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© 2004 International Monetary Fund
November 2004
IMF Country Report No. 04/343
France: 2004 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 2004 Article IV consultation with France, the following documents have been released and are included in this package:
the staff report for the 2004 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on July 6, 2004, 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 21, 2004. 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 15, 2004 updating information on recent developments.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its October 20, 2004 discussion of the staff report that concluded the Article IV consultation.
The documents listed below have been or will be separately released.
Financial System Stability Assessment
Report on the Observance of Standards and Codes—Fiscal Transparency and Data Module—Updates
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 2004 Article IV Consultation
Prepared by Staff Representatives for the 2004 Consultation with France
Approved by Michael Deppler and John Hicklin
September 21, 2004
The discussions took place in Paris during June 24–July 6, 2004. The team—Messrs. Leipold (Head), Everaert, Nadal De Simone, and Schule, Mmes. Allard and Giuliano (all EUR), and Mr. Ugolini (MFD)—met with Mr. Sarkozy, Minister of Economy, Finance, and Industry, Mr. Bussereau, Minister of the Budget, and their staff; Governor Noyer and officials of the Banque de France; Mr. Loos, Deputy Minister of Foreign Trade; 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, as well as securities and insurance supervisors; and market participants, academics, and representatives of the employers’ federation and labor unions. Seminars were held on drafts of two of the staffs Selected Issues Papers. Mr. Duquesne (Executive Director) or Mr. Cuny (Alternate Executive Director) attended the meetings.
The centre-right government is embarking on the second half of its five-year mandate with general and presidential elections due in 2007.
A Financial System Stability Assessment report was prepared as part of the Financial Sector Assessment Program (FSAP), the findings of which were discussed with the authorities during the mission.
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).
Updates of the Data Module and the Fiscal Transparency Module of the Reports on the Observance of Standards and Codes are being issued concurrently with this report.
Contents
Executive Summary
I. Background
II. Policy Discussions
A. Economic Performance and Near-Term Outlook and Policies
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. Private Consumption
3. Gross Fixed Investment
4. Employment and Unemployment
5. Labor Intensity of Output
6. Business Indicators
7. Consumer Indicators
8. Real Effective Exchange Rates and Export Shares
9. Inflation Components
10. Harmonized Consumer Price Inflation
11. Monetary Conditions
12. General Government Debt
13. Overall Balance Scenarios
14. Public Debt Scenarios
15. (De-)Regulation of Labor and Product Markets
Tables
1. Main Economic Indicators, 2000–09
2. Vulnerability Indicators, 2000–04
3. Public Sector Debt Sustainability Framework, 1999–2009
4. General Government Accounts 1996–2003
Text Boxes
1. Past Fund Policy Recommendations and Implementation
2. Household Consumption: is its Recent Strength Enduring?
3. Health Care Reform
4. Youth Unemployment, Job Mobility, and Wage Growth
5. FSAP Main Policy Recommendations
Appendices
I. Fund Relations
II. Statistical Information
Executive Summary
The recovery is well under way with domestic demand as key driver and downside risks centered on external factors. Crucial reforms have been proceeding (notably of pension and health care systems), but changes in labor market institutions and work incentives have been harder to come by, held back by “social cohesion” concerns. In the staff’s view, such changes need to be an integral part of the authorities’ stated emphasis on growth-enhancing reforms if these are to succeed in securing fiscal sustainability. Until such reforms are in hand, direct expenditure restraint should aim at achieving a small structural surplus by the end of the decade. The Financial System Stability Assessment found no systemic risks. It urged a further strengthening of supervision and the phasing-out of state interventions in financial markets.
The strength of the current recovery has surprised, removing any cyclical concerns about proceeding with much-needed fiscal adjustment. There was consensus that GDP growth would average about 2.5 percent per year in 2004 and 2005. The authorities emphasized the need to sustain confidence in the recovery, in part by supporting incomes at the lower end of the income distribution and adopting a measured approach to fiscal adjustment. With the upswing in domestic demand sufficiently well-established and downside risks mainly from the external side, staff saw no need for supportive measures and room for greater structural fiscal adjustment.
Long-term growth is being fettered by structural weaknesses and adverse demographics, requiring comprehensive structural reforms. While progress is being made in several areas, labor market reform has reached an impasse. Reliance on budgetary measures to promote higher labor utilization stands in direct conflict with fiscal consolidation objectives. Meanwhile, the needed fundamental rethinking of labor market institutions has been left to reluctant social partners and entitlement reform is largely off limits.
The authorities intend to reduce the fiscal deficit to under 3 percent of GDP in 2005 and to rely on growth-enhancing reforms for long-term fiscal sustainability. Under current growth prospects, the overall deficit is likely to fall to less than 3 percent of GDP in 2005. The underlying structural adjustment implied by the official target is thus small while the pace of medium-term consolidation is unclear. In the staff s view, while pension and health care reforms have been beneficial, there is a need to step up reforms of employment protection and benefits to meaningfully increase labor utilization while securing structural fiscal adjustment. Until such reforms are in hand, direct expenditure restraint should aim at achieving a small structural surplus by the end of this decade before higher costs of aging kick in. The fiscal framework should be strengthened and automatic stabilizers should be allowed full play, in contrast to a new fiscal rule currently under consideration.
Ongoing product market deregulation, including simplification of administrative procedures, liberalization of network industries, and an acceleration of divestiture has raised the potential returns to increased labor market flexibility and growth prospects. The financial system was found to be resilient, but continued vigilance with respect to banks’ risk exposure and further strengthening of supervision and phasing out of state intervention in financial markets were deemed necessary. The staff urged France to associate itself fully with efforts to bring the Doha round to a successful conclusion and welcomed the relatively high level of official development assistance (ODA).
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INTERNATIONAL MONETARY FUND
FRANCE
Staff Report for the 2004 Article IV Consultation Supplementary Information
Prepared by the European Department
(In consultation with the Policy Development and Review Department)
Approved by Michael Deppler and G. Russell Kincaid
October 15, 2004
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Public Information Notice (PIN) No. 04/121
FOR IMMEDIATE RELEASE
November 3, 2004
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
