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France can bolster growth through fiscal restraint, further reforms

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2005
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The cyclical recovery of the French economy was interrupted in the first half of 2005 as previously strong domestic demand faltered and the external sector continued to exert a drag on growth, the IMF said in its annual economic review. Because growth in 2004 was faster and more consumption-driven than in other large euro area countries, the fall in private consumption in the second quarter of 2005 was unexpected and possibly related to stagnating unemployment, rising oil prices, and political turmoil surrounding the rejection of the European Union constitution. Growth is likely to pick up, however, driven by an improvement in the external environment and a return of domestic demand to a normal pace following the mid-year clarification of the direction of economic policies. Indeed, the third-quarter data, not available at the time of the IMF Executive Board’s November discussion, came in strong, prompting the staff to revise its growth projection upward.

The Board commended the authorities for continuing to pursue fiscal consolidation and structural reforms amid the weak economic environment and difficult political circumstances. France’s 2006 draft budget targets a reduction in the general government deficit to 2.9 percent of GDP from 3.0 percent of GDP in 2005 and 3.6 percent of GDP in 2004. For 2006, the Board urged the authorities to step up the pace of underlying adjustment and avoid recourse to one-off measures.

France200220032004Proj.

2005
Proj.

2006
(percent increase)
Real GDP1.30.92.11.612.11
Domestic demand1.31.83.22.42.0
(percent of labor force)
Unemployment8.99.59.79.89.8
(percent of GDP)
General government balance-3.2-4.2-3.6-3.1-3.3

Revised projections. Earlier projections were 1.5 (2005) and 1.8 (2006). Data: French authorities and IMF staff estimates.

Revised projections. Earlier projections were 1.5 (2005) and 1.8 (2006). Data: French authorities and IMF staff estimates.

To prepare for the consequences of an aging population, the authorities need to be ambitious in reducing the share of public spending in GDP and in implementing growth-enhancing structural reforms. The Board encouraged the authorities to focus fiscal consolidation squarely on expenditure restraint and to further strengthen the framework for fiscal governance.

On structural issues, the authorities have undertaken a series of measures in the labor and product markets, and in the financial sector. Executive Directors strongly supported the recent labor market initiatives and urged the authorities to broaden them. They felt that adopting more flexible labor contracts throughout the labor market would help to significantly reduce unemployment and effectively combat the exclusion of some from the labor market.

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