France: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for France

International Monetary Fund. European Dept.

doi:10.5089/9798400232336.002.A001

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International Monetary Fund. European Dept.

International Monetary Fund. European Dept.
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Publication Date:: 30 Jan 2023

eISBN:: 9798400232336

ISBN:: 9798400232336

Language:: English

Keywords:: wage-price spiral; electricity price; purchasing power; savings ratio; price cap; Global

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1. After a robust recovery from the economic shock of the COVID pandemic, France is now facing the repercussions of Russia’s invasion of Ukraine. In 2021, GDP rebounded by 6.8 percent and by the end of the third quarter, output had recovered to pre-crisis levels. The recovery was broad-based—consumption, investment, employment, and labor force participation all rebounded more quickly than in most other European countries, with public consumption and private investment growth particularly strong. Only manufacturing production remained below pre-crisis levels. The energy crisis is dampening the recovery by reducing consumer purchasing power, denting confidence, and exacerbating supply-side difficulties. Staff expect growth of 2.6 percent for 2022, but high frequency indicators point to stagnating growth in the coming quarters, with businesses expecting weaker services growth, while the composite PMI has fallen into contractionary territory driven by services. In contrast, manufacturing output improved slightly with some easing of supply bottlenecks. Capacity utilization continues to remain below pre-crisis levels.

Abstract

Context and Recent Developments

1. After a robust recovery from the economic shock of the COVID pandemic, France is now facing the repercussions of Russia’s invasion of Ukraine. In 2021, GDP rebounded by 6.8 percent and by the end of the third quarter, output had recovered to pre-crisis levels. The recovery was broad-based—consumption, investment, employment, and labor force participation all rebounded more quickly than in most other European countries, with public consumption and private investment growth particularly strong. Only manufacturing production remained below pre-crisis levels. The energy crisis is dampening the recovery by reducing consumer purchasing power, denting confidence, and exacerbating supply-side difficulties. Staff expect growth of 2.6 percent for 2022, but high frequency indicators point to stagnating growth in the coming quarters, with businesses expecting weaker services growth, while the composite PMI has fallen into contractionary territory driven by services. In contrast, manufacturing output improved slightly with some easing of supply bottlenecks. Capacity utilization continues to remain below pre-crisis levels.

2. France is less directly exposed to the energy shock from the war in Ukraine, but indirect effects are dampening the recovery. Compared to European peers, France is less vulnerable to the direct effects of the war due to its reliance on nuclear energy and low dependence on Russian gas. The share of natural gas in French energy supply is about 16 percent (vs. 24 percent for the EU). Imports from Russia accounted for less than 10 percent of natural gas supply (with most coming from Norway and from LNG imports). Higher LNG imports and non-Russian pipeline flows have kept gas imports largely unchanged and allowed storage levels to increase to normal seasonal levels (95 percent capacity in early December), providing a buffer covering about 30 percent of annual consumption. However, higher gas and electricity prices, supply chain disruptions, and confidence effects are weighing on consumption and investment, and the slowdown in partner countries has weakened external demand.

3. Inflation has surged over the past year, driven by supply chain bottlenecks and the energy price shock, and is expected to average 6 percent in 2022. The twelve-month inflation rate of consumer prices (HIPC) reached 7.1 percent in November, driven by food and goods prices, while energy prices have fallen somewhat. Inflation is expected to peak in the coming months, but continues to be well below the EU average, largely due to energy price controls and subsidies, which have kept price increases an estimated 2-3 ppts lower.¹ These controls also lowered the passthrough into food and goods prices. Combined, the average burden of the energy price shock for French households was contained at about 3 percent of total household consumption in 2022 (3.3 percent for the first quintile) and about 4 percent in 2023, among the smallest across Europe.² While services inflation has risen over the past year, wage increases remain below headline inflation (3 percent) and year-ahead wage expectations (4 percent) were below overall inflation expectations in Q3 2022 (5 percent). However, risks from wage adjustments are already building, as reflected in some recent collective bargaining agreements. In addition, the automatic indexation of the minimum wage—and to a lesser extent pensions and social benefits (and advanced indexation as part of recent purchasing power measures)—could create second-round pressures and a weakening in productivity in 2023. Unit labor costs are also expected to increase over 2022-23, which may exacerbate inflation.

4. The labor market performed strongly in the recovery from the pandemic, with employment, hours worked, and labor force participation all exceeding pre-crisis levels. Headline unemployment has declined from 8.2 percent in 2019:Q4 to 7.3 percent in 2022:Q3, with a substantial contribution from falling youth unemployment. This performance reflects in part earlier labor market reforms and more recent apprenticeship programs for youth.³ Despite a rise in apprenticeships in 2022, the unemployment rate started rising for people aged 15 to 24, while remaining virtually stable for those aged 25 to 49 and decreasing for those over age 50. Total working hours are also above pre-pandemic levels in 2022:Q3, due to higher employment and the phase-out of the short-time work scheme.

5. Financial conditions have tightened amid increasing funding costs. Both external and domestic financing conditions are tightening under the impact the global increase in interest rates. Corporate bond spreads have risen, and French equities have lost some 12 percent since their peak in early 2022, with the tech and services sector stocks particularly hard-hit. Market financing rates have risen more swiftly than policy rates, reflecting the market’s dynamic response to higher inflation. Despite the increase in interest rates, corporate credit growth picked up in the first half of 2022, mainly driven by an increase in cash loans. Household credit growth remained stable but recent months have seen some slowdown in mortgage lending (¶21).

6. The external position in 2022 is assessed to be moderately weaker than the level implied by medium-term fundamentals and desirable policies (Annex III). The Current Account (CA) balance moved to a surplus of 0.4 percent of GDP in 2021 (from a deficit of 1.8 percent in 2020), driven by an improvement in the services balance and an exceptional surplus in transport services (i.e. maritime transport). Quarterly trade data point to a deterioration in the CA balance in 2022, with both the oil and non-oil goods deficits increasing sharply, while the services surplus has continued to strengthen, supported by tourism exports in the second and third quarters. Together, the large terms-of-trade shock and lower external demand are expected to produce a CA deficit of about 1.5 percent of GDP in 2022. While there is an important domestic gap from looser fiscal policy of about -1.1 percent of GDP, the overall policy gap is zero, as the gap with the rest of the world is positive.

7. The fiscal deficit remained elevated as purchasing power support replaced expiring Covid-19 support and debt service costs rose. The deficit narrowed by 2.5 ppts to 6.4 percent of GDP in 2021 due to a strong rebound in revenues and activity that more than offset the increase in recovery and purchasing power measures (1 percent of GDP). Measures in response to rising energy prices announced in 2021 included regulated gas and electricity price freezes, and cash transfers to households, totaling ¼ percent of GDP over 2021-22. In 2022, support was scaled up in March, August, and November, bringing the total to 2.1 percent of GDP, well-above that of peers.⁴ They included the extension of energy price controls, a fuel price rebate, grants to energy-intensive firms, targeted sector support, additional targeted cash transfers, tax cuts, and indexation of pensions, social assistance, and public wages. These costs were partially compensated by lower subsidies and windfall revenues from claw-back provisions in contracts with renewable energy producers under the public service energy obligation mechanism (CSPE). Despite lower inflation than peers, debt service costs related to inflation-indexed debt increased by ¼ percent of GDP on top of a small increase due to higher yields. The deficit is nonetheless expected to decline and meet the 2022 budget target of 5 percent of GDP thanks to sizeable revenue overperformance, on top of windfalls under the CSPE, from stronger-than-expected corporate profits, labor income, and VAT collection.

Outlook and Risks

8. The war in Ukraine will weigh on growth in 2023. Average inflation is expected to remain around 5 percent in 2023 as energy prices stabilize and supply bottlenecks ease. Inflationary effects, coupled with weakened confidence, will depress household consumption growth. The savings ratio is expected to remain at about 15.8 percent in 2022-23 (slightly above the 2019 level of 15 percent) as disposable income is supported by fiscal measures and employment growth. Higher interest rates and lower confidence will likely slow investment growth. Staff projects GDP growth at 0.7 percent in 2023, with quarterly growth of near zero in 2022:Q4 and 2023:Q1, but with activity expected to slowly rebound later in the year, driven by resilient consumption and an expected improvement in the external balance driven by rebounds in the key nuclear, aerospace, and automobile industries. Over the medium term, growth is expected to converge towards the potential rate of 1.3 percent, with scarring from the pandemic and the war in Ukraine leaving output some 2 percentage points below the level implied by the pre-pandemic trend. Inflation will remain persistent over the medium term with the gradual lifting of the price caps and only gradually decline to around 2 percent in 2025. The CA deficit is expected to shrink over the medium term as fiscal consolidation and structural reforms to improve competitiveness of the economy are implemented.

9. Risks to the outlook are high and tilted to the downside. Main downside risks stem from a prolonged war and an escalation of sanctions.⁵ Gas and electricity prices could further spike, leading to another surge in inflation. Inflationary pressures and higher wage demands could in turn weigh on the outlook and increase the risk of a wage-price spiral. Faster-than-expected monetary policy adjustments in Europe or elsewhere could further depress output. A deeper slowdown in the US or China could depress external demand. On the upside, swift adjustment to accelerate the green transition could ease energy shock risks and boost investment.

Authorities’ Views

10. There was broad agreement on the short-term outlook, while the authorities are more optimistic on medium-term prospects. The government is slightly more optimistic on growth for 2023, expecting a 1 percent increase in GDP, while inflation is expected to be slightly lower at about 4.7 percent (HICP). The authorities shared staff’s views on the main downside risks from a prolonged war and additional inflationary pressures, but thought that some risks are symmetric, with both upside and downside risks to gas and electricity prices going forward. They also saw more limited risks of a wage-price spiral. Over the medium-term, the authorities expect faster growth due to less scarring from the Covid and energy crises. They anticipate the savings rate will gradually decrease from its historically high level, which would boost consumption. They also expect a boost in potential growth over the medium term from the effects of labor market and pension reforms.

Policy Discussions

Fiscal policy should start tightening in 2023 after a highly stimulative position over the last 3 years. Steady, expenditure-based consolidation should be the priority for the remainder of the decade. Financial supervision should remain vigilant against possible negative effects from rising interest rates, with tighter macroprudential policy advisable in the baseline scenario. Tighter fiscal and macroprudential policies would also assist ECB monetary policy in easing inflationary pressures. Labor market policies should build on recent successes to ensure smooth transition of apprentices into permanent work while addressing skills shortages and inferior educational outcomes. Continuing structural reforms, particularly in pensions, unemployment, and product and services markets will be essential for future fiscal health as well as better competitiveness and growth. Accelerating the green transition through price and non-price measures and investment in renewable energy would help achieve emission reduction targets.

A. Fiscal Policy: Focusing Crisis Support and Reducing the Deficit

11. The large fiscal response to the energy price shock has cushioned the economic impact but has been costly, poorly targeted, and distortionary.⁶ Support totaling 2 percent of GDP in 2021-22 has been centered on households and largely channeled through untargeted, and thus costly, energy price measures and cash transfers (text table). The tariff shield (“bouclier tarifaire”) capped the increase in regulated electricity tariffs at 4 percent from February 2022 for one year and froze regulated gas tariffs at their October 2021 level until the end of 2022, at a cost of 1 percent of GDP excluding cost incurred by EDF (Box 1). For 2023, the price cap is raised by 15 percent—with poorer households compensated upfront through cash transfers⁷—while a more targeted fuel voucher (“chèque carburant”) for households earning up to median income replaces the fuel subsidy (“remise carburant”). In parallel, energy bill support to firms will be scaled up, funded from a new infra-marginal rent tax⁸ and solidary contribution from energy producers.⁹ With sizeable fiscal windfalls from renewable energy producers funding about two-thirds of the cost of the tariff shield, the net cost of support is lower than in 2022, but remains substantial at 1 percent of GDP, reflecting the large gap between market and regulated energy prices and modest demand reduction. To reduce fiscal cost and incentivize energy savings, measures should be better targeted by accelerating the phase-out of price controls and increasing support to the most affected. Alternatively, a tiered pricing mechanism could be considered, with the tariff shield only covering basic energy needs as a second-best option to a swift phase-out.

^{Table 1.}

France: Purchasing Power Measures^1/

(Percent of GDP)

Source: 2021-23 budget laws and decrees, IMF staff estimates.

^{^1/}Measures exclude the reintroduction/ extension of some Covid measures (i.e., STW scheme, tax deferrals, and PG E loan guarantees) but include those enacted under the purchasing power/ supplementary 2022 budget laws (the authorities exclude the indexation of public wages and elimination of broadcasting fees from anti-inflation measures).

^{^2/}Regulated gas and electricity tariffs under the tariff shield (bouclier tarifaire). and measures to operationalize their price caps such as the temporary cut in electricity excise tax (TICFE) and increase in the supply of nuclear energy (+20TWh) at low cost under the Arenh regime also cover firms--especially micro firms (those with less than 10 employees and turnover below €2mn, and an electricity connection of less than 36kVA benefit from regulated electricity prices).

^{Table 1.}

France: Purchasing Power Measures^1/

(Percent of GDP)

	2021	2022	2023
Total(gross)	0.2	2.1	2.4
Households ^2/	0.2	2.0	2.1
Energy price measures	0.0	1.3	1.6
Energy price controls (bouclier tarifaire)	0.0	1.0	1.6
Fuel subsidy (remise carburant)		0.3	0.0
Cash transfers	0.2	0.1	0.1
One-off transfer (indemnité inflation )	0.2	0.0	0.0
Additional energy check (chèque énergie)	0.0	0.1	0.0
Exceptional back-to-school bonus (aide exceptionnelle de rentrée)		0,0	0,0
Heating voucher for poor households using fuel oil		0.0	0.0
Fuel cost voucher (cheque carburant)			0.1
Other		0.5	0.4
Advanced indexation (pensions, wages, social assistance)		0.4	0.3
Eliminate state broadcasting fee (redevance audiovisuel/e)		0.1	0.1
Increase in mileage allowance coefficients (bareme indemnite kilometrique)		0,0	0,0
Firms		0.1	0.3
Energy bill support for energy- intensive firms		0.1	0.2
Targeted sector energy relief measures		0,0	0,0
Electricity bill rebate (amortisseure/ectricite)		0.0	0.1
Fiscal windfall from higher energy prices	-0.1	-0.7	-1.5
Renewable energy subsidies	-0.1	-0.3	-0.3
Repayment of renewable energy subsidies and removal of ceiling		-0.4	-0.7
Infra-marginal rent tax energy producers		0.0	-0.4
Temporary solidarity contribution			0.0
Total (net)	0.1	1.4	0 .9

Source: 2021-23 budget laws and decrees, IMF staff estimates.

