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INTERNATIONAL MONETARY FUND

IMF Country Report No. 14/182

July 2014

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 2014 Article IV consultation with France, the following documents have been released and are included in this package:

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 1, 2014, following discussions that ended on May 15, 2014, 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 June 17, 2014.

• An Informational Annex prepared by the IMF.

• A Press Release summarizing the views of the Executive Board as expressed during its July 1, 2014 consideration of the staff report that concluded the Article IV consultation with France.

• A Statement by the Executive Director for France.

The following document has been or will be separately released.

Selected Issues Paper

The publication policy for staff reports and other documents allows for the deletion of market-sensitive information.

Copies of this report are available to the public from

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©2014 International Monetary Fund

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INTERNATIONAL MONETARY FUND

FRANCE

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION

June 17, 2014

KEY ISSUES

Context and Outlook. The economy has shown resilience through the crisis, but faces a slow recovery. Three years of significant fiscal adjustment have dampened activity. We project growth of 0.7 percent this year and 1.4 percent in 2015, driven by stronger external demand, improvements in profitability and investment, and a lesser fiscal drag. Inflation is projected to stay just above one percent. Apart from cyclical weakness and a structural fiscal imbalance, the economy faces employment and competitiveness gaps. Supply side measures and structural reforms are expected to improve economic performance over the medium term.

Risks. Volatile and uneven leading indicators point to the risk of a stalled recovery. Continued stagnation would, in turn, make it more difficult to meet fiscal objectives. Financial stability risks, and related outward spillovers, have abated considerably, as banks have rebuilt capital and liquidity buffers at a brisk pace, although exposure to wholesale funding remains high.

Policy Recommendations. Despite substantial adjustment, mostly on the tax side, the government deficit still stood at 4.2 percent of GDP in 2013, and debt rose to 92 percent in 2013. The April 2014 Stability Program lays out a path of fiscal adjustment, tax cuts and reform aimed at closing the structural fiscal deficit over the medium term while boosting the economy’s growth potential. The targeted pace of adjustment is right— about ½ a percentage point a year. The simultaneous pursuit of tax cuts and deficit reduction rests on an ambitious program of expenditure reduction (2.2 percent of GDP). The emphasis should go to structural measures to ensure that spending growth is curbed permanently. Tax cuts and regulatory simplification are welcome measures to encourage investment. The impact of supply-side initiatives would be boosted by better functioning labor and product markets: reforms should aim to expand competition in services and to deepen labor market reforms with a view to creating more room for enterprise-level negotiations over working conditions. Indexation of the minimum wage should be reformed to limit the adverse impact on low skilled employment. Stronger liquidity and capital buffers in banks, and an improved European bank resolution framework, will better shield the economy and public finances from banking shocks. Banks still face adaptation to the evolving regulatory framework, and it will be important to ensure that the uneven taxation of financial instruments does not constrain the key intermediation role of banks.

Approved By

Jörg Decressin and Mark Flanagan

CONTENTS

• CONTEXT

• OUTLOOK AND RISKS

• POLICY DISCUSSIONS

• STAFF APPRAISAL

• BOX

• 1. The Spending Containment Package

• FIGURES

• 1. Real Sector Developments, 2007–19

• 2. Per Capita Income 1995–2013

• 3. Inflation Developments, 2009–13

• 4. Debt and Financing Conditions for Non-Financial Private Sector

• 5. Fiscal Developments and Adjustment Scenario

• 6. External Developments, 2000–13

• 7. Banking Sector Developments

• 8. Scope for Product Market Reform

• 9. Labor Market Features

• TABLES

• 1. Selected Economic and Social Indicators, 2009–19

• 2a. General Government Statement of Operations, 2009–19

• 2b. General Government Integrated Balance Sheet, 2003–12

• 2c. General Government Accounts, 2009–19

• 3. Balance of Payments, 2011–19

• 4. Vulnerability Indicators, 2006–12

• 5. Core Financial Soundness Indicators, 2006–13

• 6. Encouraged Financial Soundness Indicators 2006–13

• APPENDICES

• I. Main Recommendations of the 2013 Article IV Consultation and Authorities’ Response

• II. France: Public Debt Sustainability Analysis

• III. FSAP Update: Status of Main Recommendations

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June 17, 2014

Prepared By

CONTENTS

• FUND RELATIONS

• STATISTICAL ISSUES

• TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE

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INTERNATIONAL MONETARY FUND

Press Release No.14/326

FOR IMMEDIATE RELEASE

July 3, 2014

International Monetary Fund

Washington, D.C. 20431 USA

IMF Executive Board Concludes 2014 Article IV Consultation with France