This 2014 Article IV Consultation highlights that the economy of France fared better than most other large euro areas economies through the crisis, reflecting the resilience of private consumption, lack of financial fragmentation, and lower levels of household and corporate debt. Banks’ financial position has also been strengthened. But after two years of near stagnation, unemployment remains high. A loss of competitiveness has also weighed on growth. The outlook is for a gradual recovery, with GDP growth projected at 0.7 percent in 2014 and 1.4 percent in 2015, based on stronger external and domestic private demand, reflecting gains in real disposable income and improved profit margins.


This 2014 Article IV Consultation highlights that the economy of France fared better than most other large euro areas economies through the crisis, reflecting the resilience of private consumption, lack of financial fragmentation, and lower levels of household and corporate debt. Banks’ financial position has also been strengthened. But after two years of near stagnation, unemployment remains high. A loss of competitiveness has also weighed on growth. The outlook is for a gradual recovery, with GDP growth projected at 0.7 percent in 2014 and 1.4 percent in 2015, based on stronger external and domestic private demand, reflecting gains in real disposable income and improved profit margins.


1. The mission took place before the European Parliament elections, in which the far-right party registered large gains at the expense of the socialist and center right parties. These electoral results came in the wake of a similar rebuke at the local elections in April, following which the President nominated a new government, headed by PM Valls. Discussions with the authorities centered on the policy program of the new government, as described in the Stability Program and National Reform Program. European Parliament elections have no immediate implications for policies: the government can count on a comfortable socialist majority in parliament until Presidential and Parliamentary elections in 2017; and, in reaction to the electoral results, both the President and the PM vowed to stay the course. Nonetheless, the popular discontent voiced during these elections could make the reform and adjustment process more arduous.

2. Through the crisis, the economy fared better than other large euro area economies, except Germany, but it is also behind others in the recovery cycle (Figures 1 and 2). Investment in particular remains depressed and the output gap widened to -2.2 percent in 2013, with unemployment stuck above 10 percent. Demand has been constrained by a weak external environment and the drag caused by structural fiscal adjustment of nearly 3 percent of GDP over three years (2011–13). Resilient wage growth helped sustain consumption; but, combined with faltering productivity growth, it also compressed profit margins. Falling profitability, in turn, appears to have amplified the contraction of investment in response to flagging demand. 1 Long-standing structural and competitiveness problems have compounded these negative factors.

Figure 1.
Figure 1.

Real Sector Developments, 2007–19

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: OECD, Haver Analytics, and IMF Staff calculations.1Comprises Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Figure 2.
Figure 2.

Per Capita Income 1995–2013

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: AMECO, Haver Analytics, and IMF Staff calculations.1 Converted into Euros using the average exchange rate for 1995-2013.

3. Private consumption has been an important factor of resilience in the French economy. During the crisis, the private saving rate did not react as procyclically as in other economies (notably the United States and the United Kingdom), and consumption growth remained positive, except for a small dip in 2012—real consumption was 2.5 percent higher in 2013 than at the pre-crisis peak, and the household saving rate has been relatively stable around 15½ percent in the last decade. The stability of consumption, even as disposable incomes were squeezed by rising taxation, reflects extensive social safety nets and sustained real wage growth.

4. The stability of private consumption also reflects weak exposure to asset price changes. The absence of observable wealth effects in consumption, which have amplified the recession in other advanced economies, owes to conservative financial holdings (mostly bank deposits and life insurance products which have built-in shock absorbers) and inability to monetize real estate wealth because of rigid lending standards—these are based on capacity to repay rather than collateral. Thus, in the absence of over-leveraging, the gradual correction of real estate prices which is underway—real prices are 9 percent below pre-crisis peak—has had no discernible impact on consumption.

5. In the wake of disinflationary pressures that began in 2012, inflation has stabilized around 1 percent. The slowdown in inflation (from 2.3 percent in 2012Q2 to 0.9 percent in 2014Q1) originates from declining core, energy, and food inflation in about equal proportions (Figure 3). Core inflation bottomed out mid–2013 driven by the continued compression in profit margins, pass through of lower import prices into manufacturing products, and the significant drop of telecom prices following the entry of a fourth operator. As some of the temporary factors waned, core inflation has edged up to just over 1 percent.

