Statement by Hervé de Villeroché, Executive Director for France, July 1, 2014

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.

We would like to thank staff for a very clear, balanced and interesting set of papers that broadly validates both my authorities’ diagnosis on the French economy and the strategy that is being put in place as a response. My authorities would also like to thank the Article IV mission team for the open, thorough and candid discussions that took place in Paris during the first half of May.

1. Economic outlook

General context and relative performance

So far, the global recovery has been gradual and uneven. Initiatives in the euro area helped to ease financial tensions, particularly the decisions taken by the European Council in June 2012 and the increased involvement of the ECB announced in September 2012. However, adjustments in the euro area, particularly in countries with major external and fiscal deficits, and the appreciation of the euro exchange rate, put a drag on France’s external demand and price environment at a time when France itself was restoring its macroeconomic balances.

In this difficult external environment, the French economy’s resilience has been remarkable over the past years. As shown by the Figure 1 in the report, when compared to pre-crisis levels, French economy GDP lays almost 4 points over the euro area average. Staff’s views that France is now “behind other countries in the recovery cycle” is based essentially on the OECD leading indicators, which did not capture the relative performance of the French economy within the euro area over the past two years, and could therefore have been handled differently. In particular, France is one of the countries where business investments resisted most during the crisis.

Recent developments

There were encouraging signs at the end of the year 2013, with a recovery in investment and jobs in the private sector for the first time in two years. The annual rate of growth now stands at around 1 percent. The slowdown in Q1 2014 was caused by temporary factors such as mild weather conditions which caused a decrease in energy expenditure, after-effect of the exceptional possibility given to employees to unlock the savings invested in their company at the end of 2013 and an increase in the tax rate on polluting vehicles. Regarding demand, indicators such as manufactured goods consumption and commercial vehicles or based-on VAT indicators of investments are encouraging. A rebound in consumption and investment is then highly likely for Q2.

Macroeconomic forecasts

The French stability and growth program expects GDP growth to stand at 1 percent in 2014 before rising to 1.7 percent in 2015 and 2¼ percent in 2016-2017. Those forecasts were broadly in line with staff projections at the time of their release. In the meantime, staff revised its forecasts down due to a disappointing Q1 growth. The latest economic indicators confirm that uncertainty remains high. My authorities will wait for the Q2 figure’s release in mid August before deciding whether or not to revise the macroeconomic scenario for the draft budget law.

Engines of growth

Overall, underlying macroeconomic scenarios and expected engines of growth are quite similar in staff and authorities forecasts. The economic climate is expected to recover in 2014-2015 thanks to increased business and household confidence as well as the implementation of structural reforms, notably the Responsibility and Solidarity Pact. As a consequence, 2014-2015 should see a pick-up in corporate investments and in consumption; France should also benefit from the ongoing recovery in the Eurozone and in advanced economies, which would be materialized by an increase in exports. In a medium and long run perspective, strong demographics, rising innovation efforts by French companies, highly qualified and productive workforce, excellent infrastructure and a stable investment rate during the crisis are factors bound to support France’s growth prospects.

2. Fiscal policy

My authorities intend to provide full support for the economic recovery by carrying out a bold plan of reforms. The Responsibility and Solidarity Pact (Pacte de responsabilité et de solidarité) is the keystone of the Government’s strategy, which aims to support jobs and competitiveness through labor-management dialogue and in consultation with all stakeholders. The Pact also includes solidarity measures to support the purchasing power of low-income workers. The entire package will be financed through an unprecedented effort to reduce public spending.

Fiscal adjustment pace

The fiscal adjustment pace had been carefully calibrated in order to continue an ambitious and still needed fiscal consolidation, but in a growth-friendly manner and while financing priorities were identified for the future – secondary and higher education, justice and security. The deficit will then continue to shrink gradually from 5.1 percent of GDP in 2011, 4.8 percent in 2012, 4.2 percent in 2013 to 3.8 percent in 2014 and 3.0 percent in 2015. In keeping with our European commitments, the structural balance will be brought close to equilibrium by 2017 by means of an adjustment of 0.8 point per year in 2014 and 2015, followed by an adjustment of 0.5 point per year after that. We welcome the staff’s appraisal that this pace is the “right” one.

Fiscal adjustment composition

Consistently with staff recommendations, the fiscal adjustment will rely exclusively on the expenditure side, with an unprecedented target of €50Bn expenditure savings relative to trend; this effort corresponds to a freeze in real expenditures (compared to growth of 1½ percent over the 2000 decade). Those savings will be used to close the structural deficit and to reduce the aggregate tax and social security contribution rate, with a view to stimulate competitiveness and household’s purchasing power.