^{Table 1.}

France: Purchasing Power Measures^1/

(Percent of GDP)

	2021	2022	2023
Total(gross)	0.2	2.1	2.4
Households ^2/	0.2	2.0	2.1
Energy price measures	0.0	1.3	1.6
Energy price controls (bouclier tarifaire)	0.0	1.0	1.6
Fuel subsidy (remise carburant)		0.3	0.0
Cash transfers	0.2	0.1	0.1
One-off transfer (indemnité inflation )	0.2	0.0	0.0
Additional energy check (chèque énergie)	0.0	0.1	0.0
Exceptional back-to-school bonus (aide exceptionnelle de rentrée)		0,0	0,0
Heating voucher for poor households using fuel oil		0.0	0.0
Fuel cost voucher (cheque carburant)			0.1
Other		0.5	0.4
Advanced indexation (pensions, wages, social assistance)		0.4	0.3
Eliminate state broadcasting fee (redevance audiovisuel/e)		0.1	0.1
Increase in mileage allowance coefficients (bareme indemnite kilometrique)		0,0	0,0
Firms		0.1	0.3
Energy bill support for energy- intensive firms		0.1	0.2
Targeted sector energy relief measures		0,0	0,0
Electricity bill rebate (amortisseure/ectricite)		0.0	0.1
Fiscal windfall from higher energy prices	-0.1	-0.7	-1.5
Renewable energy subsidies	-0.1	-0.3	-0.3
Repayment of renewable energy subsidies and removal of ceiling		-0.4	-0.7
Infra-marginal rent tax energy producers		0.0	-0.4
Temporary solidarity contribution			0.0
Total (net)	0.1	1.4	0 .9

Source: 2021-23 budget laws and decrees, IMF staff estimates.

^{Box 1.}

France: EDF’s Renationalization

France has a long-standing commitment to nuclear energy, and continued reliance on it is a pillar of the country’s strategy to reduce greenhouse gas emissions. In this context, the renationalization of France’s nuclear energy producer EDF aims to give the government more control over the country’s energy transition but risks exposing it to further losses. EDF has faced operational difficulties in 2022 related to production shortfalls from both planned and unforeseen maintenance and repair of reactors as well as the government’s response to the energy crisis to cap regulated electricity tariffs and increase the amount of low-cost electricity that EDF is required to provide under the Arenh regime¹, aggravating pre-existing financial difficulties. Following a capital injection in March of €2.6bn, the government announced in July that it would acquire the remaining 16 percent of capital it doesn’t already own, offering €12 per share for a total of €9.7bn. By renationalizing EDF, the government gains full control over the country’s nuclear energy production with a view to accelerate France’s energy independence, sovereignty, and transition. It enables the government to act more quickly in navigating the energy crisis and transition, with large long-term investment needs to extend and expand France’s nuclear and renewable energy capacities (see below and Box 3). While EDF is already majority state-owned and implicitly backed by the state, reflected in its stand-alone credit ratings, the nationalization risks exposing the state to further losses. EDF is expected to continue to be classified as a non-financial public enterprise, but the nationalization entails a risk to the 2023 budget if considered a capital transfer (EC, 2022).

Nuclear reactor outages and measures in response to the energy shock have dented EDF’s revenues in 2022. Nuclear power generation has dropped to 280-300 TWh in 2022 and is expected to rebound to 300-330 TWh in 2023 (~30 percent below its 2005 peak). A combination of factors contributed to this underperformance: (i) the Grand Carénage focused on safety upgrades and reactor lifetime extensions between 2014-25, with tighter post-Fukushima safety standards increasing inspection time (from 3 to 6 months); (ii) the pandemic created a reactor maintenance backlog; (iii) corrosion led to the temporary shutdown of 12 reactors (a production loss of 60 TWh); and (iv) delays to start operating the Flamanville-3 reactor. As a result, more than half of French nuclear reactors have been unavailable since the beginning of 2022, turning EDF into a net importer of electricity. In addition, as part of the tariff shield, EDF had to sell an extra 20 TWh to its competitors at a below-market price of €46.2/MWh under the Arenh regime. Combined with sizeable investments, EDF will face negative cashflows in 2022 and has issued successive profit warnings. In the latest, it estimated the impact of outages and regulatory measures on its 2022 EBITDA at €32bn and €10bn², respectively.

With the nationalization of EDF, the government will have to strike a balance between rehabilitating the company’s financials and continuing to shield consumers. Key policy decisions will need to be taken regarding retail price increases, new financing schemes for investments in low carbon energy, and the reorganization of the company. The government plans to build at least three pairs of new nuclear reactors at an estimated cost of €52bn, with possibly an additional eight reactors by 2050. It envisages the first two coming into operation by 2035-37 and has drafted legislation to accelerate administrative procedures. The investment comes on top of an estimated €32bn for lifetime extensions of second-generation reactors under phase two of the Grand Carénage (2022-28). The nationalization of EDF could facilitate access to better financing conditions for future investments in low carbon energy and the power grid but given the high debt of the company and the important costs associated with these investments, phasing out the tariff shield and restoring EDF’s production capacity would be critical to rehabilitate the company’s financials.

¹ The Arenh regime requires EDF to sell 100 TWh of its annual nuclear output to other energy suppliers at a fixed price set by the Energy Regulatory Commission. ² INSEE will decide in March 2023 when the 2022 government accounts will be published whether to record this as government expenditure.

12. Fiscal policy is expected to remain supportive in 2023. Beyond extending energy measures, the budget envisages cutting a distortive value-added tax (CVAE, 0.3 percent of GDP) in half, with the remainder to be eliminated in 2024. This follows earlier tax cuts for firms and households that led to a permanent revenue loss of 1½ percent of GDP since Macron’s first term and adds to the reversal of temporary revenue windfalls seen in 2022, reflected in a large decline in the revenue ratio. The authorities nonetheless target an unchanged deficit of 5 percent of GDP in 2023. In contrast, staff projects the deficit to widen by ½ ppts to 5.3 percent of GDP, driven by a less favorable macro forecast.

13. Fiscal policy should take advantage of the phase-out of pandemic support to begin reducing the deficit in 2023. France’s fiscal response to successive shocks over 2020-22 has been swift and effective but costly, narrowing its fiscal space. The country’s high and rising debt level, widening gap relative to EA peers, and electoral cycle argues for consolidation to start in 2023. While activity is slowing and the output gap widening, historically low unemployment amid a tight labor market and high inflation point to limited slack. Moreover, with monetary policy normalizing to stem inflation, fiscal policy should contribute to easing demand pressures. Staff thus recommends a fiscal tightening of ¼ ppt of GDP relative to 2022 or 0.7 ppt relative to staff’s baseline, equivalent to the savings from expiring temporary Covid-19 support. This could be achieved by better targeting energy support and fully funding it from the savings from higher energy prices (under CSPE). Additional savings could come from postponing production tax cuts until compensatory measures are in place or other measures, such as temporarily indexing higher pensions and income tax brackets below inflation.¹⁰ However, if downside risks materialize, automatic stabilizers should be allowed to work while any discretionary support should be well-targeted and offset by compensatory measures to preserve an appropriately tight policy mix, policy credibility, fiscal sustainability, and consistency with monetary policy. Under an upside scenario, any revenue overperformance should be saved and support be phased out faster to accelerate the deficit reduction.

Options to Achieve Fiscal Adjustment in 2023

(Percent of GDP)

Source: IMF Staff estimates.

Options to Achieve Fiscal Adjustment in 2023

(Percent of GDP)

	Cost	Savings
Total	0.7	-0.9
Energy measures	0.6	-0.6
Accelerated phase-out energy price controls	1.6	-0.8
Savings from higher energy prices	-1.1	0.0
Targeted cash transfers		0.2
Other	0.1	-0.2
Offset/postpone production tax cut (CVAE)	0.1	-0.1
Incomplete pension indexation		-0.1

Source: IMF Staff estimates.

Options to Achieve Fiscal Adjustment in 2023

(Percent of GDP)

	Cost	Savings
Total	0.7	-0.9
Energy measures	0.6	-0.6
Accelerated phase-out energy price controls	1.6	-0.8
Savings from higher energy prices	-1.1	0.0
Targeted cash transfers		0.2
Other	0.1	-0.2
Offset/postpone production tax cut (CVAE)	0.1	-0.1
Incomplete pension indexation		-0.1

Source: IMF Staff estimates.

14. The authorities’ medium-term fiscal adjustment largely relies on the supply response of reforms that are not yet fully specified. Plans to bring the deficit below the Maastricht ceiling of 3 percent of GDP by 2027 and debt on a downward path from 2026 center on pension and labor market reforms (¶18), rationalizing tax expenditures, improving the efficiency of social security administration while reducing fraud, and tightening health and local government spending control. Savings are reflected in real spending growth targets in the draft medium-term programming bill, but measures largely remain to be specified.¹¹ The savings would largely cover planned increases in health, education, environment, and security spending, with growth and jobs generated by reforms bringing the deficit to target.¹²

15. Further efforts are needed to rebuild buffers over the medium term through a gradual but sustained fiscal consolidation. Under current policies, the fiscal deficit is expected to reach about 4¼ percent of GDP by 2027, well-above the 3 percent SGP deficit ceiling and deficit levels of peers.¹³ The primary deficit is projected to narrow to 2½ percent, more than 1¼ ppts above its debt-stabilizing level. As a result, debt will remain on an upward path, widening an already sizeable debt differential with European peers. With already elevated debt and gross financing needs (at some 112 and 22 percent of GDP in 2022, respectively) continuing to increase over the projection horizon, risks to debt sustainability have increased (see Annex VI). Risks to the debt outlook include faster monetary tightening or the materialization of contingent liabilities (e.g., loan guarantees under the PGE/Resilience schemes, EDF losses, see Box 1)¹⁴, but are mitigated by France’s large institutional investor base, home bias, lack of foreign currency debt, and long maturity profile. To reverse the deficit and debt divergence from peers and insure against a faster monetary policy tightening, staff recommend a sustained adjustment to bring the deficit down to 0.4 percent of GDP by 2030—in line with France’s pre-crisis medium-term objective (MTO). This is one year later than what staff advised last year, reflecting the need to accommodate the policy response to the energy shock. The adjustment implies a cumulative effort of about 5 ppts of GDP over 7-8 years, for an average annual effort of 0.7 percent. To minimize drag, the consolidation should be gradual and focus on current spending while protecting investment (particularly given large green/digital investment needs, ¶28 and Box 3), underpinned by structural reforms.

Projected Fiscal Scenarios

(Percent of GDP, unless otherwise indicated)

Source: IMF staff calculations.

^{^1/}Computed as the change in the structural primary balance. Recommended additional fiscal effort is relative to the baseline projections.

Projected Fiscal Scenarios

(Percent of GDP, unless otherwise indicated)

	2019	2020	2021	2022	2023	2024	2025	2026	2027
Baseline
Real GDP growth (percent)	1.9	-7.9	6.8	2.6	0.7	1.6	1.8	1.6	1.4
Revenue	52.3	52.5	52.5	53.5	52.8	51.6	51.4	51.2	51.2
Expenditure	55.4	61.5	59.1	58.4	58.1	56.4	56.0	55.7	55.7
Overall balance	-3.1	-9.0	-6.5	-5.0	-5.3	-4.8	-4.7	-4.5	-4.5
Primary balance	-1.7	-7.8	-5.2	-3.2	-3.7	-3.1	-2.9	-2.5	-2.3
Fiscal effort 1/				1.2	-0.3	0.5	-0.1	0.2	0.2
o/w temporary Covid-19 measures				2.0	0.6	0.1	0.0	0.1	0.0
Public debt	97.4	114.7	112.6	111.6	112.0	112.2	113.0	114.2	115.7
Recommended
Real GDP growth (percent)	1.9	-7.9	6.8	2.6	0.4	1.3	1.6	1.4	1.1
Revenue	52.3	52.5	52.5	53.5	52.8	51.6	51.4	51.2	51.2
Expenditure	55.4	61.5	59.1	58.4	57.5	55.6	54.9	54.1	53.6
Overall balance	-3.1	-9.0	-6.5	-5.0	-4.7	-4.0	-3.5	-2.9	-2.4
Primary balance	-1.7	-7.8	-5.2	-3.2	-3.2	-2.3	-1.8	-1.0	-0.3
Fiscal effort 1/				1.2	0.3	0.9	0.5	0.7	0.8
Cumulative fiscal effort since 2023					0.3	1.2	1.7	2.4	3.2
o/w temporary Covid-19 measures					0.6	0.7	0.8	0.8	0.8
Recommended additional fiscal effort ^1/					0.7	0.4	0.5	0.5	0.6
Cumulative recommended additional fiscal effort since 2023					0.7	1.1	1.6	2.1	2.7
Public debt	97.4	114.7	112.6	111.6	111.6	111.1	110.6	110.0	109.3

Source: IMF staff calculations.

^{^1/}Computed as the change in the structural primary balance. Recommended additional fiscal effort is relative to the baseline projections.

Projected Fiscal Scenarios

(Percent of GDP, unless otherwise indicated)

	2019	2020	2021	2022	2023	2024	2025	2026	2027
Baseline
Real GDP growth (percent)	1.9	-7.9	6.8	2.6	0.7	1.6	1.8	1.6	1.4
Revenue	52.3	52.5	52.5	53.5	52.8	51.6	51.4	51.2	51.2
Expenditure	55.4	61.5	59.1	58.4	58.1	56.4	56.0	55.7	55.7
Overall balance	-3.1	-9.0	-6.5	-5.0	-5.3	-4.8	-4.7	-4.5	-4.5
Primary balance	-1.7	-7.8	-5.2	-3.2	-3.7	-3.1	-2.9	-2.5	-2.3
Fiscal effort 1/				1.2	-0.3	0.5	-0.1	0.2	0.2
o/w temporary Covid-19 measures				2.0	0.6	0.1	0.0	0.1	0.0
Public debt	97.4	114.7	112.6	111.6	112.0	112.2	113.0	114.2	115.7
Recommended
Real GDP growth (percent)	1.9	-7.9	6.8	2.6	0.4	1.3	1.6	1.4	1.1
Revenue	52.3	52.5	52.5	53.5	52.8	51.6	51.4	51.2	51.2
Expenditure	55.4	61.5	59.1	58.4	57.5	55.6	54.9	54.1	53.6
Overall balance	-3.1	-9.0	-6.5	-5.0	-4.7	-4.0	-3.5	-2.9	-2.4
Primary balance	-1.7	-7.8	-5.2	-3.2	-3.2	-2.3	-1.8	-1.0	-0.3
Fiscal effort 1/				1.2	0.3	0.9	0.5	0.7	0.8
Cumulative fiscal effort since 2023					0.3	1.2	1.7	2.4	3.2
o/w temporary Covid-19 measures					0.6	0.7	0.8	0.8	0.8
Recommended additional fiscal effort ^1/					0.7	0.4	0.5	0.5	0.6
Cumulative recommended additional fiscal effort since 2023					0.7	1.1	1.6	2.1	2.7
Public debt	97.4	114.7	112.6	111.6	111.6	111.1	110.6	110.0	109.3

Source: IMF staff calculations.

^{^1/}Computed as the change in the structural primary balance. Recommended additional fiscal effort is relative to the baseline projections.

16. A credible package of reforms is needed to rationalize spending and narrow the gap with peers. This could build on earlier proposals and new plans that are yet to be fully specified:

Pension reform: Reform plans—still to be finalized—aim to increase the employment rate of older workers, the effective retirement age, and minimum pensions, and to gradually bring special regimes into the general regime for new participants. While key parameters remain under discussion, raising the minimum retirement age at a rate of 3 months per year and contribution period for a full pension—with provisions for special circumstances (e.g., long or interrupted careers, arduous jobs, etc.)—should bring the effective retirement age, among the lowest in Europe, closer to peers. Beyond facilitating longer careers, this would strengthen the sustainability of the system and generate significant savings.¹⁵ Introducing automatic adjustment by indexing the retirement age to life expectancy would further enhance sustainability, while unifying the fragmented system—comprising 42 different schemes—would improve equity, lower administrative cost, and facilitate labor mobility.