Figure 3.

Inflation Developments, 2009–13

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: INSEE, Haver Analytics, and IMF Staff calculations.1 Ratio of value added deflator to consumption deflator.

6. Monetary easing has been transmitted into domestic interest rates, but monetary conditions have tightened since 2012. Despite the low level of nominal lending rates, falling inflation expectations have led to an increase in real interest rates. Balance sheet restructuring by banks was achieved mostly by shedding non-core foreign activities while preserving the core lending business. Domestic credit growth has thus remained positive through much of the crisis, although in 2013 the only growth was in mortgage lending. Corporate and household debt levels have increased, but they remain moderate by international comparison (Figure 4).

Figure 4.

Debt and Financing Conditions for Non-Financial Private Sector

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: ECB, Haver Analytics, and IMF Staff calculations.1 The difference between consolidated and non-consolidated NFC debt in these countries was a maximum of 21 percent of GDP in 2012 for France; no consolidated data exist for the UK.

France: Lending Rate for New Business Loans

(In percent)

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: Haver Analytics, IMF Staff calculations.Though nominal interest rates have remained broadly stable,

France: Real Lending Rate and Differential Relative to Germany

(In percent, for new business loans up to one year maturity)

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: Haver Analytics; Consensus Forecasts; and staff calculations.1 Nominal rates deflated using CPI consensus forecasts.real interest rates have risen as inflation has come down.

7. Notwithstanding the significant adjustment already achieved, the government deficit was still 4.2 percent of GDP in 2013 (2.8 percent in structural terms). The persistence of structural fiscal deficits stems from the fact that public expenditure has tended to outrun GDP growth over decades, including through the fiscal stimulus of 2009. The resulting accumulation of deficits since 1975, even in good times, has reduced fiscal space and limited the ability of governments to sustain demand as the economy slowed down in 2012-13 (Figure 5). 2 Fiscal space is also constrained by contingent liabilities, which declined from 152 percent of GDP end 2012 to 134 percent of GDP in 2013 (slightly more than half is related to pensions). Despite the increase in debt, government borrowing rates have stabilized at historically low levels (the 10-year yield has declined from 4.7 percent in June 2008 to less than 1.9 percent in May 2014).

Figure 5.

France: Fiscal Developments and Adjustment Scenario

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: French Authorities, INSEE, and IMF Staff calculations.

8. The fiscal policy strategy was to divide the adjustment equally between revenue and expenditure measures but to front-load the revenue measures because of their lower (expected) multiplier. The tax burden increased by 2.8 percent of GDP from 2007 to 2013. Fiscal adjustment shifted from tax increases to expenditure containment in 2013, but growth of spending was still 0.9 percent in real terms. The strategy has encountered a number of challenges, including a political backlash against taxation, falling tax buoyancy and inflation, expenditure slippages at the level of local governments, and rising social spending. In the event, the social insurance system which has contributed to the economy’s resilience has become more difficult to sustain financially and to reconcile with deficit reduction.

9. Loss of competitiveness has weighed on growth. The competitiveness gap is evident from export market share and unit labor cost developments (Figure 6). The evidence based on price competitiveness is less clear, because narrowing profit margins have compensated for the loss of cost competitiveness. At the same time, EBA model estimates suggest that the 2013 current account was 1 to 3 percent of GDP below its cyclically-adjusted norm. Based on all of these considerations, staff considers that the real exchange rate in 2013 was 5-10 percent higher (i.e., overvalued) relative to medium term fundamentals and desirable policy settings. Export performance appears weak even when correcting for the fact that France is less integrated in the Global Value Chains, which tend to gross up both imports and exports.3 Non-cost factors weighing on competitiveness are related to rigidities in the economy. The recent narrowing of the current account deficit—from 2.1 percent of GDP in 2012 to 1.3 percent in 2013—reflects to a greater extent weak domestic demand than a rebound of export growth. The net international investment position has deteriorated since the outset of the crisis to -20 percent of GDP. However, its size and trajectory do not raise sustainability concerns.

Figure 6.