The savings effort will be shared equally across the whole general government sector:

  1. -Central government and central government agencies’ will shoulder the largest portion (€18 billion over three years) by increasing efficiency and further improving their cost control;
  2. -Local government will bring expenditure growth back into line with inflation, saving €11 billion through cuts on state transfers to local governments and the progressive savings expected by a deep organizational reform (halving the number of régions by 2017, strengthening intercommunal structures, clarifying the division of powers by eliminating the clause de competence générale and by eliminating the département councils by 2021);
  3. -The health insurance system will save €10 billion through ongoing structural reforms to ensure the quality of care and the level of coverage while keeping costs under tighter control;
  4. -The social protection system will save €11 billion through reforms that have already been adopted, notably regarding pensions and family benefits, and through future measures, such as efficiency gains in the management of social security funds and a stabilization of benefits in nominal terms, except for minimum social benefits, for one year;
  5. -Finally, civil servants will also play their part through a stabilization of the civil service pay scale, but efforts to recruit new personnel in priority sectors will continue.

The supplementary budget bill presented on June 11th includes several extra savings amounting to €4 bn while providing a break totaling €1.1 bn on income tax paid by middle and low-income households (the cost of this measure will be compensated by the increased revenues generated by the anti-fraud service - STDR).

Tax cuts - Responsibility and solidarity pact.

With the Responsibility and Solidarity Pact, French labor costs, which has already fallen as a result of the Competitiveness and Employment Tax Credit (CICE) by €20 Bn, will be cut further for a total reduction of €30 Bn (1 ½ percent of GDP), in order to boost employment and restore firms profitability. By 2016, there will no longer be any social security payroll contributions on minimum-wage jobs, other than unemployment insurance contributions. Family allowance contributions will be reduced as well on jobs paying up to three and a half times the minimum wage.

The Pact also includes a “fiscal side” that will imply business taxes to be streamlined and reduced: the corporate social solidarity contribution (C3S), which is based on turnover and not on income, will be reduced starting in 2015 and phased out by 2017; the exceptional corporate income tax payment for large corporations will be phased out in 2016 and the standard rate of corporate income tax will decrease starting in 2017, bringing it down to 28 percent by 2020.

At the same time, measures in favor of low-income workers will total €5 Bn by 2017, including a reduction in the employee social security contributions for workers earning the minimum wage.

Macroeconomic impacts

Based on the usual macroeconomic patterns, the Responsibility and Solidarity Pact will add half a percentage point to growth and create nearly 200,000 additional jobs in the medium term. In practice, this impact should be amplified by the commitments made by economic and social players under the Pact and, more generally, by a positive confidence shock. This assessment is broadly consistent with IMF staff’s own estimates of the total long term impact of recent actions taken to lower the labor cost (including the CICE tax credit), which would create at least 600,000 additional jobs.

3. Structural reforms

Labor market

Several structural reforms have already been undertaken over the past two years to improve the functioning of the labor market, beyond the pro-employment tax policy:

  1. (i)The law on sécurisation de l’emploi, which transposed the national multisector agreement on January 11, 2013, has created a framework for agreements to protect jobs when a company’s economic situation deteriorates, while securing workers’ careers, especially for the most vulnerable;
  2. (ii)The Act, established on March 5, 2014, on vocational training which also transposed a former agreement at the national multisector level, provides for individual and transferable rights to training (individual training accounts) and greatly simplifies the existing system. It expands the scope of the training available, particularly for the most vulnerable individuals (including the unemployed and young people); it also aims to ensure that training meets the economy’s need for skills in the short and medium term;
  3. (iii)Staff rightly emphasizes the structural impact of the introduction of “rechargeable” unemployment benefit entitlements, which is part of the broader social partners’ agreement, established on March 22, 2014, on unemployment benefits; this scheme will reduce uncertainty for unemployed person to re-enter the workplace, by preserving unused benefits if a new job is accepted.

On the minimum wage, my authorities do not endorse the staff’s recommendation to include the unemployment rate of the low skilled in its indexation rule. A reform of the indexation rule took place in 2013, precisely in order to better guarantee the purchasing power of the low-income workers; a decrease in the minimum wage in bad times would have unacceptable social consequences and an unclear macroeconomic effect (positive effect on labor demand but negative impact on aggregate revenue). Moreover, it should be borne in mind that thanks to existing tax and social exemptions, the tax wedge at the minimum wage is already within international standards; together, the CICE tax credit and the Responsibility and Solidarity Pact (by decreasing employers and employees contributions, notably at the minimum wage level) will further reduce the tax wedge for the less skilled workers, supporting labor demand and labor supply. These schemes seem simpler, more efficient, and more direct than modifying the indexation of the minimum wage to support employment.