Unemployment benefit reform: The delayed 2019 reform adjusted rules to calculate and cumulate benefits, tightened eligibility and introduced degressivity for higher incomes and a modulation of employers’ unemployment contribution rate under a new bonus-malus system to discourage excessive use of short-term contracts. A recently enacted law¹⁶ extends the application of the reform that was due to expire on November 1 until end-2023 and allows the government to expand it by introducing countercyclicality in unemployment benefits. The reform, to be enacted by decree and effective from February, envisages varying benefit duration with labor market conditions, with a 25 percent reduction in the maximum duration when the unemployment rate is below 9 percent and its quarterly rate of increase below 0.8 ppts.¹⁷ It also tightens eligibility for workers who voluntarily resign and workers on fixed-term contracts who repeatedly refuse permanent contracts. After negotiations of social partners on the governance of unemployment insurance, new rules should apply from 2024. While welcoming the reform plans that would strengthen automatic stabilizers and labor market incentives, staff encourage further revisiting eligibility and generosity as the reform firms up that could generate additional savings.
Other reforms: Bringing spending closer to peers could yield substantial savings in several areas, with an over 10 ppt of GDP spending gap driven by social benefits, the wage bill, and subsidies (see heatmap and SIP). Tax expenditures that are not only costly but also distortive, regressive, or relatively ineffective should be rationalized (e.g., fossil fuels and housing) or redesigned (e.g., R&D).¹⁸ Reinvigorating plans from Macron’s first term to streamline the public sector workforce would improve its efficiency and lower the public wage bill. Reducing overlap between different levels of government would support this effort while lowering administrative costs. Simplifying and unifying social minima schemes, while differentiating for special conditions, in line with pre-pandemic plans, could improve their targeting and administration, yielding additional savings. This could build on social security benefit reform plans (solidarité à la source) that aim to improve and streamline access through automation, digitalization, and better data exchange. Upcoming spending reviews that will be integrated into the budget process provide an opportunity to identify additional structural measures that can sustainably reduce current spending over the medium term.

17. Adoption of the medium-term programming bill is critical to the implementation of new fiscal framework. The December 2021 organic budget law requires programming bills to include annual real spending targets and their corresponding nominal amounts for each level of government over the full 5-year horizon, with deviations to be reported in annual budgets and assessed by the Fiscal Council (HCFP). Notwithstanding the transposition of targets in annual budgets, the adoption of the medium-term programming bill is key for the new fiscal framework to become fully operational.

Authorities’ Views

18. The authorities agreed on the need to better target support and rebuild buffers through an expenditure-led fiscal consolidation but are pursuing more gradual adjustment. They argued that the tariff shield has been effective in containing inflation, second-round effects, and indexation, leaving French households better off than those in neighboring countries while offsetting part of its fiscal cost. They agreed that support should be temporary and better targeted, but they noted that the energy shock necessitated a timely response and disproportionally hit middle-income earners, complicating targeting, and that unwinding temporary cash transfers has proved difficult in the past. The authorities plan to gradually ease price controls while protecting the vulnerable but stressed that any exit strategy would depend on energy market developments, including a coordinated response at the European level to reduce wholesale prices. The authorities agreed that rebuilding fiscal buffers should be a key policy priority. They concurred that this should be achieved through an expenditure-led fiscal consolidation while leaving space for investment needs for the green and digital transition (including through France 2030). They stressed that the pace and composition of adjustment would need to strike a balance between preserving credibility, growth, and reform momentum, reflected in a gradual adjustment path that relies more on supply side reforms to boost growth and job creation. With significant untapped potential, they see unemployment, pension, and vocational training reforms, as well as measures to foster youth employment as key levers to raise labor supply and potential growth. They agreed with other areas for potential savings outlined by staff, pointing out that spending reviews are underway. While emphasizing that fiscal objectives are reflected in budget laws, they agreed that adoption of the medium-term programming bill is important to fully operationalize the new fiscal framework.

B. Maintaining Financial Sector Stability in Choppy Waters

19. Since the onset of Russia’s war against Ukraine, systemic risks in the financial sector have increased. The darkening economic outlook will adversely impact corporate balance sheets, while a sharp reduction in asset prices is also amplifying financial market volatility.¹⁹ This, coupled with a possible downturn in the housing market and increased debt ratios, has increased the credit risk for financial institutions and will weigh in on their profitability. Exposures to the financial sector from possible turbulence in the non-financial sector (both resident and non-resident) under tightening financial conditions and commodity price volatility could also perturb financial stability.

20. French banks posted higher profits at the beginning of the year but face weaker prospects from the economic slowdown. The five major French banks doubled their annual net profit in 2021, to about 25 percent above pre-crisis levels. This was mainly due to lower loan loss provisioning and higher net income. Despite the increase in profitability, banks’ return on assets improved by only 3 basis points compared to 2019, suggesting that balance sheet expansion was the main driver of profitability. Bank solvency and liquidity indicators remained solid – the CET1 ratio increased by 4 percentage points to 15.5 percent at end-2021 while the LCR stood at about 150 percent. The non-performing loan (NPL) ratio fell to 3.4 percent, but there was substantial heterogeneity across sectors, with NPL volumes increasing by 60 percent in pandemic-affected sectors (hospitality and recreation). The overall strong banking performance will, however, likely weaken in the near term with banks expected to incur higher credit risk from energy and inflation-affected sectors (about 75 percent of combined loan exposure).²⁰ The economic slowdown, amidst heightened uncertainty, will also impact bank revenues from slower lending growth. Some of these effects could be offset by higher net interest margins from the rise in interest rates, but as the net effect will likely depend on bank-specific fundamentals, the authorities should remain vigilant and closely monitor the health of all banks.

21. Vulnerabilities in the corporate sector are starting to reemerge, with firms facing liquidity pressures from energy price volatility. Corporate liquidity is starting to weaken, with firms reporting cash outflows in the first half of 2022, partly due to significant redemptions from commodity related money market funds. This has led to a slight increase in corporate net debt, which had previously remained stable despite a rise in gross debt levels. Firm bankruptcies are still below pre-pandemic levels, but are currently trending higher, suggesting pockets of risk among smaller enterprises. Energy sector firms and energy-intensive firms are particularly vulnerable in the context of high price volatility. Liquidity support to affected firms in the form of guaranteed loans (€150bn envelope) and grants to energy-intensive firms (€3bn envelope) mitigate risks, but uptake has been low so far. While the guarantee scheme could cover a portion of energy related losses, staff encourage the authorities to consider more targeted liquidity support options for critically integrated wholesale energy producers to help cover their extraordinarily large margin requirements, should energy market volatility escalate.²¹ This would help stabilize the energy market as well as safeguard financial stability by minimizing counterparty risk in the case that firms fail to post the large collateral required to hedge against price fluctuations.

22. The housing market is beginning to cool amid rate rises and tighter prudential standards. Mortgage loan volumes were 9 percent lower through end-August, compared to the same period last year (see also text figure). This partly reflects rate hikes and the tightening of borrower-based limits. While effective interest rates on housing loans have increased by about 50 basis points compared to a year ago, the government-mandated cap on effective rates—the usury rate—has increased by only about 10 basis points in recent months (text figure).²² The narrowing of the gap between effective interest rates and the legal cap increases constraints on banks to adequately price their lending without resorting to credit rationing within some segments or offering riskier credit instruments, which could have adverse implications for financial stability. Banks also face tighter borrower limits following the decision by the French prudential authority, the HCSF, to make legally binding limits to loan maturity (25 years) and debt-service-to-income ratios (35 percent) effective January 1, 2022. All banks are complying with these limits; the roughly 5 percent of the loans remaining above the limits are well within the exemption margin of 20 percent. While banks are adequately shielded from housing-related losses, due to mortgage insurance and the preponderance of fixed-rate loans, risks from high inflation remain elevated. Staff analysis shows that the percentage of borrowers-at-risk could increase by 5 percentage points from a cost-of-living shock (20 percent increase in food and energy prices). Staff judge that the current borrower-based measures are adequate and will help prevent any possible lowering of credit standards in the wake of rising interest rates. Staff noted the adjustment introduced by the authorities in April 2022 to more dynamically update the usury rate²³ to better reflect changes in market conditions but encouraged them to consider additional modifications as needed to enable a complete pass-through of monetary policy and prevent an undue exclusion of marginal borrowers from access to credit.²⁴

23. Staff support the authorities’ plan to tighten the counter-cyclical buffer (CCyB) to a rate above pre-crisis levels, given the buildup of financial stability risks and ample excess capital buffers. Overall credit growth eased in early 2021, reflecting the phase-out of pandemic support loans, which helped reduce the large and positive credit gap to pre-crisis levels. Corporate credit growth also rebounded (see ¶5) and may increase further if liquidity pressures intensify. The countercyclical capital buffer (CCyB) rate was returned in March 2022 to its pre-crisis level of 0.5 percent, and the HCSF has recently decided to raise it by a further 0.5 points. Staff support this decision, which is consistent with the monetary stance aimed at curbing inflation²⁵. Staff believe that targeting a CCyB rate²⁶ between 1 to 1.25 percent would be appropriate at this juncture given that: (i) current credit-gap metrics remain around pre-crisis levels and would call for a commensurate increase in the buffer to address pre-existing debt vulnerabilities and to prevent an abrupt reversal of the credit cycle under the worsening outlook²⁷; and (ii) constraints on increasing the CCyB is not large at this juncture, given significant excess capital buffers, but could increase if downside risks materialize. Raising the buffer now also leaves banks with ample space should financial stability risks materialize and creates room to promptly lower it later, in response to future downturns. The HCSF should therefore stand ready to release the buffer should there be a sudden deterioration of financial conditions. Given the concentration of debt vulnerabilities in the corporate sector, the authorities could also explore the deployment of a sectoral systemic risk buffer directed at corporate exposures.

Authorities’ Views

24. The authorities broadly shared staff’s assessment of the buildup of financial stability risks due to the energy crisis and Russia’s war in Ukraine and the need for heightened vigilance of all banks. They reiterated the need to raise the CCyB rate further to guard against the buildup of these risks, taking into account the high and still increasing debt trajectory as well as the low cost of raising capital for banks from increased profitability. The authorities deem the current borrower-based limits sufficient and felt they would help contain credit growth in riskier segments of the mortgage market as rates rise. They disagreed with staff on the need to further adjust the usury rate, noting that this would require parliamentary approval and is politically costly at this stage. They felt that the current adjustments and communication were sufficient to prevent any borrower exclusion.

C. Structural Policies to Increase Potential Growth

25. Further efforts to reduce labor market frictions, increase labor supply, and improve worker training will help raise potential growth. The French labor market has performed very well in recent years, with historically high employment and labor force participation and historically low unemployment. Nevertheless, participation rates remain below many peer countries and there are still challenges, particularly among low-skilled and young workers. Policies should be aimed at alleviating skills shortages, such as combining job-search assistance schemes with training programs and improving the quality of training. In this respect, continued efforts by France Compétences to enhance certification of training and professional qualifications will be important, also to contain fiscal cost. The apprenticeship system—which has had significant success in bringing more youth into the workforce—should be monitored to ensure the smooth transition of apprentices into permanent work. Steps to improve job-to-job and geographical mobility could also help reduce structural unemployment. Unemployment benefits and pension reforms (discussed above) will improve labor force participation and enhance growth.

26. Addressing weak educational outcomes and inefficiencies in education spending could help upskilling of the workforce (see Box 2). Educational attainment and student performance in France are relatively low compared to peers while spending is relatively high, suggesting room for efficiency savings. This could include rebalancing excess spending from upper secondary to primary education and rationalizing non-teaching staff spending. Reducing performance gaps in education could further be supported by improving teacher training and aligning compensation with performance, given low teacher salaries relative to peers. Disparities linked to socio-economic status could be reduced by incentivizing teachers to teach in disadvantaged areas, including through teacher pay. Giving more responsibilities and autonomy to school administrations could foster teaching innovations.

27. Improving product and service market efficiency would increase productivity growth and resilience to shocks. Recent laws adopted as part of the National Recovery and Resilience Plan28 introduced measures to encourage competition in network sectors (i.e., road transport) and ease the administrative burden on firms. France continues to lag peers on regulatory barriers, including entry barriers and competition in regulated professional services (especially accounting and legal services), retail services, and network sectors. Easing these restrictions would help raise potential growth.

^{Box 2.}

France: Spending Efficiency and Educational Attainment

Public education spending is high compared to peers, and mostly geared towards secondary education. At 5.2 percent of GDP in 2019, public education spending is higher than in other advanced European countries. While teachers’ salaries are lower than in peers, compensation of non-teaching staff represents a larger share of current expenditure from primary to tertiary education (22 percent in non-tertiary and 38 percent in tertiary education, vs. 12 and 28 percent in peers, respectively). Expenditure per student is 5 percent higher than peers for secondary education and over 30 percent higher for the upper secondary level, while it is 20 percent lower for primary and 8 percent lower in tertiary education. While teacher/pupil ratios at all education levels are lower than peers, they are slightly higher in upper secondary education, which drives costs up. Meanwhile, higher average class sizes can lead to lower educational outcomes. Compared to the rest of advanced Europe, France appears to have scope for efficiency savings from rationalizing education spending.

Student performance, education attainment and skills are relatively lower than peers. PISA test scores in secondary education in France are below Germany, the UK and other advanced economies. France also performs worse than the G5 in terms of test scores in math, science, and reading for grades 4 and 8. Only 30 percent of the population have completed a post-secondary education cycle, versus 35 and 33 percent in the UK and Germany, respectively. Within the post-secondary education, France has one of the lowest shares of students graduating with a master’s degree or higher among the G5. Meanwhile, it has one of the highest shares of graduates for upper secondary education.

There are also important differences in performance and educational attainment linked to socio-economic inequalities. In France, more than 20 percent of math performance was explained by the PISA index of socio-economic status, with a smaller share of top performers in math in the bottom quarter of the PISA index compared to the G5 and other advanced economies. A similar gap for disadvantaged students exists in reading performance. Furthermore, the share of adults completing tertiary education among disadvantaged adults is smaller in France compared to most G5 and the EU14 average, while the likelihood of completing tertiary education among advantaged adults is relatively higher. In addition, students from lower socio-economic backgrounds are more likely to enter upper secondary vocational programs than general ones in France. Students without any tertiary-educated parent represented 84 percent of entrants to upper secondary vocational programs, compared to 50 percent among entrants to general programs.

Equity in Educational Attainment

^{^1.}Adults with parents who did not complete lower secondary education.

^{^2.}Adults with at least one parent who completed tertiary education.

Sources: OECD, PIAAC, and IMF staff calculations.

Equity in Educational Attainment

	Disadvantaged¹ adults who completed tertiary education			Adults who reported higher educational attainment than their parents (upward social mobility)			Increased likelihood of completing tertiary education among advantaged² adults, relative to disadvantaged adults
	All (26-65 years old)	Older adults (56-65 years old)	Younger adults (26-35 years old)	All (26-65 years old)	Older adults (56-65 years old)	Younger adults (26-35 years old)	All (26-65 years old)
	%	%	%	%	%	%	Odds ratio
UK	22.9	20.0	23.0	39.0	40.4	33.4	9.3
France	16.9	11.3	24.2	45.2	41.2	41.3	13.6
Germany	14.9	N/A	N/A	24.4	33.2	20.5	7.9
Italy	6.7	4.8	10.2	34.2	22.6	46.1	24.9
Spain	24.1	12.6	29.5	39.8	27.4	43.1	7.6
EU14+CHE+UK	20.5	15.9	26.7	40.0	39.6	34.8	8.7

^{^1.}Adults with parents who did not complete lower secondary education.