External Developments, 2000–13

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: European Commission, IMF WEO Statistics, IMF BOP Statistics, Haver Analytics, and IMF Staff calculations.1 Compensation in current Euros divided by apparent labor productivity measured in 2005 Euros.2 Adjusted by imputing the CICE tax credit (0.9 percent of GDP) to lower labor costs.

10. Financial sector indicators show continued improvements, but banks remain exposed to wholesale funding risks. Banks have made significant progress in building capital and liquidity buffers, drawing from increased profitability and adjustments in their funding structure. These improvements have been reflected in rising price-to-book ratios (Figure 7). Despite a further reduction in the loan-to-deposit ratio (to 115.9 percent in 2013 for the six large banking groups), banks face gaps relative to future net stable funding ratio requirements. And, although the large groups have met the CRD-IV fully loaded minimum CET1 capital requirement, many peers have gone further. Deleveraging has continued, with total assets of the five large banking groups down 7.5 percent in 2013. Non-performing loans have risen to 4.5 percent in 2013 (Table 5), but continue to be well provisioned.

Figure 7.

Banking Sector Developments

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: Banque De France, ACPR, SNL Financial, Bloomberg, and IMF Staff calculations.


11. The recovery faces a difficult take off. On the back of a weaker than expected first quarter, staff revised growth projections relative to the April WEO, to 0.7 percent in 2014 and 1.4 percent in 2015. The expected gradual recovery rests on stronger external and domestic private demand (from gains in real disposable income and gradual improvements in profit margins), and a lesser fiscal drag. Supply side measures are expected to gain in strength over the medium term. Following 2 years of net job destruction, the private sector should become a source of net job creation this year, but the unemployment rate should begin to come down measurably only in 2016.

12. Inflation is expected to remain around 1 percent, rising only very gradually over the medium term. The inflation projection is predicated on moderate wage inflation related to the slack in the labor market and the need of enterprises to restore profit margins. However, there are non-negligible downside risks to the inflation outlook. While so far wage growth has declined very slowly in response to labor market slack, it could decelerate more rapidly in a context of continued slow output growth. In particular, downward pressures could develop as falling inflation feeds into wages through the indexation of the minimum wage.

13. The 2014 budget was prepared on the basis of prudent macroeconomic assumptions, reflecting the moderating role of the fiscal council. The authorities project a deficit of 3.8 percent of GDP based on additional saving measures to be adopted this summer. Staff projects a deficit of 4.0 percent reflecting the downward revision to growth and lower tax buoyancy. Structural adjustment would be 0.4 percent of GDP, the bulk of it coming from expenditure containment.

14. The authorities’ medium-term scenario envisages a somewhat stronger and faster response of the economy to supply side measures. The Stability Program, prepared prior to the release of the poor Q1 results, envisaged growth of 1 percent this year and 1.7 percent in 2015, rising to 2.25 percent by 2016. It also assumed higher price and wage inflation and a more rapid decline of the unemployment rate. The newly created fiscal council assessed the growth and employment projections to be realistic for 2014, possible but subject to the “realization of several positive assumptions” in 2015, and optimistic for 2016-17.

15. Delivery of planned supply side and fiscal policies should help correct the external imbalance. In the staff’s baseline scenario, the current account deficit is projected to close over the medium-term in tandem with the fiscal deficit. This would bring the external position to a level consistent with fundamentals and desirable policy settings. This adjustment is to be facilitated by internal depreciation induced by the implementation of the authorities’ policy program of public expenditure containment and labor tax reductions, and by wage moderation. These policy actions are aligned with those recommended by staff to close the external gap.

16. Risks around the baseline scenario remain substantial, reflecting uncertainty about the timing and strength of the cyclical turnaround and the impact of popular discontent on policy resolve. Slower global growth and financial market volatility are the main external risks (see Risk Assessment Matrix). The main domestic risk is a stalled recovery of investment in the face of an uncertain outlook—some leading indicators remain below average. A negative spiral of low growth and falling inflation, and its effect on real interest rates, would have additional adverse effects on investment and the fiscal deficit. Lower-than-expected growth could also fuel popular discontent and could undermine fiscal resolve. However, the fiscal responsibility framework would likely kick in to limit backtracking on fiscal policy. Public debt is particularly sensitive to a lower growth scenario (DSA in Appendix II). On the upside, staff could be underestimating the rebound, given the well-known difficulties in projecting cyclical turnarounds. The main financial sector risks stem from the banks’ continued reliance on wholesale funding, even though the maturity of debt has been lengthened; medium-term risks relate to the ability of French banks to adapt to changes in the regulatory environment (see policy discussion). Legal risks associated with their global operations (e.g., investigations into market manipulation, compliance with international sanctions) could also weigh significantly on some banks, particularly if penalties were to curtail some of their international activities.

