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© 2003 International Monetary Fund
October 2003
IMF Country Report No. 03/334
France: 2003 Article IV Consultation—Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2003 Article IV consultation with France, the following documents have been released and are included in this package:
the staff report for the 2003 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 30, 2003, with the officials of France on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 12, 2003. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff supplement of October 3, 2003 updating information on recent developments.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its October 8, 2003 discussion of the staff report that concluded the Article IV consultation.
The document(s) listed below have been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
FRANCE
Staff Report for the 2003 Article IV Consultation
Prepared by Staff Representatives for the 2003 Article IV Consultation with France
Approved by Michael Deppler and Leslie Lipschitz
September 12, 2003
The discussions took place in Paris during June 19–30,2003. The team—Messrs. Leipold (Head), Everaert, Estevao, Nadal De Simone (EU1), Fonteyne (MFD), and Mottu (MED)—met with Mr. Mer, Minister of the Economy, Finance, and Industry, and Mr. Lambert, Minister of the Budget, and their staff; Governor Trichet and officials of the Banque de France; Mr. Poncelet, president of the Senate; Mr. Delevoye, Minister of Public Administration; economic advisors to the Prime Minister; the presidents of the finance commissions of the National Assembly and the Senate; officials of the Ministries of Health and Social Affairs, Labor, and Solidarity, the national statistics institute, the Banking Commission, the securities and insurance supervisors; as well as market participants, academics, and representatives of labor unions. Well attended seminars were held on drafts of the staffs Selected Issues Papers. Mr. Duquesne (Executive Director) or Mr. Boitreaud (Alternate Executive Director) attended the meetings.
France is an Article VIII member and, apart from certain security restrictions, maintains an exchange system free of restrictions (Appendix I).
France subscribes to the Fund’s Special Data Dissemination Standard and comprehensive economic data are available on a timely basis (Appendix II).
Contents
Executive Summary
I. Overview
II. Policy Discussions
A. Economic Performance and Near-Term Outlook
B. Fiscal Consolidation Strategy
C. Labor and Product Markets
D. Financial Sector
E. Other Issues
III. Staff Appraisal
Figures
1. GDP and Demand Components
2. Household Savings and Unemployment Expectations
3. Household Consumption and Disposable Income
4. Investment, Enterprise Margins and Tobin’s Q
5. Unemployment Rates Normalized by their Recent Trough
6. Sectoral Employment
7. Business Indicators
8. Consumer Indicators
9. Real Effective Exchange Rate
10. Inflation Components
11. Monetary Conditions
12. General Government Balance
13. General Government Debt
14. Public Health Care Spending
Tables
1. Main Economic Indicators
2. General Government Accounts 1995–2002
3. General Government Real Expenditure Growth
4. Vulnerability Indicators 1999–2003
Text Boxes
1. Fiscal Sustainability and Pension Reform
2. Tax Policy and Economic Efficiency
3. Do Active Labor Market Policies Increase Employment?
4. Administrative Intervention in Financial Markets
Appendices
I. Fund Relations
II. Statistical Information
Executive Summary
Prospects for a near-term recovery are tentative and dependent on global conditions while over the long term population aging will lower potential growth and challenge fiscal sustainability. Pension reform has made major inroads on the latter, but fiscal consolidation needs to resume, with sustained adjustment over the medium term based on credible expenditure restraint, while structural reforms are needed to increase growth potential, especially by raising labor utilization.
The French economy has been no exception to the prolonged global slowdown and economic recovery has remained elusive, though there are now tentative prospects of an uptick. With the impact of adverse shocks waning and external demand conditions, business indicators, and equity markets improving, a gradual recovery is expected, though there remain downside risks from the external environment and, domestically, from the unemployment outlook and corporate balance sheet adjustment. Staff projects GDP to grow by 2 percent in 2004, after 0.5 percent in 2003.
The authorities agreed that monetary policy and the full operation of automatic fiscal stabilizers should deal with cyclical requirements, while already envisaged modest tax cuts should proceed as planned, accompanied by strict expenditure control. The budget deficit is set to rise to 4 percent of GDP in 2003. Administrative interest rates have been lowered to enhance the effectiveness of monetary policy, but are not fully in line with market rates.
Attaining long-term fiscal sustainability will require that the recently enacted pension reform be accompanied by the achievement of a small structural surplus within about five years and structural reforms that deliver an appreciable increase in potential growth. Following the milestone pension reform, the authorities declared their intention to resume fiscal consolidation at a moderate pace of about ½ of one percentage point of GDP per year as from 2004. The staff recommends that this approach be pursued through expenditure reduction until a small structural surplus is reached (excluding the costs of aging). Health care and civil service reform and decentralization offer scope for expenditure reduction. The expenditure control framework needs to be strengthened and extended to cover social security. A reduction in the high tax burden would be helpful for growth, if accompanied by credible expenditure cuts, while the staff also advocates a revenue-neutral tax reform to remove distortions.
Labor and product market reforms are needed to deliver higher medium-term growth. With low employment rates providing scope to improve labor utilization rates, staff welcomes the shift in policies toward tempering the rise in labor costs and promoting private sector employment and recommends stepping up labor market reforms while being mindful of the budgetary cost. Product market functioning is being improved but network liberalization and divestiture should be pursued more resolutely. Financial markets are holding up well to the downturn while supervision and governance are being strengthened, but administrative interventions in financial markets should be phased out. Staff urges more ambitious agricultural and trade reforms while welcoming a high level of ODA.
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INTERNATIONAL MONETARY FUND
FRANCE
Staff Report for the 2003 Article IV Consultation Supplementary Information
Prepared by the European I Department
(In consultation with the Policy Development and Review Department)
Approved by Michael Deppler and Leslie Lipschitz
October 3, 2003
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Public Information Notice (PIN) No. 03/128
FOR IMMEDIATE RELEASE
October 29, 2003
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