Product markets

France implemented several structural reforms of the product markets in order to simplify administrative burden and red tape, fight economic rents and boost purchasing power and competitiveness, in line with staff recommendations.

The Consumer Act, established on February 13, 2014, contains measures that promote competition and consumers’ interests. It creates a class action procedure for consumer disputes under French law, particularly in the case of anti-competitive practices in services. The provisions of the Act enhance competition in services, particularly in the healthcare sector (opticians, chemists) and in the financial sector (banking and insurance). The measures under this Act will have a significant impact on households’ purchasing power, estimated at €1.5bn in all. My authorities intend to take further steps, particularly in the healthcare sector, with further reform of the market for certain so-called “borderline” products, which are currently sold exclusively by chemists and greater price transparency in the distribution of certain medical devices, such as prostheses and optical products.

Other measures will increase competition in services. The Act, established on January 2, 2014, eliminated restrictions in the legal and accounting professions in order to develop the business of notaries, lawyers and accountants. Other changes to legislation are being considered, such as a more cost-based approach to pricing in some of these professions. Consultations will be held with professionals that may also cover the organization of certain services with a view to achieve greater economic efficiency.

In addition, a large program for the simplification of administrative burden was launched in July 2013. More than 200 measures were put forward, among them more than half are directly linked to firms’ routine. To increase the impact of the program, the government has been granted the right to speed up the process and has created a council for businesses’ simplification, which has already designed 50 new measures. From May 2014 onward, 10 new simplification measures will be decided upon each month.

By the end of the year, the Businesses Simplification Committee is scheduled to review the rules governing access and permission to exercise certain professions, and submit proposals to the Government. In June 2014, the French minister of the Economy asked the French Competition Authority to issue an opinion on the fixation and revision of tariffs of specific regulated professions (notaries, bailiffs, clerks of Commercial Court, etc.)

4. Financial sector

Staff’s report rightly underlines that French banks have made significant progress towards meeting Basel III requirements. They meet the CRD-IV fully loaded minimum CET1 capital requirement, and have strongly reduced their dependence to short term wholesale funding, which only represents around 10 percent of total liabilities in 2013, compared to 30 percent pre-crisis. It is certainly too early to assess their position relative to future net stable funding requirements at this point in time, as the precise definition and calibrations of the NSFR ratio are still under discussion by the BCBS; we however strongly believe in French banks’ capacity to meet the new requirements, if published in a not-too-distant future, in a timely manner as they already did with the other CRD-IV capital requirements. Finally, it is likely that the various regulatory and supervisory measures implemented so far at the national (notably the loi de separation et de regulation des activités bancaires established on July 26, 2013 and European level, in particular the setting-up of the single supervision and resolution mechanisms, as well as significant efforts made by banks to strengthen their resilience, have decreased the systemic risks posed by a potential failure. The ongoing asset quality review and the stress test will also be key to provide additional clarity on the banks that will be subject to the ECB’s direct supervision.

My authorities remain confident that the financing needs of the economy will continue to be satisfied when the demand for funding will become more buoyant, despite the evolving regulatory framework. Recent reforms will help finance firms’ growth and development following a two-pronged approach by providing them with the means to diversify their financing instruments and sources. On one hand, French authorities have been working in close liaison with all relevant market participants to ease market access of firms large enough to benefit from market financing (the euro private placement workstream) and restarting a robust and viable loan securitization market; this should allow all French firms to find solutions when their demand for funding will gain further momentum. On the other hand, work has been done to diversify potential sources of funding through reforms in the insurance sector (reform of life insurance products, adjustment in the prudential treatment of the simplest securitized products invested in loans to corporate) and the introduction of a dedicated SME bucket in savings plan (PEA-PME).

5. Risk assessment

Uncertainty remains high, mainly stemming from international developments. The pace of France’s recovery hinges on that of the euro area. The recent actions taken by the ECB to tackle the risk of a low inflation period are welcome, notably because monetary conditions have become tighter over the past months, as staff’s report emphasizes.

There are also more specific risks. In particular, there is still uncertainty about the behavior of private sector economic agents. Brighter prospects for growth could lead to a stronger rebound in investment, which would entail more jobs, thereby boosting household incomes and consumption. Policies to support competitiveness and employment will have a positive impact, but the scale of this impact will depend on how businesses behave. Businesses could, for example, pass on lower labor costs in the form of price competitiveness gains that favor exports and curb domestic inflation. Alternatively, they may prefer to boost their profit margins which could boost non price competitiveness.

Finally, while we broadly share the staff’s assessment of risks, we cannot agree on the risk of a political resolve lessening. My authorities have repeatedly expressed a very strong commitment to stay the course of reform and the method based on social dialogue allowed significant achievements, notably on the labor market reform.