17. The potential for outward spillovers from France appears to have abated since the crisis, particularly with respect to financial linkages. Recent research shows that, whereas credit and funding shocks to French banks could have induced banking failures in more than ten countries in 2008, as of 2012 significant outward spillovers would have been limited to Belgium, Italy, and Ireland, reflecting lower cross-border exposures.4 Other research shows that, under deteriorated liquidity conditions, cutbacks in interbank lending were the first line of defense of French banks, and that banks with higher capital ratios were able to maintain higher rates of lending to the foreign non-financial sector.5 By implication, the generalized improvement in capital ratios since the crisis should help limit outward spillovers to the real sector in the event of renewed liquidity stress. With respect to trade linkages, France continues to exercise strong demand effects especially on small neighboring countries. A recent study highlights the strong outward spillovers of business investment in particular, given its large import component.6 In all, with investment set to recover gradually, and with banks’ capital and liquidity positions strengthened and direct financial inter-linkages reduced, large adverse spillovers from France appear less likely.

France: Risk Assessment Matrix7

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18. A comprehensive policy program to address structural imbalances. Persistent fiscal deficits have eroded fiscal space to the point where there may not be enough room to counter effectively possible future shocks without putting fiscal credibility at risk. Underutilization of labor resources, with an employment rate of youth and seniors among the lowest in the OECD, has not only lowered potential GDP but also impacted social spending, with adverse effects on the fiscal balance and taxation. Overlaying these challenges is a competitiveness gap which has further undermined potential growth. This diagnostic, shared by the authorities, is the motivation behind the ambitious course of adjustment and reform laid out in the April 2014 Stability Program and National Reform Program. At the core of the strategy are a very sizeable correction in public expenditure and measures to increase the supply response of the economy.

19. Steady and more moderate fiscal adjustment going forward. The Stability Program targets structural fiscal adjustment averaging about ½ a percent of GDP a year, until (structural) fiscal balance is reached. Staff and the authorities agreed that this objective adequately balances the need to restore fiscal space against the risk of undermining the recovery. Staff noted that no additional measures should be taken this year, beyond those already planned, given the fragility of the recovery. The authorities project to converge to structural fiscal balance by 2017 (the horizon of the Stability Program). Under the staff’s more conservative macroeconomic scenario, fiscal adjustment would need to continue at the same pace until 2019 to reach balance (see staff baseline scenario in the tables).

20. Adjustment anchored by an expenditure reduction plan. Because of simultaneous tax cuts (see below), the strategy relies on sizable expenditure reduction (relative to trend). The expenditure effort (2.2 percent of GDP over three years) is distributed across all sectors, including local governments and social security where expenditure growth has been the strongest in recent years. Expenditure cuts at the local government level will be backed by institutional reforms aimed at rationalizing overlapping structures which have contributed to overspending. This institutional reform should begin in the next couple of years. In all, real expenditure would remain roughly constant over the next three years, compared to growth of 0.5 percent in 2011-14. The areas of adjustment have been identified, and the underlying measures are in various stages of preparation. The authorities plan to provide greater clarity on the specific measures in the multi-year finance law in the fall (Box 1).

21. Still, sizeable implementation risks ahead. Given the scale of the effort, resistance to expenditure tightening is likely to build up as specific measures are put up for discussion with social partners and for parliamentary approval. Staff also noted that institutional reform that will help contain local government spending will only come into effect over the medium term. In the meantime, there is a risk that local governments would react to reduced transfers from the central government by cutting productive investment, raising taxes, or increasing debt. This would undermine the government’s strategy.