^{^2.}Adults with at least one parent who completed tertiary education.

Sources: OECD, PIAAC, and IMF staff calculations.

Equity in Educational Attainment

	Disadvantaged¹ adults who completed tertiary education			Adults who reported higher educational attainment than their parents (upward social mobility)			Increased likelihood of completing tertiary education among advantaged² adults, relative to disadvantaged adults
	All (26-65 years old)	Older adults (56-65 years old)	Younger adults (26-35 years old)	All (26-65 years old)	Older adults (56-65 years old)	Younger adults (26-35 years old)	All (26-65 years old)
	%	%	%	%	%	%	Odds ratio
UK	22.9	20.0	23.0	39.0	40.4	33.4	9.3
France	16.9	11.3	24.2	45.2	41.2	41.3	13.6
Germany	14.9	N/A	N/A	24.4	33.2	20.5	7.9
Italy	6.7	4.8	10.2	34.2	22.6	46.1	24.9
Spain	24.1	12.6	29.5	39.8	27.4	43.1	7.6
EU14+CHE+UK	20.5	15.9	26.7	40.0	39.6	34.8	8.7

^{^1.}Adults with parents who did not complete lower secondary education.

^{^2.}Adults with at least one parent who completed tertiary education.

Sources: OECD, PIAAC, and IMF staff calculations.

28. The energy crisis presents opportunities to accelerate the green transition. The rise in fossil fuel prices should be used to promote energy conservation and increase the use of renewables, with a positive effect on emission reductions. Investments in low carbon energy, in particular in renewables, should be accelerated in the coming years, to achieve an efficient and low-carbon energy mix over the medium-term. Incentivizing such investments will not only enhance France’s energy security but also boost potential output by offsetting the impact of depleted capital stock in fossil fuel assets (see Box 3). In this context, IMF staff supports draft legislation aimed at streamlining regulatory and judicial procedures to accelerate renewable and nuclear energy development. Financial support for capital-intensive conservation measures (e.g. thermal renovation, heat pumps) or renewables investments (e.g. rooftop solar) is also appropriate. In this context, the investments of the France 2030 plan are welcome. Non-pricing instruments, like feebates and regulations, can reinforce incentives for low-carbon investments, especially in the transport and building sectors which are less responsive to emissions pricing. Any future moderation in global energy prices could be used to increase carbon taxation without further hikes in retail energy prices. Scaling up carbon pricing will have to go hand-in-hand with support for vulnerable households. In an illustrative analysis (see details in Ari et al., 2022), the combination of higher projected carbon prices and energy prices would reduce emissions by about a third relative to the pre-crisis baseline in the EU Emissions Trading System (ETS) sectors and about one fourth in the Effort Sharing Regulation (ESR) sectors.

29. While France has taken significant steps to prevent and deter foreign bribery, challenges exist that undermine enforcement efforts (see Annex V). France is a voluntary participant in the Fund’s assessment of transnational aspects of corruption under the Framework for Enhanced Engagement on Governance. A recent report by the OECD Working Group on Bribery evaluates France’s implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The report, published in December 2021, highlights progress by France in combatting foreign bribery, but also identifies critical shortcomings. France has undertaken important legislative and institutional reforms strengthening the criminal justice system. France was also recognized as bolstering its enforcement efforts, with a notable increase in investigations into and prosecutions of foreign bribery, including against legal persons. However, the Working Group considered that enforcement efforts are not yet commensurate with France’s risk exposure. Additionally, recent legislative amendments curtailing the length of preliminary investigations are detrimental to complex criminal proceedings. The Working Group therefore recommended that France take all necessary measures to effectively detect, investigate, prosecute, and sanction perpetrators of foreign bribery.

^{Box 3.}

France: Investment Needs for the Climate Transition in France

Significant investment into green technologies will be needed to substitute further investment in fossil-fuels and achieve climate neutrality objectives. Various studies have estimated the additional level of investment— both public and private—needed to ensure that the national climate transition objectives are met by 2030. These estimates are based on a sector-wise assessment of investment relative to their climate targets and/or estimating the overall green technology investment needed to reach the sustainable energy mix (see RTE, 2021). The text table provides an illustrative example for France - the net increase in non-fossil fuel energy investment would amount to approximately €200-250 billion over 8 years, including the building of new nuclear reactors and life-cycle extension of existing ones (see Box 1) as well as scaling up of renewable energy. Additional investments in upgrading the transportation and residential infrastructure (e.g., electric vehicles, thermal renovation) would amount to approximately €200-250 billion over the same period. Overall, for France, studies examining the whole economy place net climate investment needs at around €70-90 billion per year (around 2.5 percent of GDP or 10-12 percent in additional gross fixed capital formation).

Additional Capital Needs (cumulative, 2023-2030)

* Net of planned investment in fossil-fuel assets (baseline) excl. stranded assets.

^{^1/}Incl. announced pledges on new reactors and existing life-cycle extensions.

^{^2/}Mahfouz and Pisani-Ferry (2022); IRENA ReMap 2050 scenario for EU-28 with French share inferred from French share of renewables.

^{^3/}Difference between gross and net figures approximately derived from I4CE 2022, assuming no further investments in fossil fuel are made (see Pfeiffer et. al, 2016, who show that no new emitting electricity infrastructure can be built after 2017 for the 2°C pathway, to be met.

^{^4/}Rexcode (2022) for upper bound; lower bound deducts some overlaps from energy investments due to boiler renewal or electricity generation needs.

Additional Capital Needs (cumulative, 2023-2030)

	Gross	Gross Net*
	(amount in billion euros)
Investment in energy:
Nuclear ^1/	85
Renewable ^2/	150-175
Sub-total ^3/	235-260	185-210
Additional Investment in:
Transportation ^4/		50-94
Buildings (Residential + Tertiary) ^4/		250-333
Sub-total		300-427
Grand Total (approx.)		485-640

* Net of planned investment in fossil-fuel assets (baseline) excl. stranded assets.

^{^1/}Incl. announced pledges on new reactors and existing life-cycle extensions.

^{^2/}Mahfouz and Pisani-Ferry (2022); IRENA ReMap 2050 scenario for EU-28 with French share inferred from French share of renewables.

^{^4/}Rexcode (2022) for upper bound; lower bound deducts some overlaps from energy investments due to boiler renewal or electricity generation needs.

Additional Capital Needs (cumulative, 2023-2030)

	Gross	Gross Net*
	(amount in billion euros)
Investment in energy:
Nuclear ^1/	85
Renewable ^2/	150-175
Sub-total ^3/	235-260	185-210
Additional Investment in:
Transportation ^4/		50-94
Buildings (Residential + Tertiary) ^4/		250-333
Sub-total		300-427
Grand Total (approx.)		485-640

* Net of planned investment in fossil-fuel assets (baseline) excl. stranded assets.

^{^1/}Incl. announced pledges on new reactors and existing life-cycle extensions.

^{^2/}Mahfouz and Pisani-Ferry (2022); IRENA ReMap 2050 scenario for EU-28 with French share inferred from French share of renewables.

^{^4/}Rexcode (2022) for upper bound; lower bound deducts some overlaps from energy investments due to boiler renewal or electricity generation needs.

The transition to a low-carbon economy also entails deep structural changes involving a fast phase-out of fossil-fuel production. The collapsing expectations of future profits from invested fossil-fuel capital, as a result of disruptive policy and/or technological change, can lead to a pre-mature stranding of assets. The global estimate for such stranded assets – consistent with achieving a 2°C climate goal – can be large, estimated at around $1.4 trillion. Semieniuk, et. al. (2022), link the (pre-war) stranded fossil-fuel capital and transition risk at the asset level to the financial loss borne by ultimate owners in different countries (text figure). For France, while the physical loss at the oil/gas field are small, the financial losses linked to its companies’ and investors’ exposure to various physical assets worldwide is large, at around 1.2 percent of GDP. This is attributable to the fact that many major French energy companies have large exposures to oil and gas fields outside of France.

The additional investment, considering stranded Net Capital Stock under Transition Scenarios assets, will likely raise the future capital stock, depending on the scenario considered. Taking the lower bound estimate for additional investment needs, a transition path would increase the level of capital stock in 2030 by about 5 percent, compared to the baseline¹, and its growth rate by 0.5 percentage points if the investment is sustained (text figure). On the other hand, a faster depreciation and/or retirement rate of fossil fuel capital through asset stranding could lower the trajectory, increasing the level of capital stock in 2030 by about 2.5 percent instead. Alternatively, there could be a lower than baseline trajectory of capital stock in the absence of any green investments, which could lead to lower potential output.

¹ Net capital stock (NCS) is given by NCS_t = [1 – (r_t + d_t)]NCS_{t – 1} + GFCF_t, where r_t and d_t are the retirement and depreciation rates respectively. The baseline is projected using the 5-year average growth rate of GFCF and retirement/depreciation rates backed out from historical data. A doubling of the deprecation rate is assumed for the scenario with faster deprecation for the small share of energy capital stock (to approximate for stranded fossil-fuel assets).

Authorities’ Views

30. The authorities emphasized the strong labor market performance in recent years, which they attributed largely to recently reforms. They shared staff’s concerns on labor market frictions and weak educational outcomes relative to spending. They concurred that alleviating skills mismatches by improving worker training and addressing inefficiencies in education spending remain key for reskilling/upskilling the workforce. They stressed that the upcoming unemployment benefits and pension reforms will help raise the labor supply further. Furthermore, developing competencies and skills for jobs of the future as well as for the youth will help reduce long-term unemployment. There was agreement on the need to ensure the smooth transition of apprentices into permanent work, with some evidence pointing to a relatively high job insertion rate.

30. On the green transition, the authorities agreed on the need for carbon taxation, but emphasized it should be within a package of measures as part of a medium-term strategy. While the current context of high energy prices and anticipated declines in prices over the coming years could be an opportunity to incentivize strengthening it, they noted that increases in carbon pricing should be reflected in a planned medium-term strategy of decarbonization and completed with a package of measures. France is implementing a clear strategy of strengthening the carbon price within the “Fit for 55” which is strengthening the existing EU ETS and extending it to the housing and road transport sectors.

Staff Appraisal

32. After a strong economic recovery from the Covid pandemic, France was hit by an energy shock driven by Russia’s invasion of Ukraine. While it has been less affected than most EU countries due to a lower reliance on Russian gas and a strong (but costly) policy response, France still faces high inflation and a sharp slowdown in economic activity. The energy crisis is dampening the recovery by reducing consumer purchasing power, denting confidence, and exacerbating supply-side difficulties. Inflation has surged over the past year, driven by the energy price shock and an increase in core inflation due to both higher goods and services price rises. However, inflation continues to be well below the EU average, largely due to energy price controls and subsidies. Staff projects growth at 0.7 percent in 2023, while inflation will remain persistent over the next two years as price controls ease. The external position in 2022 is assessed to be moderately weaker than the level implied by medium-term fundamentals and desirable policies. Near-term risks are titled to the downside stemming from a prolonged war and an escalation of sanctions and a further spike in gas and electricity prices, faster-than-expect monetary policy adjustments in Europe or elsewhere, and a deeper slowdown in the US or China. Over the medium-term, output will grow near potential but scarring from the pandemic and the energy shock will leave output some 2 percentage points below the pre-pandemic trend.

33. Fiscal policy should take advantage of the phase-out of pandemic support to begin reducing the deficit in 2023. While the large fiscal response to the energy shock has cushioned its impact, two-thirds of the fiscal cost reflect untargeted price and purchasing power measures that pushed up costs while reducing incentives to lower energy consumption. France’s high public deficit and debt levels, divergence from Euro Area peers, and electoral cycle argue for consolidation to start in 2023, which would also support monetary policy efforts to stem inflation. Staff recommends a modest fiscal tightening of ½ ppt of GDP relative to 2022 which could largely be achieved by a faster phase-out of energy price controls and more targeted support. If, however, downside risks materialize, automatic stabilizers should be allowed to fully operate but any discretionary support should be well-targeted and offset by compensatory measures. Under an upside scenario, any revenue overperformance should be saved and support phased out faster to accelerate the deficit reduction.

34. Further efforts are needed to rebuild buffers over the medium term through a gradual but sustained fiscal consolidation. With elevated debt and gross financing needs, risks to debt sustainability have increased. To put France’s debt-to-GDP ratio on a firmly declining path and rebuild fiscal buffers, staff recommends an ambitious adjustment—totaling some 5 ppts of GDP over 7-8 years for an average annual effort of 0.7 percent of GDP—to bring the deficit down to around ¼ percent of GDP by 2030. Efforts should focus on rationalizing current spending, underpinned by structural reforms, while leaving space to accelerate green and digital investment. Implementation of the recently approved unemployment benefits reform and the upcoming pension reform could deliver part of the needed adjustment, but additional reforms would be needed to sustainably reduce current spending. Areas for savings could include tax expenditures, social benefits, education, healthcare, and subnational spending. Adoption of—and adherence to—the medium-term programming bill is critical to the implementation of the new fiscal framework that strengthens fiscal governance and the credibility of fiscal targets.

35. The banking sector has weathered the crisis soundly, though financial stability risks are increasing. The five major French banks increased profits in 2021 and bank solvency and liquidity indicators remain solid. However, the overall banking performance could weaken in the near term though increased credit risk from SMEs and energy intensive sectors. Given the buildup of financial stability risks and still low cost of capital for banks, staff support the authorities’ plan to tighten the counter-cyclical buffer (CCyB) to a rate above pre-crisis levels by the end of the year. However, this decision should be reconsidered if there is a sudden deterioration of financial conditions in the interim. The housing market has started to cool amidst rate hikes and tighter prudential requirements. Staff judge the borrower-based measures to be sufficient but encourage the authorities to keep adjusting the legal cap on consumer credit to enable a full-pass through of monetary policy and to prevent any borrower exclusion.

36. To boost potential growth, continued action is needed to reduce labor market frictions and increase labor supply as well as to improve product and services market efficiency. Labor force participation rates remain below many peer countries and employment rates for disadvantaged groups, particularly for the youth and the low-skilled, also remain lower. To alleviate skill mismatches, it will be critical to combine training programs with job-search assistance, while the recently approved unemployment benefits reform and upcoming pension reform will help raise the labor supply. In addition, improvements in the quality of education and worker training will help boost productivity and potential growth, including through improved certification of worker training and reorienting educational spending away from non-teaching staff and toward classroom teachers, particularly outside the upper secondary level. Increasing competition in product and services markets will further help raise potential growth.

37. The energy price shock underscores the urgency of the transition to cleaner and more secure energy sources. Allowing fuller passthrough of prices and other incentives will promote energy conservation and increased production of renewable energy, with benefits for climate mitigation. To speed up investments in low carbon energy, in particular in renewables, it would be critical to streamline regulatory and judicial procedures for renewable energy development. The anticipated decline in fossil fuel prices as the current crisis eases may provide an opportunity to scale up carbon pricing while providing support for vulnerable households. Well-designed fiscal incentives, feebates and regulations can accelerate the transition to electric/other zero-emission vehicles and increase building efficiency.

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

^{Table 2.}

France: Selected Economic Indicators, 2019–27

(In percent of GDP unless otherwise indicated)

Sources: Haver Analytics, INSEE, Banque de France, and IMF Staff calculations.

