On July 29, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with France1.
In a context of weakening economic conditions in Europe, sizeable fiscal consolidation and domestic policy uncertainty, the French economy flat lined in 2012, but recent improvements in economic indicators support the expectation of a gradual recovery in the second half of 2013. Credit conditions remain supportive, and private demand is unencumbered by balance sheet repair issues and thus more apt to respond favorably to an improvement in confidence. In all, the economy is projected to contract by 0.2 percent in 2013 and to grow by 0.8 percent in 2014.
The economy’s growth potential, beyond its cyclical recovery, is hindered by structural rigidities in labor and product markets, which have, over time, contributed to a gradual loss of cost competitiveness and export performance. These have been accompanied by sizeable declines in the share of manufacturing production and employment and a narrowing of profit shares in national income. Structural reforms to address these constraints have been given an important forward momentum by the recent reduction in labor taxes and correction of the labor market toward greater “flexicurity.”
The pace of fiscal consolidation was accelerated further in 2013, with a structural adjustment equivalent to 1.8 percent of GDP, which comes on top of an adjustment of 2.2 percent of GDP sustained over the previous two years. IMF staff projects that the fiscal deficit will decline to 3.9 percent of GDP in 2013, from 4.8 percent in 2012. The bulk of the adjustment to date (about 90 percent) has been realized through revenue measures, whereas IMF staff had suggested a more balanced distribution of the effort. Under the new fiscal government framework, the authorities have announced that they would henceforth be setting and monitoring fiscal objectives in terms of the structural deficit, thus increasing the stability and reducing the procyclicality of fiscal policy. The Stability Program of April 2013 targets an easing of the pace of adjustment starting in 2014 and a rebalancing of the adjustment efforts toward expenditure measures.
Financial stability risks have abated considerably, as banks have completed their deleveraging objectives and strengthened capital and liquidity buffers. However, bank profitability remains low. The French financial system still needs to adapt fully to new international regulations on bank liquidity.
Executive Board Assessment
Executive Directors were encouraged by recent improvements in economic indicators, supporting the expectation of a gradual recovery during the second half of the year. Given remaining risks, including from uncertain euro area prospects, Directors underscored the importance of pursuing structural reforms to support the recovery of private demand and strengthen competitiveness, while continuing efforts to ensure fiscal sustainability and safeguard financial stability.
Directors welcomed the significant progress already achieved towards consolidating public finances. Going forward, many Directors saw merit in allowing for a smoother pace of adjustment than envisaged in the Stability Program to support the hesitant recovery. Many other Directors advised the authorities to persevere with the consolidation plans under the program, noting that it already allows automatic stabilizers to operate. While Directors welcomed the shift to structural deficit targeting, a number of them noted that nominal targets should not be neglected. With tax rates already at a very high level, Directors stressed that rebalancing fiscal adjustment toward expenditure containment is critical, including in the areas of social security and local spending where there is room for improved efficiency.
Directors welcomed the progress made on structural reforms. They noted that the reduction in the labor tax wedge would boost enterprise competitiveness until the impact of deeper structural reforms gains ground. They commended the broad labor market reform of 2013 and its contribution to greater labor market flexibility while still protecting worker security, and encouraged the authorities to follow up on its implementation.
Directors underscored the importance of pursuing reforms on a broader front to improve competitiveness and growth prospects. They welcomed ongoing efforts to simplify the regulatory framework and improve labor training mechanisms, and urged the authorities to reform pensions in a way that increases labor market participation rather than contribution rates. Directors called for deeper labor market reforms to increase employment of the young and low-skilled, and underscored the potential growth and employment gains from opening product and services markets to greater competition.
Directors welcomed the significant progress achieved in reducing financial vulnerabilities while preserving the capacity of banks to provide credit. Nonetheless, the combination of low bank profitability and weak growth prospects calls for continued vigilance. Directors also noted that the French financial system would need to adapt further to prudential requirements, notably in regard to bank funding structures, which continue to rely heavily on wholesale funding. To that end, Directors recommended that tax incentives on financial products be better aligned with regulatory objectives, including by removing tax disincentives against deposits and phasing out regulated interest rates.
Directors welcomed the efforts deployed by the authorities to keep the process of convergence toward the Single Supervisory Mechanism and Single Resolution Mechanism in the European Union (EU) on track. They commended the banking reform for aligning the resolution regime to the EU directive, in line with Financial Sector Assessment Program recommendations, ring-fencing trading activities, and strengthening the macro-prudential framework.
|Real economy (change in percent)|
|Nominal GDP (billions of euros)||1937||2001||2032||2061||2114||2178||2251||2336||2427|
|CPI (year average)||1.5||2.1||2.0||1.4||1.5||1.5||1.6||1.7||1.8|
|Unemployment rate (in percent)||9.7||9.6||10.2||11.2||11.6||11.4||10.9||10.6||10.4|
|Gross national savings (percent of GDP)||17.7||18.8||17.5||17.7||18.1||18.7||19.3||20.0||20.5|
|Gross domestic investment (percent of GDP)||19.3||20.8||19.8||19.1||19.4||19.5||19.7||20.0||20.3|
|Public finance (percent of GDP)|
|Central government balance||−6.3||−4.4||−3.9||−2.8||−2.4||−2.0||−1.5||−1.1||−0.9|
|General government balance||−7.1||−5.3||−4.8||−3.9||−3.5||−2.8||−1.9||−1.0||−0.8|
|Structural balance (percent of potential GDP)||−5.7||−4.6||−3.5||−1.7||−1.2||−0.8||−0.4||0.0||0.0|
|General government gross debt||82.4||85.8||90.2||93.5||95.0||94.9||93.8||91.4||88.7|
|Money and interest rates (in percent)|
|Money market rate 1/||0.5||0.8||0.1||0.0|
|Government bond yield 1/||3.1||3.3||2.5||2.0|
|Balance of payments (in percent of GDP)|
|Exports of goods||20.2||21.2||21.5||21.1||21.0||21.1||21.2||21.4||21.6|
|Volume growth (in percent)||9.5||5.4||2.4||1.4||3.1||4.4||4.5||4.6||4.6|
|Imports of goods||23.0||25.0||25.0||24.1||24.0||23.7||23.5||23.4||23.4|
|Volume growth (in percent)||8.9||5.1||−1.1||0.2||2.7||3.0||3.2||3.6||3.7|
|Official reserves (US$ billion)||55.8||48.6|
|Fund position (as of January 31, 2012)|
|Holdings of currency (percent of quota)||79.7||73.1||70.9|
|Holdings of SDRs (percent of allocation)||96.1||95.5||94.2|
|Quota (SDRs million)||10739||10739||10739|
|Euro per U.S. dollar, period average||0.75||0.72||0.78|
|Nominal effective rate, ULC-styled (2000=100)||102.4||102.4||100.1|
|Real effective exchange rate, ULC-based (2000=100)||104.3||105.4||104.8|
|Potential output and output gap|
|Per capita GDP (2006): US$35,471; Life expectancy at birth (2009): 77.7 (male) and 84.4 (female);|
|Poverty rate (mid-2000s): 14.1 percent (60 percent line), 7.1 percent (50 percent line);|
|Income distribution (ratio of income received by top and bottom quintiles, 2004): 4.2.|
For 2013, average for January-May.
For 2013, average for January-May.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.