22. Careful piloting needed to mitigate these risks. The authorities recognized the difficulty of piloting this program over the next three years, but emphasized the strong political will behind it, as reflected in the decision to obtain parliamentary endorsement. With such endorsement, the authorities believed they could pursue the necessary measures, even if concessions may need to be made at the margins. As for the effort required of local governments, they noted that it was doable without disorderly adjustment or leakages into higher taxes or debt, since it only implies a stabilization of real spending (compared to a reduction of about 1 percent per year for the central government). Nonetheless, the authorities were seeking to develop coordination mechanisms to guide and monitor the actions of local governments through the consolidation phase. They also thought that raising taxes was no longer politically viable for local elected officials.

The Spending Containment Package

Announced expenditure containment of €50 billion, relative to trend, over 2015-17 implies an effort of 2.2 percent of GDP and would result in a stabilization of real spending over the three years. By comparison, the expenditure effort planned for 2014 is €19 billion (including €4 billion in extra cuts added in supplementary budgets).

The cuts are frontloaded: €21 billion in 2015, €16 billion in 2016, and €13 billion in 2017. Cumulatively, they represent about 4 percent of spending for each level of government (central, sub-national, and social security). The cuts are distributed as follows:

Central government: €18 billion. To be achieved through spending rationalization, pooling of purchases and ICT spending across ministries, reduced funding of state agencies, and extension of the wage freeze introduced in 2010 combined with stabilization of the number of civil servants.1 Discussions are under way on how to distribute the burden across ministries consistent with government priorities.

Local governments: €11 billion cut in transfers from the central government, expected to lead to equivalent cuts in spending. These cuts follow a freeze in 2012 and a €1.5 billion cut in 2014. Because of their fiscal independence, local authorities could, within limits, compensate for lower transfers by raising taxes and debt. 2 To ensure that the cut in transfers will translate in spending reductions, the government has launched plans to reduce the number of sub-national governments over the medium term. The plan also includes elimination of the general competency clause which has spurred duplication of spending by allowing the various layers of government to operate in the same areas of competence.

Health spending: €10 billion. Measures have been largely identified, and they are mostly structural: development of ambulatory surgery (€1 billion), rationalization and pooling of hospital spending (€1 billion), cut in medicine costs notably through promotion of generics (€3.5 billion), elimination of ineffective medical procedures (€2.5 billion). Additional savings would come from the public sector wage freeze and from fighting fraud.

Social protection: €11 billion. €2.9 billion comes from recent reforms of family allowance and pensions; €4 billion from de-indexation of pensions, family, and housing allowances—expected to be adopted in 2014; and €2.8 billion from additional reform of unemployment insurance and family allowances—yet to be defined. The remaining €1.2 billion in savings would come from reduced administrative costs.

The proposed savings are at different stages of identification. The wage freeze, de-indexation of social benefits, and impact of recent reforms in social benefits are well identified. Central government savings (outside of wage and employment freeze) have yet to be announced, but the central government has the means to deliver. Savings in health spending are identified and rationing mechanisms are in place to ensure execution, although health spending is subject to factors that fall outside the control of the authorities. Of the social spending saving, about €4 billion depends on reforms of social protection programs, which will need to be decided in consultation with social partners, who are ultimately responsible for these programs. As for local governments, they have the means to realize savings by reducing employment through attrition, and by containing other current and capital spending. The degree to which there will be leakage into higher taxes or higher debt is uncertain.

1 The base wage freeze applies to all levels of government.2 The potential for tax increases is limited by the narrow own tax base (6 percent of GDP). Local governments can only resort to debt financing for capital projects, so debt could increase only by shifting the financing of such projects from own resources to debt.

23. Supply side measures to reinvigorate investment and job creation. The package of supply side measures includes: (i) tax cuts for enterprises (2 percent of GDP in 2014–17), comprising the CICE8 tax credit scheme introduced in 2013, and the various tax breaks under the Responsibility and Solidarity Pact (RSP) announced by the new government; and (ii) an enhanced program of regulatory simplification conducted in consultation with enterprises. The intention behind the tax cuts, which are mostly in the form of lower labor taxes, is to restore profit margins and thus the capacity of enterprises to invest, and to enrich the employment content of growth. The authorities also planned to ease regulatory thresholds which create additional costly regulatory requirements beyond 10, 20, and 50 employees, hampering enterprise growth and development. Though the bulk of tax cuts will benefit firms, the authorities also plan to reduce taxes paid by household by about 0.25 percent of GDP over 2015-17, which should more directly support demand.