^{^1/}Values reflect lockdown-related losses in value added due to pubic services not provided during the lockdown in 2020

^{Table 2.}

France: Selected Economic Indicators, 2019–27

(In percent of GDP unless otherwise indicated)

				Est.	Projections
	2019	2020	2021	2022	2023	2024	2025	2026	2027
Real economy (change in percent)
Real GDP	1.9	-7.9	6.8	2.6	0.7	1.6	1.8	1.6	1.4
Domestic demand	2.1	-6.7	6.6	3.1	0.5	1.3	1.7	1.5	1.4
Private consumption	1.8	-6.8	5.3	2.6	0.5	1.7	2.1	1.6	1.4
Public consumption ^1/	1.0	-4.0	6.4	2.3	0.3	0.9	1.1	1.1	1.1
Gross fixed investment	4.2	-8.4	11.3	2.2	0.5	0.9	1.6	1.8	1.7
Foreign balance (contr. to GDP growth)	-0.3	-1.0	0.0	-0.6	0.1	0.3	0.0	0.0	0.0
Exports of goods and services	1.6	-17.0	8.6	7.8	2.8	3.9	4.1	3.9	3.4
Imports of goods and services	2.4	-13.0	7.8	9.0	2.2	2.8	3.8	3.5	3.2
Nominal GDP (billions of euros)	2,438	2,310	2,499	2,631	2,741	2,871	2,984	3,085	3,181
CPI (year average)	1.3	0.5	2.1	5.9	5.0	2.8	2.1	1.6	1.6
GDP deflator	1.2	2.9	1.3	2.6	3.5	3.1	2.1	1.8	1.7
Gross national savings (percent of GDP)	24.9	21.8	24.9	23.5	21.9	22.3	22.4	22.5	22.7
Gross domestic investment (percent of GDP)	24.4	23.6	24.6	25.0	23.5	23.3	23.1	23.0	23.1
Public finance (percent of GDP)
General government balance	-3.1	-9.0	-6.5	-5.0	-5.3	-4.8	-4.7	-4.5	-4.5
Revenue	52.3	52.5	52.5	53.5	52.8	51.6	51.4	51.2	51.2
Expenditure	55.4	61.5	59.1	58.4	58.1	56.4	56.0	55.7	55.7
Primary balance	-1.7	-7.8	-5.2	-3.2	-3.7	-3.1	-2.9	-2.5	-2.3
Structural balance (percent of pot. GDP)	-2.1	-5.8	-5.2	-4.4	-4.5	-4.2	-4.4	-4.3	-4.4
Nominal expenditure (change in percent)	2.6	5.3	3.9	4.2	3.5	1.7	3.3	2.8	3.0
Real expenditure (change in percent)	1.3	4.7	1.8	-1.7	-1.5	-1.0	1.2	1.1	1.5
General government gross debt	97.4	114.7	112.6	111.6	112.0	112.2	113.0	114.2	115.7
Labor market (percent change) Employment	0.8	-0.3	1.7	0.4	-0.1	0.1	0.1	0.1	0.1
Labor force	0.1	-0.7	1.6	0.0	0.0	0.1	0.0	0.0	0.0
Unemployment rate (percent)	8.4	8.0	7.9	7.5	7.6	7.5	7.5	7.4	7.4
Credit and interest rates (percent)
Growth of credit to the private non-financial sector	5.3	8.1	2.5	3.8	4.2	4.7	3.9	3.4	3.1
Money market rate (Euro area)	-0.4	-0.5	-0.5	…	…	…	…	…	…
Government bond yield, 10-year	0.1	-0.1	0.0	…	…	…	…	…	…
Balance of payments (percent of GDP)
Current account	0.5	-1.8	0.4	-1.5	-1.6	-1.0	-0.7	-0.6	-0.4
Trade balance of goods and services	-0.9	-1.8	-1.2	-1.7	-1.5	-0.9	-0.7	-0.5	-0.3
Exports of goods and services	32.7	28.4	31.2	39.3	40.7	41.3	42.7	44.3	46.2
Imports of goods and services	-33.6	-30.2	-32.4	-41.1	-42.2	-42.2	-43.3	-44.8	-46.5
FDI (net)	1.1	0.2	-0.4	0.4	0.8	1.0	1.0	1.1	1.1
Official reserves (US$ billion)	69.7	76.1	101.7	…	…	…	…	…	…
Exchange rates
Euro per U.S. dollar, period average	0.89	0.88	0.82	…	…	…	…	…	…
NEER, ULC-styled (2005=100, +=appreciation)	97.1	97.4	98.4	…	…	…	…	…	…
REER, ULC-based (2005=100, +=appreciation)	90.2	95.8	94.1	…	…	…	…	…	…
Potential output and output gap
Potential output (change in percent)	1.0	-3.3	3.7	1.5	1.0	1.4	1.3	1.3	1.3
Memo: per working age person	1.2	-3.2	4.1	1.5	1.0	1.4	1.3	1.3	1.3
Output gap	0.0	-4.7	-1.9	-0.8	-1.1	-0.9	-0.5	-0.3	-0.2

Sources: Haver Analytics, INSEE, Banque de France, and IMF Staff calculations.

^{^1/}Values reflect lockdown-related losses in value added due to pubic services not provided during the lockdown in 2020

^{Table 2.}

France: Selected Economic Indicators, 2019–27

(In percent of GDP unless otherwise indicated)

				Est.	Projections
	2019	2020	2021	2022	2023	2024	2025	2026	2027
Real economy (change in percent)
Real GDP	1.9	-7.9	6.8	2.6	0.7	1.6	1.8	1.6	1.4
Domestic demand	2.1	-6.7	6.6	3.1	0.5	1.3	1.7	1.5	1.4
Private consumption	1.8	-6.8	5.3	2.6	0.5	1.7	2.1	1.6	1.4
Public consumption ^1/	1.0	-4.0	6.4	2.3	0.3	0.9	1.1	1.1	1.1
Gross fixed investment	4.2	-8.4	11.3	2.2	0.5	0.9	1.6	1.8	1.7
Foreign balance (contr. to GDP growth)	-0.3	-1.0	0.0	-0.6	0.1	0.3	0.0	0.0	0.0
Exports of goods and services	1.6	-17.0	8.6	7.8	2.8	3.9	4.1	3.9	3.4
Imports of goods and services	2.4	-13.0	7.8	9.0	2.2	2.8	3.8	3.5	3.2
Nominal GDP (billions of euros)	2,438	2,310	2,499	2,631	2,741	2,871	2,984	3,085	3,181
CPI (year average)	1.3	0.5	2.1	5.9	5.0	2.8	2.1	1.6	1.6
GDP deflator	1.2	2.9	1.3	2.6	3.5	3.1	2.1	1.8	1.7
Gross national savings (percent of GDP)	24.9	21.8	24.9	23.5	21.9	22.3	22.4	22.5	22.7
Gross domestic investment (percent of GDP)	24.4	23.6	24.6	25.0	23.5	23.3	23.1	23.0	23.1
Public finance (percent of GDP)
General government balance	-3.1	-9.0	-6.5	-5.0	-5.3	-4.8	-4.7	-4.5	-4.5
Revenue	52.3	52.5	52.5	53.5	52.8	51.6	51.4	51.2	51.2
Expenditure	55.4	61.5	59.1	58.4	58.1	56.4	56.0	55.7	55.7
Primary balance	-1.7	-7.8	-5.2	-3.2	-3.7	-3.1	-2.9	-2.5	-2.3
Structural balance (percent of pot. GDP)	-2.1	-5.8	-5.2	-4.4	-4.5	-4.2	-4.4	-4.3	-4.4
Nominal expenditure (change in percent)	2.6	5.3	3.9	4.2	3.5	1.7	3.3	2.8	3.0
Real expenditure (change in percent)	1.3	4.7	1.8	-1.7	-1.5	-1.0	1.2	1.1	1.5
General government gross debt	97.4	114.7	112.6	111.6	112.0	112.2	113.0	114.2	115.7
Labor market (percent change) Employment	0.8	-0.3	1.7	0.4	-0.1	0.1	0.1	0.1	0.1
Labor force	0.1	-0.7	1.6	0.0	0.0	0.1	0.0	0.0	0.0
Unemployment rate (percent)	8.4	8.0	7.9	7.5	7.6	7.5	7.5	7.4	7.4
Credit and interest rates (percent)
Growth of credit to the private non-financial sector	5.3	8.1	2.5	3.8	4.2	4.7	3.9	3.4	3.1
Money market rate (Euro area)	-0.4	-0.5	-0.5	…	…	…	…	…	…
Government bond yield, 10-year	0.1	-0.1	0.0	…	…	…	…	…	…
Balance of payments (percent of GDP)
Current account	0.5	-1.8	0.4	-1.5	-1.6	-1.0	-0.7	-0.6	-0.4
Trade balance of goods and services	-0.9	-1.8	-1.2	-1.7	-1.5	-0.9	-0.7	-0.5	-0.3
Exports of goods and services	32.7	28.4	31.2	39.3	40.7	41.3	42.7	44.3	46.2
Imports of goods and services	-33.6	-30.2	-32.4	-41.1	-42.2	-42.2	-43.3	-44.8	-46.5
FDI (net)	1.1	0.2	-0.4	0.4	0.8	1.0	1.0	1.1	1.1
Official reserves (US$ billion)	69.7	76.1	101.7	…	…	…	…	…	…
Exchange rates
Euro per U.S. dollar, period average	0.89	0.88	0.82	…	…	…	…	…	…
NEER, ULC-styled (2005=100, +=appreciation)	97.1	97.4	98.4	…	…	…	…	…	…
REER, ULC-based (2005=100, +=appreciation)	90.2	95.8	94.1	…	…	…	…	…	…
Potential output and output gap
Potential output (change in percent)	1.0	-3.3	3.7	1.5	1.0	1.4	1.3	1.3	1.3
Memo: per working age person	1.2	-3.2	4.1	1.5	1.0	1.4	1.3	1.3	1.3
Output gap	0.0	-4.7	-1.9	-0.8	-1.1	-0.9	-0.5	-0.3	-0.2

Sources: Haver Analytics, INSEE, Banque de France, and IMF Staff calculations.

^{^1/}Values reflect lockdown-related losses in value added due to pubic services not provided during the lockdown in 2020

^{Table 3.}

France: General Government Operations, 2019–27

(In percent of GDP unless otherwise indicated)

Sources: Haver Analytics, INSEE, Banque de France, and IMF Staff calculations.

^{Table 3.}

France: General Government Operations, 2019–27

(In percent of GDP unless otherwise indicated)

				Est.	Proj.
	2019	2020	2021	2022	2023	2024	2025	2026	2027
Revenue	52.3	52.5	52.5	53.5	52.8	51.6	51.4	51.2	51.2
Taxes	30.2	30.2	30.0	30.5	30.5	29.5	29.4	29.4	29.4
Direct taxes	13.1	13.2	12.9	13.2	12.8	12.6	12.5	12.5	12.5
Indirect taxes	17.1	17.1	17.1	17.3	17.7	16.9	16.8	16.8	16.8
Social contributions	16.7	17.0	16.8	17.1	16.8	16.7	16.6	16.6	16.5
Other revenue	5.4	5.3	5.8	5.8	5.5	5.5	5.4	5.3	5.3
Expenditure	55.4	61.5	59.1	58.4	58.1	56.4	56.0	55.7	55.7
Expense	55.1	61.3	58.9	58.2	57.8	56.2	55.8	55.5	55.5
Compensation of employees	12.2	13.2	12.5	12.5	12.3	12.2	12.1	12.0	11.9
Goods and services	4.9	5.3	5.1	5.2	5.2	5.2	5.1	5.0	5.0
Interest	1.4	1.3	1.4	1.8	1.6	1.8	1.9	2.0	2.2
Social benefits	25.3	28.8	26.9	25.8	25.6	25.5	25.5	25.4	25.3
Other expense	11.3	12.8	12.9	12.9	13.1	11.5	11.3	11.1	11.0
Gross public investment	3.7	3.7	3.6	3.9	3.7	3.7	3.6	3.4	3.4
Net acquisition of nonfinancial assets	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
Net lending / borrowing	-3.1	-9.0	-6.5	-5.0	-5.3	-4.8	-4.7	-4.5	-4.5
Primary balance	-1.7	-7.8	-5.2	-3.2	-3.7	-3.1	-2.9	-2.5	-2.3
Memorandum items:
Structural balance (percent of potential GDP)	-2.1	-5.8	-5.2	-4.4	-4.5	-4.2	-4.4	-4.3	-4.4
Structural primary balance (percent of potential GDP	-0.8	-4.7	-3.9	-2.7	-3.0	-2.5	-2.6	-2.4	-2.2
Change in structural primary balance	-0.8	-3.9	0.8	1.2	-0.3	0.5	-0.1	0.2	0.2
Public gross debt (Maastricht definition)	97.4	114.7	112.6	111.6	112.0	112.2	113.0	114.2	115.7
Nominal GDP (in billion of Euros)	2,438	2,310	2,499	2,631	2,741	2,871	2,984	3,085	3,181
Real GDP growth (in percent)	1.9	-7.9	6.8	2.6	0.7	1.6	1.8	1.6	1.4
Nominal expenditure growth	2.6	5.3	3.9	4.2	3.5	1.7	3.3	2.8	3.0
Real expenditure growth (in percent)	1.3	4.7	1.8	-1.7	-1.5	-1.0	1.2	1.1	1.5
of which: primary	1.8	5.3	1.5	-2.4	-1.2	-1.3	1.0	0.8	1.0
of which: structural primary	1.9	4.6	1.9	-2.3	-1.3	-1.3	1.1	0.8	1.0

Sources: Haver Analytics, INSEE, Banque de France, and IMF Staff calculations.

^{Table 3.}

France: General Government Operations, 2019–27

(In percent of GDP unless otherwise indicated)

				Est.	Proj.
	2019	2020	2021	2022	2023	2024	2025	2026	2027
Revenue	52.3	52.5	52.5	53.5	52.8	51.6	51.4	51.2	51.2
Taxes	30.2	30.2	30.0	30.5	30.5	29.5	29.4	29.4	29.4
Direct taxes	13.1	13.2	12.9	13.2	12.8	12.6	12.5	12.5	12.5
Indirect taxes	17.1	17.1	17.1	17.3	17.7	16.9	16.8	16.8	16.8
Social contributions	16.7	17.0	16.8	17.1	16.8	16.7	16.6	16.6	16.5
Other revenue	5.4	5.3	5.8	5.8	5.5	5.5	5.4	5.3	5.3
Expenditure	55.4	61.5	59.1	58.4	58.1	56.4	56.0	55.7	55.7
Expense	55.1	61.3	58.9	58.2	57.8	56.2	55.8	55.5	55.5
Compensation of employees	12.2	13.2	12.5	12.5	12.3	12.2	12.1	12.0	11.9
Goods and services	4.9	5.3	5.1	5.2	5.2	5.2	5.1	5.0	5.0
Interest	1.4	1.3	1.4	1.8	1.6	1.8	1.9	2.0	2.2
Social benefits	25.3	28.8	26.9	25.8	25.6	25.5	25.5	25.4	25.3
Other expense	11.3	12.8	12.9	12.9	13.1	11.5	11.3	11.1	11.0
Gross public investment	3.7	3.7	3.6	3.9	3.7	3.7	3.6	3.4	3.4
Net acquisition of nonfinancial assets	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
Net lending / borrowing	-3.1	-9.0	-6.5	-5.0	-5.3	-4.8	-4.7	-4.5	-4.5
Primary balance	-1.7	-7.8	-5.2	-3.2	-3.7	-3.1	-2.9	-2.5	-2.3
Memorandum items:
Structural balance (percent of potential GDP)	-2.1	-5.8	-5.2	-4.4	-4.5	-4.2	-4.4	-4.3	-4.4
Structural primary balance (percent of potential GDP	-0.8	-4.7	-3.9	-2.7	-3.0	-2.5	-2.6	-2.4	-2.2
Change in structural primary balance	-0.8	-3.9	0.8	1.2	-0.3	0.5	-0.1	0.2	0.2
Public gross debt (Maastricht definition)	97.4	114.7	112.6	111.6	112.0	112.2	113.0	114.2	115.7
Nominal GDP (in billion of Euros)	2,438	2,310	2,499	2,631	2,741	2,871	2,984	3,085	3,181
Real GDP growth (in percent)	1.9	-7.9	6.8	2.6	0.7	1.6	1.8	1.6	1.4
Nominal expenditure growth	2.6	5.3	3.9	4.2	3.5	1.7	3.3	2.8	3.0
Real expenditure growth (in percent)	1.3	4.7	1.8	-1.7	-1.5	-1.0	1.2	1.1	1.5
of which: primary	1.8	5.3	1.5	-2.4	-1.2	-1.3	1.0	0.8	1.0
of which: structural primary	1.9	4.6	1.9	-2.3	-1.3	-1.3	1.1	0.8	1.0

Sources: Haver Analytics, INSEE, Banque de France, and IMF Staff calculations.

