adverse macroeconomic scenario assumes real GDP growth of 0.7 percent in 2010 and -0.1 percent in 2011. In addition to the adverse scenario, a shock was applied to sovereign exposures in banks' trading books and loans to the private sector in their banking books. The stress scenario—adverse macroeconomic scenario coupled with the sovereign shock—reduces the average Tier 1 ratio of French banks by 165 basis points relative to the benchmark level of 9.3 percent at end-2011, which is only 60 basis points below the actual end-2009 level. The impact on Tier 1 capital of the shock to sovereign exposures is only 16 basis points on average with small variation among banks. The Tier 1 ratio of individual banks under the stress scenario ranges from 8.5 to 10 percent, well above the 6 percent threshold used in the test.

6. The publication of the stress test results, in combination with the full disclosure of the sovereign holdings of French banks are helpful steps toward better transparency. As argued in the staff report, steps in this direction may help the market’s assessment of French banks. In addition to Europe-wide coordinated efforts, France should—as recommended in the staff report—continue with appropriate national efforts.

The working group is chaired by Mr. Camdessus and its final report was presented on June 21, 2010.

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