24. Potentially significant impact of the tax cuts, but over an uncertain horizon. The authorities have estimated that the tax reductions of the RSP would create about 200,000 jobs. Staff has estimated that the reductions in labor taxes under the CICE and the RSP (about 1.4 percent of GDP in all) would create at least 600,000 in the long run, after the capital stock has fully adjusted.9 However, both sets of estimates are derived from models that neglect demand side constraints, which would affect the time it takes to realize these gains. For the authorities the gains can be realized in full by 2017, while staff considered it would take longer.

25. Slow product market reform has left the economy with unrealized potential gains. The gradual product-by-product approach to liberalization pursued until now has had mixed results, as reforms have been limited and often thwarted or watered down by vested interests, notably in services. Indeed, the OECD Product Market Regulation (PMR) indicator shows no progress over the last five years (Figure 8). Estimates of the gains from product market liberalization vary considerably.10 A recent study estimated that a move by France to the OECD frontier in terms of the PMR indicators could increase productivity by 3 percent after 5 years.11 A 2014 staff study estimated that a 1 percent productivity gain in regulated services accounting for less than 30 percent of GDP (distribution, transport and storage, and other business services) ) could raise GDP by 0.8 percent after two years.12

26. A more decisive approach to product market reform going forward. The authorities said they would pursue product market reform more proactively by stressing the purchasing power gains that can accrue from eliminating rents. The chosen methods of reform are reducing barriers to entry in regulated professions and/or changing price setting mechanism of regulated services. The competition authority has also gained a more visible role, and has stressed, for instance, the significant costs caused by constraints on competition in the transport sector. At the same time, the authorities have restated the importance of state intervention in product markets to steer the economy toward sectors with growth potential. Such intervention would come mostly in the form of seed money provided by the state to leverage private initiative. Staff underscored the large potential employment benefits of liberalizing opening hours in the retail sector and of the authorities’ plans to simplify urban planning rules which currently stifle construction.

27. A more adaptable labor market needed to complement supply side measures. Rigidities in labor regulations and high and unpredictable dismissal costs have been a hindrance to hiring and labor mobility (Figure 9). The law on job security and flexibility sought to increase adaptability by easing cumbersome collective dismissal procedures and giving enterprises and their workers room to renegotiate, within bounds, labor market conditions when faced with restructuring needs.13 This option has been used sparingly so far, perhaps because of its limitations. Meanwhile, other measures have been adopted to improve labor market functioning, including better targeted professional training and the introduction of rechargeable unemployment rights which should reduce inactivity traps.14 The unemployment insurance system is scheduled for review by 2016. Staff noted that this is an opportunity to increase work incentives (for instance by revisiting degressivity rules and the high ceiling on benefits) and to align contributions of employers to their job turnover.

28. Improved social dialogue as a foundation for reform. Staff recommended expanding further the scope for enterprise level negotiations over work and pay, in order to increase the capacity of enterprises to adapt and take risks. The authorities supported the idea but noted that the process needs to overcome a history of conflictual labor relations. Observers suggested that it was because of this mistrust that state intervention had grown into a complex labor code and reliance on the judicial system to settle disputes. In this regard, the authorities underscored that the decision to involve social partners in the labor market reforms pursued since 2012 had already improved the quality of the social dialogue; and that the law on job security and flexibility may not have resulted in many successful negotiations, but it had spurred a welcome increase in discussions at the enterprise level.

29. The challenge of raising job prospects for the less skilled. A side effect of the minimum wage (EUR 1,445.4 per month) has been to limit job creation for the low skilled—the unemployment rate for workers with education up to a lower secondary degree was 16.2 percent in 2012, against 9.9 and 5.7 percent for those with intermediate and tertiary education, respectively. The authorities’ approach to limit the rationing effect of the minimum wage has been to eliminate labor taxes at and near the minimum wage, and to expand subsidized job schemes and alternative job entry paths (apprenticeships and work-study schemes). Targeted labor tax cuts are, however, costly (around 1 percent of GDP already in 2012, before the new set of tax cuts) and could create low-wage traps.