^{Table 4.}

France: Balance of Payments, 2019–27

(In percent of GDP)

Sources: Haver Analytics, Banque de France, and IMF Staff calculations.

^{Table 4.}

France: Balance of Payments, 2019–27

(In percent of GDP)

				Est.	Projections
	2019	2020	2021	2022	2023	2024	2025	2026	2027
Current account	0.5	-1.8	0.4	-1.5	-1.6	-1.0	-0.7	-0.6	-0.4
Net exports of goods	-1.9	-2.6	-2.7	-4.1	-3.9	-3.5	-3.4	-3.4	-3.4
Exports of goods	21.9	19.1	21.0	26.0	27.0	27.3	28.3	29.4	30.6
Imports of goods	23.8	21.7	23.7	30.1	30.9	30.9	31.7	32.8	34.0
Net exports of services	1.1	0.8	1.5	2.4	2.4	2.6	2.8	2.9	3.1
Exports of services	10.8	9.3	10.2	13.3	13.7	13.9	14.4	15.0	15.6
Imports of services	9.8	8.5	8.7	11.0	11.3	11.3	11.6	12.0	12.5
Income balance	3.2	1.8	3.3	1.9	1.7	1.7	1.9	1.9	1.9
Current transfers	-1.8	-1.9	-1.7	-1.7	-1.8	-1.8	-1.9	-2.0	-2.0
Capital and financial account
Capital account	0.1	0.1	0.5	0.1	0.1	0.1	0.1	0.1	0.1
Financial account	0.0	-2.3	0.1	-1.5	-1.5	-0.9	-0.6	-0.5	-0.3
Direct investment	1.1	0.2	-0.4	0.4	0.8	1.0	1.0	1.1	1.1
Portfolio investment	-2.6	-1.4	-0.2	-1.2	-0.9	-0.2	0.2	0.3	0.5
Financial derivatives	0.2	-1.0	0.7	0.2	0.0	-0.1	-0.2	-0.2	-0.2
Other investments net	1.2	-0.3	-0.9	-1.0	-1.5	-1.7	-1.8	-1.9	-1.9
Reserve assets	0.1	0.2	0.9	0.1	0.1	0.1	0.2	0.2	0.2
Errors and omissions	-0.6	-0.6	-0.7	0.0	0.0	0.0	0.0	0.0	0.0

Sources: Haver Analytics, Banque de France, and IMF Staff calculations.

^{Table 4.}

France: Balance of Payments, 2019–27

(In percent of GDP)

				Est.	Projections
	2019	2020	2021	2022	2023	2024	2025	2026	2027
Current account	0.5	-1.8	0.4	-1.5	-1.6	-1.0	-0.7	-0.6	-0.4
Net exports of goods	-1.9	-2.6	-2.7	-4.1	-3.9	-3.5	-3.4	-3.4	-3.4
Exports of goods	21.9	19.1	21.0	26.0	27.0	27.3	28.3	29.4	30.6
Imports of goods	23.8	21.7	23.7	30.1	30.9	30.9	31.7	32.8	34.0
Net exports of services	1.1	0.8	1.5	2.4	2.4	2.6	2.8	2.9	3.1
Exports of services	10.8	9.3	10.2	13.3	13.7	13.9	14.4	15.0	15.6
Imports of services	9.8	8.5	8.7	11.0	11.3	11.3	11.6	12.0	12.5
Income balance	3.2	1.8	3.3	1.9	1.7	1.7	1.9	1.9	1.9
Current transfers	-1.8	-1.9	-1.7	-1.7	-1.8	-1.8	-1.9	-2.0	-2.0
Capital and financial account
Capital account	0.1	0.1	0.5	0.1	0.1	0.1	0.1	0.1	0.1
Financial account	0.0	-2.3	0.1	-1.5	-1.5	-0.9	-0.6	-0.5	-0.3
Direct investment	1.1	0.2	-0.4	0.4	0.8	1.0	1.0	1.1	1.1
Portfolio investment	-2.6	-1.4	-0.2	-1.2	-0.9	-0.2	0.2	0.3	0.5
Financial derivatives	0.2	-1.0	0.7	0.2	0.0	-0.1	-0.2	-0.2	-0.2
Other investments net	1.2	-0.3	-0.9	-1.0	-1.5	-1.7	-1.8	-1.9	-1.9
Reserve assets	0.1	0.2	0.9	0.1	0.1	0.1	0.2	0.2	0.2
Errors and omissions	-0.6	-0.6	-0.7	0.0	0.0	0.0	0.0	0.0	0.0

Sources: Haver Analytics, Banque de France, and IMF Staff calculations.

^{Table 5.}

France: Vulnerability Indicators, 2014–22

(In percent of GDP unless otherwise indicated)

Sources: French authorities, INSEE, BdF, ECB, Haver, and IMF International Financial Statistics.

^{^1/}The debt figure does not include guarantees on non-general government debt.

^{^2/}Data is based on new methodology which is not comparable to older figures before 2014.

^{Table 5.}

France: Vulnerability Indicators, 2014–22

(In percent of GDP unless otherwise indicated)

	2014	2015	2016	2017	2018	2019	2020	2021	2022
External Indicators
Exports (annual percentage change, in U.S. dollars)	2.0	-10.4	0.3	6.8	10.0	-2.7	-16.0	23.1	17.8
Imports (annual percentage change, in U.S. dollars)	2.7	-11.6	0.8	8.1	10.5	-3.4	-13.2	20.6	18.3
Terms of trade (annual percentage change)	1.3	3.1	1.0	-1.3	-1.2	0.9	0.8	-0.2	-1.1
Current account balance	-1.0	-0.4	-0.5	-0.8	-0.8	0.5	-1.8	0.4	-1.5
Capital and financial account balance	-0.4	-0.1	-0.7	-1.4	-0.9	0.1	-2.3	0.6	-1.4
Of which
Inward portfolio investment (debt securities, etc.)	4.1	0.2	1.6	1.2	0.6	5.4	7.5	4.2	…
Inward foreign direct investment	0.2	1.8	1.3	1.4	2.8	2.0	0.5	3.0	…
Other investment (net)	-0.1	-3.0	-1.8	-2.8	-3.2	1.2	-0.3	-0.9	-1.0
Total reserves minus gold
(in billions of U.S. dollars, end-of-period)	49.5	55.2	56.1	54.8	66.1	69.7	76.1	101.7	…
Euros per U.S. dollar (period average)	0.8	0.9	0.9	0.9	0.8	0.9	0.9	0.8	1.0
Market Indicators
Financial Markets
Public sector debt ^1/	94.8	95.4	96.1	98.1	97.8	97.4	114.7	112.6	111.6
3-month T-bill yield (percentage points)	0.1	-0.2	-0.6	-0.6	-0.6	-0.6	-0.6	-0.7	…
3-month T-bill yield in real terms (percentage points)	0.0	-0.4	-1.2	-1.8	-2.2	-2.0	-0.6	-3.4	…
US 3 month T-bill	0.0	0.1	0.3	0.9	1.9	2.1	0.4	0.0	…
Spread with the US T-bill (percentage points)	0.0	-0.3	-0.9	-1.6	-2.6	-2.6	-0.9	-0.7	…
10-year government bond (percentage points)	1.7	0.8	0.5	0.8	0.8	0.1	-0.1	0.0	…
10-year government bond (United States)	2.5	2.1	1.8	2.3	2.9	2.1	0.9	1.4	…
Spread with US bond (percentage points)	-0.9	-1.3	-1.4	-1.5	-2.1	-2.0	-1.0	-1.4	…
Yield curve (10 year - 3 month, percentage points)	1.6	1.0	1.0	1.5	1.4	0.7	0.4	0.7	…
Stock market index (period average, 1995=100)	213.4	216.2	218.6	221.7	224.0	227.3	229.5	230.4	231.7
Real estate prices (index, Q1-10=100, period average)	101.9	100.0	100.9	104.0	107.1	110.7	116.8	124.7	N.A.
Credit markets (end-of-period 12-month growth rates)
Credit to the private sector	0.5	2.5	4.3	4.6	6.3	5.3	8.5	3.8	5.7
Bank credit to households	1.9	3.3	3.3	5.6	5.3	6.0	4.7	5.3	…
Housing Loans	2.2	4.0	3.5	6.1	5.8	6.8	5.5	6.4	…
Bank credit to nonfinancial enterprises	2.6	4.3	4.3	5.8	5.7	4.2	13.0	3.5	…
Sectoral risk indicators
Household sector									15.7
Household savings ratio	14.5	14.1	14.0	14.1	14.4	15.0	21.0	18.7	~~16.4~~
Household financial savings ratio	5.2	4.8	4.5	4.2	4.3	4.6	11.6	7.7	…
Corporate sector Gross margin ratio	0.3	0.3	0.3	0.3	0.3	0.3	0.3	0.3	…
Investment ratio	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.3	…
Savings ratio	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.3	…
Self-financing ratio	0.9	1.0	1.0	1.0	0.9	1.0	0.9	1.1	…
Banking sector
Share of housing loans in bank credit to the private sector	41.3	41.6	41.8	42.4	42.4	42.7	42.2	43.4	42.8
Share of nonperforming loans in total loans	4.2	4.0	3.7	3.1	2.7	2.5	2.7	2.4	2.3
Ratio of nonperforming loans net of provisions to capital	19.2	18.0	16.2	15.0	13.6	12.2	11.9	10.3	10.4
Liquid assets to total short-term liabilities ^2/	17.8	17.5	20.2	20.7	19.3	20.1	26.0	27.0	23.5
Return on assets	0.2	0.6	0.5	0.4	0.4	0.4	…	…	…
Return on equity	4.4	9.2	8.4	6.3	6.7	6.4	…	…	…
Regulatory capital to risk-weighted assets	16.3	17.1	18.3	18.9	18.8	19.6	19.9	20.4	19.7

Sources: French authorities, INSEE, BdF, ECB, Haver, and IMF International Financial Statistics.

^{^1/}The debt figure does not include guarantees on non-general government debt.

^{^2/}Data is based on new methodology which is not comparable to older figures before 2014.

^{Table 5.}

France: Vulnerability Indicators, 2014–22

(In percent of GDP unless otherwise indicated)

	2014	2015	2016	2017	2018	2019	2020	2021	2022
External Indicators
Exports (annual percentage change, in U.S. dollars)	2.0	-10.4	0.3	6.8	10.0	-2.7	-16.0	23.1	17.8
Imports (annual percentage change, in U.S. dollars)	2.7	-11.6	0.8	8.1	10.5	-3.4	-13.2	20.6	18.3
Terms of trade (annual percentage change)	1.3	3.1	1.0	-1.3	-1.2	0.9	0.8	-0.2	-1.1
Current account balance	-1.0	-0.4	-0.5	-0.8	-0.8	0.5	-1.8	0.4	-1.5
Capital and financial account balance	-0.4	-0.1	-0.7	-1.4	-0.9	0.1	-2.3	0.6	-1.4
Of which
Inward portfolio investment (debt securities, etc.)	4.1	0.2	1.6	1.2	0.6	5.4	7.5	4.2	…
Inward foreign direct investment	0.2	1.8	1.3	1.4	2.8	2.0	0.5	3.0	…
Other investment (net)	-0.1	-3.0	-1.8	-2.8	-3.2	1.2	-0.3	-0.9	-1.0
Total reserves minus gold
(in billions of U.S. dollars, end-of-period)	49.5	55.2	56.1	54.8	66.1	69.7	76.1	101.7	…
Euros per U.S. dollar (period average)	0.8	0.9	0.9	0.9	0.8	0.9	0.9	0.8	1.0
Market Indicators
Financial Markets
Public sector debt ^1/	94.8	95.4	96.1	98.1	97.8	97.4	114.7	112.6	111.6
3-month T-bill yield (percentage points)	0.1	-0.2	-0.6	-0.6	-0.6	-0.6	-0.6	-0.7	…
3-month T-bill yield in real terms (percentage points)	0.0	-0.4	-1.2	-1.8	-2.2	-2.0	-0.6	-3.4	…
US 3 month T-bill	0.0	0.1	0.3	0.9	1.9	2.1	0.4	0.0	…
Spread with the US T-bill (percentage points)	0.0	-0.3	-0.9	-1.6	-2.6	-2.6	-0.9	-0.7	…
10-year government bond (percentage points)	1.7	0.8	0.5	0.8	0.8	0.1	-0.1	0.0	…
10-year government bond (United States)	2.5	2.1	1.8	2.3	2.9	2.1	0.9	1.4	…
Spread with US bond (percentage points)	-0.9	-1.3	-1.4	-1.5	-2.1	-2.0	-1.0	-1.4	…
Yield curve (10 year - 3 month, percentage points)	1.6	1.0	1.0	1.5	1.4	0.7	0.4	0.7	…
Stock market index (period average, 1995=100)	213.4	216.2	218.6	221.7	224.0	227.3	229.5	230.4	231.7
Real estate prices (index, Q1-10=100, period average)	101.9	100.0	100.9	104.0	107.1	110.7	116.8	124.7	N.A.
Credit markets (end-of-period 12-month growth rates)
Credit to the private sector	0.5	2.5	4.3	4.6	6.3	5.3	8.5	3.8	5.7
Bank credit to households	1.9	3.3	3.3	5.6	5.3	6.0	4.7	5.3	…
Housing Loans	2.2	4.0	3.5	6.1	5.8	6.8	5.5	6.4	…
Bank credit to nonfinancial enterprises	2.6	4.3	4.3	5.8	5.7	4.2	13.0	3.5	…
Sectoral risk indicators
Household sector									15.7
Household savings ratio	14.5	14.1	14.0	14.1	14.4	15.0	21.0	18.7	~~16.4~~
Household financial savings ratio	5.2	4.8	4.5	4.2	4.3	4.6	11.6	7.7	…
Corporate sector Gross margin ratio	0.3	0.3	0.3	0.3	0.3	0.3	0.3	0.3	…
Investment ratio	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.3	…
Savings ratio	0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.3	…
Self-financing ratio	0.9	1.0	1.0	1.0	0.9	1.0	0.9	1.1	…
Banking sector
Share of housing loans in bank credit to the private sector	41.3	41.6	41.8	42.4	42.4	42.7	42.2	43.4	42.8
Share of nonperforming loans in total loans	4.2	4.0	3.7	3.1	2.7	2.5	2.7	2.4	2.3
Ratio of nonperforming loans net of provisions to capital	19.2	18.0	16.2	15.0	13.6	12.2	11.9	10.3	10.4
Liquid assets to total short-term liabilities ^2/	17.8	17.5	20.2	20.7	19.3	20.1	26.0	27.0	23.5
Return on assets	0.2	0.6	0.5	0.4	0.4	0.4	…	…	…
Return on equity	4.4	9.2	8.4	6.3	6.7	6.4	…	…	…
Regulatory capital to risk-weighted assets	16.3	17.1	18.3	18.9	18.8	19.6	19.9	20.4	19.7

Sources: French authorities, INSEE, BdF, ECB, Haver, and IMF International Financial Statistics.