30. The role of the minimum wage. Staff suggested that the objective of ensuring, through the minimum wage (SMIC), that work pays a living wage should also be balanced against the cost of exclusion from the labor market. It proposed that the indexation system of the SMIC include the unemployment rate of the low skilled. The authorities considered that the SMIC was too central to the social contract to contemplate any changes, and said they would continue to focus on facilitating job placement through subsidized jobs, apprenticeships and by improving skills.

31. Increased financial resilience and transition to banking union. The authorities underscored the progress made in the various building blocks of the banking union, with preparations for the Single Supervisory Mechanism well underway. Banks and the supervisor expected that the comprehensive assessment would validate the quality of the loan portfolios. Even so, they noted that surprises on the need for additional provisioning could not be ruled out, and banks could face additional changes, as the ECB will likely try to harmonize the validation of bank’s risk models across countries.15 The authorities also pointed to the actions taken to reinforce the resolution framework at the national level first (new banking law) and at the euro area level. A single resolution mechanism at the European level would, in time, address the problem of cross-border resolution which has contributed to national ring fencing and fragmentation. In all, banks and the supervisor believed that reinforced capital, liquidity and loss absorption buffers adequately mitigate too-big-to-fail (TBTF) risks. By contrast, they were concerned that the uncoordinated multiplication of regulatory safeguards (GLAC, MREL) could have unintended effects on financial intermediation. GFSR analysis has found that implicit subsidies for systemically important banks remain sizeable, suggesting that TBTF risks remain important, although regulatory reforms may have reduced them.

32. Adapting to changing global regulatory standards. The French financial system, with banks at the center of credit provision and life insurance at the center of savings mobilization, has left banks with a structural funding gap which they have filled through the wholesale market.16 This has resulted in relatively high loan-to-deposit ratios and elevated liquidity risk. Under pressure frommarkets and regulations to build larger liquidity buffers, banks have reduced their loan-to-deposit ratios considerably since 2011, helped in part by weak credit demand and low long-term rates which have made life insurance products less attractive.17 However, under more stringent liquidity requirements, banks’ deposit raising capacity may not be able to keep up with loan demand in a more buoyant environment. The authorities believed two factors would reduce this risk: increased securitization of bank loans and reliance of firms on market financing. Although these alternative financing channels have grown in recent years, they remain limited. Given uncertainties over their development, staff underscored that a reform of financial savings taxation might also become necessary to level the playing field, for instance by taking a maturity-based rather than a product-based approach to tax incentives.

Figure 8.

France: Scope for Product Market Reform

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: OECD, Monteagudo and others (2012), and IMF Staff Calculations.1 Reduction in barriers to establishment of domestic and foreign providers.2 High index values indicate strict regulation.3 Chart shows output rise in each sector due to a unit increase in final demand of all other sectors (forward linkages).
Figure 9.

Labor Market Features

Citation: IMF Staff Country Reports 2014, 182; 10.5089/9781498328760.002.A001

Sources: Eurostat, OECD, Stovicek and Turrini (2012), and IMF Staff calculations.1 Entitlement and activation index from 1 to 5, where 1 is less strict (left scale). Duration is equal to months of benefits for an unemployed worker with 22 years of contributions (right scale). Degressivity is equal average net replacement rate in years 2 to 5 as percent of net replacement rate in year 1 (right scale).


33. The strategy laid out by the authorities for the next three years holds the promise of placing the French economy on more solid foundations over the medium term. Economic policies may have appeared as lacking a clear direction in recent years, but they have gelled into a coherent package based on an accurate understanding of the challenges. Furthermore, the objectives are backed by well-identified policies. The strategy is ambitious and so naturally subject to risks; and it could be boosted by deeper structural reforms.