^{^1/}The debt figure does not include guarantees on non-general government debt.

^{^2/}Data is based on new methodology which is not comparable to older figures before 2014.

^{Table 6.}

France: Core Financial Soundness Indicators, 2016-22

Sources: Banque de France, ACPR

^{^1/}These may be grouped in different peer groups based on control, business lines, or group structure.

^{^2/}Consolidated data for the five banking groups (IFRS).

^{^3/}All credit institutions' aggregated data on a parent-company basis.

^{^4/}ROA and ROE ratios are calculated after taxes (same calculation as the ECB consolidated data ratios).

^{Table 6.}

France: Core Financial Soundness Indicators, 2016-22

	2016	2017	2018	2019	2020	2021	2022
Deposit-taking institutions ^1/
Regulatory capital to risk-weighted assets ^2/	18.3	18.9	18.8	19.6	19.9	20.4	19.7
Regulatory Tier I capital to risk-weighted assets ^2/	15.1	15.4	15.6	16.0	17.1	16.9	16.4
Nonperforming loans net of provisions to capital	16.2	15.0	13.6	12.2	11.9	10.3	10.4
Bank provisions to Nonperforming loans	51.0	50.6	50.4	49.9	48.7	49.2	48.4
Nonperforming loans to total gross loans	3.7	3.1	2.7	2.5	2.7	2.4	2.3
Sectoral distribution of loans to total loans, of which Deposit-takers	0.0	0.0	0.0	0.0	0.0	3.4	3.5
Nonfinancial corporation	0.0	0.0	0.0	0.0	0.0	20.0	19.7
Households (including individual firms)	28.1	25.7	25.5	25.9	24.2	30.1	29.2
Nonresidents (including financial sectors)	0.0	0.0	0.0	0.0	0.0	38.5	39.9
ROA (aggregated data on a parent-company basis) ^3/ ^4/	0.4	0.4	0.4	0.4	0.3	0.5	0.4
ROA (main groups on a consolidated basis) ^2/ ^4/	0.4	0.4	0.4	0.4	0.3	0.5	0.3
ROE (aggregated data on a parent-company basis) ^3/ ^4/	6.8	6.5	6.4	6.0	4.1	7.1	6.3
ROE (main groups on a consolidated basis) ^2/ ^4/	6.5	6.4	6.5	6.0	4.1	7.5	6.1
Interest margin to gross income	37.8	36.2	36.0	37.1	38.8	35.6	35.8
Noninterest expenses to gross income	71.5	74.2	76.2	73.3	70.4	67.5	68.1
Liquid assets to total assets	13.0	13.9	13.7	14.1	18.0	18.5	16.9
Liquid assets to short-term liabilities	20.2	20.7	19.3	20.1	26.0	27.0	23.5

Sources: Banque de France, ACPR

^{^1/}These may be grouped in different peer groups based on control, business lines, or group structure.

^{^2/}Consolidated data for the five banking groups (IFRS).

^{^3/}All credit institutions' aggregated data on a parent-company basis.

^{^4/}ROA and ROE ratios are calculated after taxes (same calculation as the ECB consolidated data ratios).

^{Table 6.}

France: Core Financial Soundness Indicators, 2016-22

	2016	2017	2018	2019	2020	2021	2022
Deposit-taking institutions ^1/
Regulatory capital to risk-weighted assets ^2/	18.3	18.9	18.8	19.6	19.9	20.4	19.7
Regulatory Tier I capital to risk-weighted assets ^2/	15.1	15.4	15.6	16.0	17.1	16.9	16.4
Nonperforming loans net of provisions to capital	16.2	15.0	13.6	12.2	11.9	10.3	10.4
Bank provisions to Nonperforming loans	51.0	50.6	50.4	49.9	48.7	49.2	48.4
Nonperforming loans to total gross loans	3.7	3.1	2.7	2.5	2.7	2.4	2.3
Sectoral distribution of loans to total loans, of which Deposit-takers	0.0	0.0	0.0	0.0	0.0	3.4	3.5
Nonfinancial corporation	0.0	0.0	0.0	0.0	0.0	20.0	19.7
Households (including individual firms)	28.1	25.7	25.5	25.9	24.2	30.1	29.2
Nonresidents (including financial sectors)	0.0	0.0	0.0	0.0	0.0	38.5	39.9
ROA (aggregated data on a parent-company basis) ^3/ ^4/	0.4	0.4	0.4	0.4	0.3	0.5	0.4
ROA (main groups on a consolidated basis) ^2/ ^4/	0.4	0.4	0.4	0.4	0.3	0.5	0.3
ROE (aggregated data on a parent-company basis) ^3/ ^4/	6.8	6.5	6.4	6.0	4.1	7.1	6.3
ROE (main groups on a consolidated basis) ^2/ ^4/	6.5	6.4	6.5	6.0	4.1	7.5	6.1
Interest margin to gross income	37.8	36.2	36.0	37.1	38.8	35.6	35.8
Noninterest expenses to gross income	71.5	74.2	76.2	73.3	70.4	67.5	68.1
Liquid assets to total assets	13.0	13.9	13.7	14.1	18.0	18.5	16.9
Liquid assets to short-term liabilities	20.2	20.7	19.3	20.1	26.0	27.0	23.5

Sources: Banque de France, ACPR

^{^1/}These may be grouped in different peer groups based on control, business lines, or group structure.

^{^2/}Consolidated data for the five banking groups (IFRS).

^{^3/}All credit institutions' aggregated data on a parent-company basis.

^{^4/}ROA and ROE ratios are calculated after taxes (same calculation as the ECB consolidated data ratios).

Annex I. Authorities’ Response to Past IMF Policy Recommendations

IMF 2021 Article IV Recommendations	Authorities’ Response
Fiscal Policy
Maintain a supportive fiscal stance in 2022 but target any additional stimulus on supply-side measures to boost potential growth. In response to rising energy prices, provide targeted and temporary support to vulnerable households rather than broad- based transfers and long-lasting price-control measures. If downside risks materialize, additional targeted relief support should be provided.	The authorities provided additional, mostly broad-based support to mitigate the impact of rising energy prices, largely offsetting expiring Covid-19 support. Energy price controls will be extended into 2023, allowing for a 15 percent increase in regulated tariffs coupled with (moderately) targeted cash transfers.
Embark on a gradual but sustained expenditure-based fiscal consolidation over 2023-29 to rebuild buffers and sustainably lower debt.	The authorities are committed to bring the deficit below 3 percent of GDP in 2027 and debt on a declining path from 2026 based on an objective to limit real expenditure growth to 0.6 percent, but key measures are yet to be specified.
Structural Reforms
Continued action to address labor-market frictions and ensure equitable opportunities for the youth.	The 2022 budget included additional measures to tackle skills shortages in certain activities and to aid labor market integration of youth that are neither working nor studying (Contrat Engagement Jeune, CEJ). The CEJ has been launched in March 2022.
Policies to increase product/services market efficiency, raise competitiveness and increase external sector resilience.	The National Recovery and Resilience Plan introduced measures to increase competition in some network sectors and reduce administrative burdens and envisages important investments in innovation and the digital economy.
Implementing additional green policies to reduce emissions and strengthening the existing ones, including adequate carbon pricing with mitigating measures for low-income households.	Policy proposals have been announced in the context of the “Fit For 55” initiative at the EU level, including a new ETS for transport and buildings, as well as harmonization and better alignment of energy taxation with carbon content. The second supplementary budget included additional cash transfers (chèques énergie) to compensate households in the bottom two income quintiles (12mn) for the impact of a 15 percent increase in regulated tariffs in 2023.
Financial Sector
Gradually phase out corporate support measures to spur investment and business dynamism, while reducing risk from excessive leverage.	Covid related corporate support measures have mostly been scaled down but new programs to support firms affected by the war in Ukraine have been launched. PGE availability has also been extended to such firms.
Raise the counter-cyclical capital buffer depending on the recovery.	The HCSF decided in March 2022 to normalize the countercyclical capital buffer rate to 0.5 percent as a preventative measure to guard against persistent vulnerabilities and increased risks.

IMF 2021 Article IV Recommendations	Authorities’ Response
Fiscal Policy
Maintain a supportive fiscal stance in 2022 but target any additional stimulus on supply-side measures to boost potential growth. In response to rising energy prices, provide targeted and temporary support to vulnerable households rather than broad- based transfers and long-lasting price-control measures. If downside risks materialize, additional targeted relief support should be provided.	The authorities provided additional, mostly broad-based support to mitigate the impact of rising energy prices, largely offsetting expiring Covid-19 support. Energy price controls will be extended into 2023, allowing for a 15 percent increase in regulated tariffs coupled with (moderately) targeted cash transfers.
Embark on a gradual but sustained expenditure-based fiscal consolidation over 2023-29 to rebuild buffers and sustainably lower debt.	The authorities are committed to bring the deficit below 3 percent of GDP in 2027 and debt on a declining path from 2026 based on an objective to limit real expenditure growth to 0.6 percent, but key measures are yet to be specified.
Structural Reforms
Continued action to address labor-market frictions and ensure equitable opportunities for the youth.	The 2022 budget included additional measures to tackle skills shortages in certain activities and to aid labor market integration of youth that are neither working nor studying (Contrat Engagement Jeune, CEJ). The CEJ has been launched in March 2022.
Policies to increase product/services market efficiency, raise competitiveness and increase external sector resilience.	The National Recovery and Resilience Plan introduced measures to increase competition in some network sectors and reduce administrative burdens and envisages important investments in innovation and the digital economy.
Implementing additional green policies to reduce emissions and strengthening the existing ones, including adequate carbon pricing with mitigating measures for low-income households.	Policy proposals have been announced in the context of the “Fit For 55” initiative at the EU level, including a new ETS for transport and buildings, as well as harmonization and better alignment of energy taxation with carbon content. The second supplementary budget included additional cash transfers (chèques énergie) to compensate households in the bottom two income quintiles (12mn) for the impact of a 15 percent increase in regulated tariffs in 2023.
Financial Sector
Gradually phase out corporate support measures to spur investment and business dynamism, while reducing risk from excessive leverage.	Covid related corporate support measures have mostly been scaled down but new programs to support firms affected by the war in Ukraine have been launched. PGE availability has also been extended to such firms.
Raise the counter-cyclical capital buffer depending on the recovery.	The HCSF decided in March 2022 to normalize the countercyclical capital buffer rate to 0.5 percent as a preventative measure to guard against persistent vulnerabilities and increased risks.

Annex II. 2019 Key FSAP Recommendations—Implementation Status

* I= immediate (within one year), NT= near term (1–3 years), MT= medium term (3–5 years); these ratings reflect the authorities’ own assessment of implementation status.