34. The chosen pace and instrument of fiscal adjustment are right. After three years of substantial adjustment, the more moderate pace of adjustment chosen under the Stability Program is appropriate given the weakness in the economy. Most importantly, the decision to anchor adjustment by an explicit expenditure target addresses the fundamental structural weakness of public finances. While simple expenditure containment will necessarily be part of the approach, the emphasis should go to structural measures to ensure that the rate of growth of spending is curbed permanently. On that score, important structural decisions have been taken, notably to rationalize local government layers and to contain the growth of health spending.

35. Both political and economic risks weigh on the strategy. Pressures to dilute the program could increase as difficult reforms are introduced. These pressures should be resisted as there is little room to deviate from the chosen course if both tax cuts and deficit reductions are to be pursued simultaneously. The medium-term budget to be presented to parliament in the fall is an opportunity to lock in specific measures underlying the adjustment, and thus reinforce the strategy. On the economic front, a delayed recovery poses the greatest risk. If growth threatens to disappoint projections by an appreciable margin, the pace of adjustment could be eased by moving forward or accelerating proposed tax cuts. However, this should not be a reason to postpone structural spending measures.

36. Monetary conditions have been insufficiently supportive of adjustment and restructuring of the economy. France did not suffer from financial fragmentation and lending rates remain at record low levels. However, monetary conditions have arguably become tighter owing to the strengthening euro and the fall of inflation and its impact on real interest rates. Such tightening does not appear appropriate for France’s cyclical position.

37. Supply side measures to restart investment and job creation are welcome and should be boosted by reforms of labor and product markets. The proposed tax cuts will give breathing space to enterprises whose squeezed profit margins have impeded investment. Regulatory simplification is equally welcome. But these initiatives will not durably improve potential growth unless they are supplemented by better functioning labor and product markets. The renewed focus on fighting rents is a powerful guiding principle to spur reform and should be pursued by opening protected sectors to greater competition. This process of labor market reform should be broadened, with a view to giving enterprises and their workers more flexibility to negotiate working conditions. This also requires the establishment of a more cooperative social dialogue. The minimum wage is a legitimate instrument to ensure that work pays a living wage, but its level should also be set with a view to limiting the exclusion effect it has for the low skilled. The authorities’ efforts to enhance employment opportunities for the low skilled through job subsidies, apprenticeships, and work-study programs are welcome, but these schemes are unlikely, by themselves, to close the employment gap for this group.

38. The economy and public finances are better shielded today from the risks of banking shocks, but the evolving regulatory framework may require continued adjustments for banks. Higher liquidity and capital buffers, enhanced loss absorption capacity, and a strengthened European resolution framework will help mitigate too-big-to-fail risks. At the same time, the balance sheet adjustments needed to meet these requirements could reduce the intermediation role of banks in the French economy. While there are benefits to diversifying financing channels, these will take time to develop and they are subject to risks. In this context it will be important to ensure that, as banks adapt to the new environment, their financing role is not constrained by distortions in the taxation of financial instruments.

39. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

France: Selected Economic and Social Indicators, 2009–19

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Sources: French authorities; IMF staff estimates and projections.

For 2014, January-March.

Table 2a.

France: General Government Statement of Operations, 2009–19

(In percent of GDP, unless otherwise indicated)

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Source: GFS yearbook, INSEE, French authorities, and IMF staff estimates and projections.

Excludes cyclical effects.

Table 2b.

France: General Government Integrated Balance Sheet, 2003–12

(In percent of GDP)

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Source: GFS yearbook.
Table 2c.

France: General Government Accounts, 2009–19

(In percent of GDP, unless otherwise indicated)

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Sources: French authorities; IMF staff estimates and projections.

Maastricht definition.

In percent of potential GDP.

The debt figure, based on Maastricht definition, does not include guarantees on nongeneral government debt.

Table 3.

France: Balance of Payments, 2011–19

(In percent of GDP)

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Source: IMF, Balance of Payments Statistics; and Direction Générale des Douanes et Droits Indirects for goods exports and imports.
Table 4.

France: Vulnerability Indicators, 2006–12

(In percent of GDP; unless otherwise indicated)

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Sources: French authorities; INSEE; BdF; ECB; Haver; Credit Logement; IMF, International Financial Statistics; and Bloomberg.

The debt figure does not include guarantees on non-general government debt.

This index combines the effect of real disposable income, repayment conditions for loans, real estate prices, and interest subsidies.