Recommendations	Agency	Timing*	Implementation Status D—Done / LD—Largely Done / PD—Partly Done / NA—No Action
*Preemptive Management of Systemic Vulnerabilities*
Engage with ECB and other EU agencies on use of Pillar II measures to address bank-specific residual risk from concentration of exposures to large, indebted corporates.	ACPR	I	D The ECB has published on its website further explanation with the ’guide on leveraged transactions’ dated May 2017. In addition, bank-specific letters were sent to the most exposed banks (of which 4 French groups). Banks were required to provide detailed information on their risk appetite framework and how it is operationalized. The answers to the letters were analyzed by the SSM and fed to the SREP analysis. In France, the macroprudential authority, Haut Conseil à la Stabilité Financière (HCSF), issued a decision in 2018 limiting the exposure of systemic banks to highly indebted big French companies to 5% of their eligible funds. A recommendation of reciprocity has been adopted at the European level, which seven countries have applied in the EU. Compliance with this recommendation is closely monitored.
Develop analytical framework for borrower-based measures for corporates. Consider a sectoral Systemic Risk Buffer (SRB) if risks intensify.	HCSF	NT	PD These two options were expertized before the HCSF decided to extend Art.458 as a potential alternative. First, BBM measures for NFC cannot be addressed in the only domestic dimension, but European agencies have decided to leave this topic out of their work program. Second, sSyRB analytical assessment has been carried out to substitute the Art.458, but it was concluded that the measure does not fit with the risks and would be less effective than maintaining Art.458.
Evaluate options to further incentivize corporates to finance through equity rather than debt.	MoF	NT	NA
*Ensuring Adequate Liquidity Management and Buffers*
Develop with the ECB options to manage any disruptions in wholesale funding markets. Consider, as appropriate, liquidity buffers to cover at least 50 percent of wholesale funding outflows over/up to five days horizon for all major currencies.	ACPR, ECB	NT	PD Banks currently maintain a significant liquidity buffer, above the 100% usual threshold for LCR and NSFR introduced as a prudential requirement in June 2021. Within the framework of the SREP analysis in 2022, the ECB judged that liquidity risks were not particularly high and liquidity risk management frameworks globally adequate. Currently, there is no need to add or change liquidity buffer requirements. However – in the context of evolving rate environment – the monitoring of liquidity risk will be reinforced through dedicated initiatives to monitor the effects of termination of extraordinary monetary policy actions (TLTRO reimbursement notably) and the impacts of higher funding prices.
Actively engage with the ESRB and others for a speedy development of liquidity and leverage related tools for insurers and investment funds.	BdF, HCSF, ACPR, AMF	NT	PD As regards investment funds, BdF substantially contributed to the “low-interest expert group report,” in which the questions of leverage and liquidity are extensively discussed. BdF and AMF are taking an active part in the ESRB’s Policy Task Force on macroprudential tools for investment funds. The group assesses the key transmission mechanisms and the adequacy of the existing tools in addressing macroprudential objectives, which are complementary to the microprudential ones. The next step of the reflections will focus on new tools reducing systemic risk. In addition, BdF and AMF are actively involved in the Research Task Force on ETFs vulnerabilities assessment. The group is in charge of the risk and vulnerabilities assessment of ETFs. Regarding insurers, the review of Directive 2009/138/EC aims at enhancing liquidity monitoring and supervising by introducing a liquidity risk management plan and new powers for the supervisor, such as temporarily stopping redemption of contracts.
*Further Integration of Financial Conglomerate Oversight*
Report intragroup exposures and transactions within conglomerates on a flow and stock basis at quarterly or regular frequency. Develop guidance to address direct and indirect, and common exposures of entities in the conglomerate.	ACPR, AMF	NT	PD As of this date, French conglomerates report on common exposures and intragroup transactions within conglomerates on a flow and stock basis at a regular frequency (CONGLOMER reporting). An enhanced reporting has been developed by the European Joint Committee on Financial Conglomerate; the European Commission should adopt it through an Implementing Technical Standard by 2024. The first reporting date should be 31/12/2023
Develop with the ECB and other EU agencies liquidity risk management requirements and stress testing at the conglomerate level.	ACPR, AMF	NT	PD No liquidity risk management requirement has been considered at this stage because the current supervisory framework coinciding with the prudential consolidation perimeter is deemed satisfactory. Along with a market-wide stress test that typically encompasses conglomerates and allows distinguishing their performance compared with other financial groups, ACPR is carrying out ad hoc research projects on liquidity analysis and the conduct of stress testing at the conglomerate level, recently presented to the ACPR Scientific Committee. Thorough research is still ongoing and will improve ACPR oversight and assessment of liquidity risk.
Strengthen conglomerate oversight and work with the Joint Committee of the ESAs to finalize common reporting templates, and with the ECB on common supervisory guidance for conglomerates.	ACPR, AMF	NT	PD The ACPR maintained a high level of engagement in both arenas in order to strengthen conglomerate supervision. An ACPR’s deputy Secretary General chairs the works of the JC of the ESAs on common reporting templates and the group should be in position to deliver the full set of reporting by end 2021. ACPR actively participated in ESA’s work to answer The Commission’s call for advice on digital finance, including questions on a potential review of FICOD to supervise mixed-activity groups. As an “integrated” supervisor, the ACPR actively favors the exchange of information between the insurance supervision side and the banking one, which encompasses discussions with ECB staff members. These discussions also include the development of joint supervisory guidance. ACPR and the ECB are putting in place coordination arrangements for each Financial conglomerate to formalize and strengthen their cooperation on this matter.
*Enhancing Governance, Financial Policies and Financial Integrity*
The ACPR and AMF should have autonomy to determine their resource levels based on a forward-looking review of supervisory and monitoring needs.	ACPR, AMF, MoF	I	NA (constitutional constraint) The NSAs are free to allocate resources towards the most needed fields, but it is not constitutionally possible to let them determine their global resource level as these resources are fiscal by nature thus requiring a parliamentary decision. Note that the parliamentary decision is informed by an independent report from the NSA. The current arrangement with a vote on a resource threshold is guaranteeing a stable funding of the NSAs.
To avoid any perception of a potential conflict of interest and facilitate operationally independent functioning, the government should recuse itself from all supervisory decision-making committees at the ACPR and the AMF.	MoF	I	NA (provides the legal underpinning to sharing confidential information) The presence of the MoF as an observer at the NSAs’ board does not prevent the decisions to be taken independently. On the contrary, the cross participation of the NSA and the attendance of a MoF representative on a non-voting basis give a robust legal framework for sharing information between the NSAs and with the MoF both on policy (where the MoF has regulatory responsibilities) and oversight issues (as it contribute to informative feedbacks).
Reduce further the spread between market interest rates and the return on regulated savings products. Ensure timely and effective implementation of CDC governance reform under the Loi PACTE and undertake a full review of regulated savings framework at the appropriate time.	MoF	NT	NA
Enhance AML/CFT supervision of smaller banks rated as high-risk. (¶67) Explore ways to provide systematic guidance on detection of potential terrorist financing activities.	ACPR, Tracfin	I	D The ACPR implements a risk-based AML/CFT supervisory approach that links the supervisory intensity applied to any supervised entity (banks, insurance companies, payment services, and electronic money providers) to its individual risk assessment. The AML-CFT supervisory approach provides for different supervisory tools with different levels of intrusiveness, from annual returns and meetings to onsite visits and inspections. Thus, over the 2015-2020 onsite inspection cycle, 88% of the higher-risk banks were subject to an onsite inspection, compared to 44% of the medium-high-risk banks, 9% of the medium-low risk banks, and 1% of the lower-risk banks. As regards guidance on the detection of terrorist financing activities, the ACPR/TRACFIN joint Guidelines list several criteria, including weak signals that oblige entities to have to take into account. In addition, the Sectoral Risk Assessment published by ACPR describes the risks of each category of institutions and gives a focus on CFT for each activity
*Reinforcing Crisis Management, Safety Nets, Resolution Arrangement*
Work toward an enhanced resolution framework for insurers by including wider powers to restructure liabilities (bail-in), and enhanced safeguards and funding.	ACPR	MT	NA (EU single market issue) The French authorities recognize that the resolution framework would benefit from additional tools, especially bail-in powers and adequate resolution funding arrangements. In September 2021, the European Commission published a proposal for a directive for a harmonized regime in recovery and resolution in the European Union within its Solvency II package review. This proposal includes a write-down or conversion tool, a solvent run-off tool, an asset and liability separation tool, a sale of business tool, and a bridge undertaking tool. However, no funding arrangements or harmonization of national Insurance Guarantee Schemes are foreseen in the first version of this proposal. The authorities consider an EU Directive essential to further advance the recovery and resolution framework in the context of a level playing field for insurers in the European Union. During the French Presidency of the EU, the ACPR was heavily involved in providing technical input to discussions on the various themes covered by the directive proposal and will continue to provide this support thereafter.
The eligibility of the FGDR’s Supervisory Board membership, which is formed by bank executives in activity, should be changed to independent members only.	FGDR	MT	NA
Develop modalities for providing ELA in currencies other than euros and establish general rules that may assist banks in identifying assets, which might be proposed as ELA collateral and buttress their operational readiness to pledge them.	BdF, ACPR	MT	PD The main responsibility for the provision of ELA lies with National Central Banks but must comply with general principles laid down in ECB ELA agreement. Banque de France has an internal and recently updated procedure in place to ensure efficient and quick implementation of ELA. These arrangements are, however, confidential.

* I= immediate (within one year), NT= near term (1–3 years), MT= medium term (3–5 years); these ratings reflect the authorities’ own assessment of implementation status.

Recommendations	Agency	Timing*	Implementation Status D—Done / LD—Largely Done / PD—Partly Done / NA—No Action
*Preemptive Management of Systemic Vulnerabilities*
Engage with ECB and other EU agencies on use of Pillar II measures to address bank-specific residual risk from concentration of exposures to large, indebted corporates.	ACPR	I	D The ECB has published on its website further explanation with the ’guide on leveraged transactions’ dated May 2017. In addition, bank-specific letters were sent to the most exposed banks (of which 4 French groups). Banks were required to provide detailed information on their risk appetite framework and how it is operationalized. The answers to the letters were analyzed by the SSM and fed to the SREP analysis. In France, the macroprudential authority, Haut Conseil à la Stabilité Financière (HCSF), issued a decision in 2018 limiting the exposure of systemic banks to highly indebted big French companies to 5% of their eligible funds. A recommendation of reciprocity has been adopted at the European level, which seven countries have applied in the EU. Compliance with this recommendation is closely monitored.
Develop analytical framework for borrower-based measures for corporates. Consider a sectoral Systemic Risk Buffer (SRB) if risks intensify.	HCSF	NT	PD These two options were expertized before the HCSF decided to extend Art.458 as a potential alternative. First, BBM measures for NFC cannot be addressed in the only domestic dimension, but European agencies have decided to leave this topic out of their work program. Second, sSyRB analytical assessment has been carried out to substitute the Art.458, but it was concluded that the measure does not fit with the risks and would be less effective than maintaining Art.458.
Evaluate options to further incentivize corporates to finance through equity rather than debt.	MoF	NT	NA
*Ensuring Adequate Liquidity Management and Buffers*
Develop with the ECB options to manage any disruptions in wholesale funding markets. Consider, as appropriate, liquidity buffers to cover at least 50 percent of wholesale funding outflows over/up to five days horizon for all major currencies.	ACPR, ECB	NT	PD Banks currently maintain a significant liquidity buffer, above the 100% usual threshold for LCR and NSFR introduced as a prudential requirement in June 2021. Within the framework of the SREP analysis in 2022, the ECB judged that liquidity risks were not particularly high and liquidity risk management frameworks globally adequate. Currently, there is no need to add or change liquidity buffer requirements. However – in the context of evolving rate environment – the monitoring of liquidity risk will be reinforced through dedicated initiatives to monitor the effects of termination of extraordinary monetary policy actions (TLTRO reimbursement notably) and the impacts of higher funding prices.
Actively engage with the ESRB and others for a speedy development of liquidity and leverage related tools for insurers and investment funds.	BdF, HCSF, ACPR, AMF	NT	PD As regards investment funds, BdF substantially contributed to the “low-interest expert group report,” in which the questions of leverage and liquidity are extensively discussed. BdF and AMF are taking an active part in the ESRB’s Policy Task Force on macroprudential tools for investment funds. The group assesses the key transmission mechanisms and the adequacy of the existing tools in addressing macroprudential objectives, which are complementary to the microprudential ones. The next step of the reflections will focus on new tools reducing systemic risk. In addition, BdF and AMF are actively involved in the Research Task Force on ETFs vulnerabilities assessment. The group is in charge of the risk and vulnerabilities assessment of ETFs. Regarding insurers, the review of Directive 2009/138/EC aims at enhancing liquidity monitoring and supervising by introducing a liquidity risk management plan and new powers for the supervisor, such as temporarily stopping redemption of contracts.
*Further Integration of Financial Conglomerate Oversight*
Report intragroup exposures and transactions within conglomerates on a flow and stock basis at quarterly or regular frequency. Develop guidance to address direct and indirect, and common exposures of entities in the conglomerate.	ACPR, AMF	NT	PD As of this date, French conglomerates report on common exposures and intragroup transactions within conglomerates on a flow and stock basis at a regular frequency (CONGLOMER reporting). An enhanced reporting has been developed by the European Joint Committee on Financial Conglomerate; the European Commission should adopt it through an Implementing Technical Standard by 2024. The first reporting date should be 31/12/2023
Develop with the ECB and other EU agencies liquidity risk management requirements and stress testing at the conglomerate level.	ACPR, AMF	NT	PD No liquidity risk management requirement has been considered at this stage because the current supervisory framework coinciding with the prudential consolidation perimeter is deemed satisfactory. Along with a market-wide stress test that typically encompasses conglomerates and allows distinguishing their performance compared with other financial groups, ACPR is carrying out ad hoc research projects on liquidity analysis and the conduct of stress testing at the conglomerate level, recently presented to the ACPR Scientific Committee. Thorough research is still ongoing and will improve ACPR oversight and assessment of liquidity risk.
Strengthen conglomerate oversight and work with the Joint Committee of the ESAs to finalize common reporting templates, and with the ECB on common supervisory guidance for conglomerates.	ACPR, AMF	NT	PD The ACPR maintained a high level of engagement in both arenas in order to strengthen conglomerate supervision. An ACPR’s deputy Secretary General chairs the works of the JC of the ESAs on common reporting templates and the group should be in position to deliver the full set of reporting by end 2021. ACPR actively participated in ESA’s work to answer The Commission’s call for advice on digital finance, including questions on a potential review of FICOD to supervise mixed-activity groups. As an “integrated” supervisor, the ACPR actively favors the exchange of information between the insurance supervision side and the banking one, which encompasses discussions with ECB staff members. These discussions also include the development of joint supervisory guidance. ACPR and the ECB are putting in place coordination arrangements for each Financial conglomerate to formalize and strengthen their cooperation on this matter.
*Enhancing Governance, Financial Policies and Financial Integrity*
The ACPR and AMF should have autonomy to determine their resource levels based on a forward-looking review of supervisory and monitoring needs.	ACPR, AMF, MoF	I	NA (constitutional constraint) The NSAs are free to allocate resources towards the most needed fields, but it is not constitutionally possible to let them determine their global resource level as these resources are fiscal by nature thus requiring a parliamentary decision. Note that the parliamentary decision is informed by an independent report from the NSA. The current arrangement with a vote on a resource threshold is guaranteeing a stable funding of the NSAs.
To avoid any perception of a potential conflict of interest and facilitate operationally independent functioning, the government should recuse itself from all supervisory decision-making committees at the ACPR and the AMF.	MoF	I	NA (provides the legal underpinning to sharing confidential information) The presence of the MoF as an observer at the NSAs’ board does not prevent the decisions to be taken independently. On the contrary, the cross participation of the NSA and the attendance of a MoF representative on a non-voting basis give a robust legal framework for sharing information between the NSAs and with the MoF both on policy (where the MoF has regulatory responsibilities) and oversight issues (as it contribute to informative feedbacks).
Reduce further the spread between market interest rates and the return on regulated savings products. Ensure timely and effective implementation of CDC governance reform under the Loi PACTE and undertake a full review of regulated savings framework at the appropriate time.	MoF	NT	NA
Enhance AML/CFT supervision of smaller banks rated as high-risk. (¶67) Explore ways to provide systematic guidance on detection of potential terrorist financing activities.	ACPR, Tracfin	I	D The ACPR implements a risk-based AML/CFT supervisory approach that links the supervisory intensity applied to any supervised entity (banks, insurance companies, payment services, and electronic money providers) to its individual risk assessment. The AML-CFT supervisory approach provides for different supervisory tools with different levels of intrusiveness, from annual returns and meetings to onsite visits and inspections. Thus, over the 2015-2020 onsite inspection cycle, 88% of the higher-risk banks were subject to an onsite inspection, compared to 44% of the medium-high-risk banks, 9% of the medium-low risk banks, and 1% of the lower-risk banks. As regards guidance on the detection of terrorist financing activities, the ACPR/TRACFIN joint Guidelines list several criteria, including weak signals that oblige entities to have to take into account. In addition, the Sectoral Risk Assessment published by ACPR describes the risks of each category of institutions and gives a focus on CFT for each activity
*Reinforcing Crisis Management, Safety Nets, Resolution Arrangement*
Work toward an enhanced resolution framework for insurers by including wider powers to restructure liabilities (bail-in), and enhanced safeguards and funding.	ACPR	MT	NA (EU single market issue) The French authorities recognize that the resolution framework would benefit from additional tools, especially bail-in powers and adequate resolution funding arrangements. In September 2021, the European Commission published a proposal for a directive for a harmonized regime in recovery and resolution in the European Union within its Solvency II package review. This proposal includes a write-down or conversion tool, a solvent run-off tool, an asset and liability separation tool, a sale of business tool, and a bridge undertaking tool. However, no funding arrangements or harmonization of national Insurance Guarantee Schemes are foreseen in the first version of this proposal. The authorities consider an EU Directive essential to further advance the recovery and resolution framework in the context of a level playing field for insurers in the European Union. During the French Presidency of the EU, the ACPR was heavily involved in providing technical input to discussions on the various themes covered by the directive proposal and will continue to provide this support thereafter.
The eligibility of the FGDR’s Supervisory Board membership, which is formed by bank executives in activity, should be changed to independent members only.	FGDR	MT	NA
Develop modalities for providing ELA in currencies other than euros and establish general rules that may assist banks in identifying assets, which might be proposed as ELA collateral and buttress their operational readiness to pledge them.	BdF, ACPR	MT	PD The main responsibility for the provision of ELA lies with National Central Banks but must comply with general principles laid down in ECB ELA agreement. Banque de France has an internal and recently updated procedure in place to ensure efficient and quick implementation of ELA. These arrangements are, however, confidential.

* I= immediate (within one year), NT= near term (1–3 years), MT= medium term (3–5 years); these ratings reflect the authorities’ own assessment of implementation status.

Annex III. External Sector Assessment

Annex IV. Risk Assessment Matrix

^¹The Risk Assessment Matrix shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of the staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline. (“Low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more.)

Risks	Likelihood of Risk¹	Expected Impact of Risk	Policy Response
Intensifying spillovers from Russia’s war in Ukraine. Further sanctions resulting from the war and related uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe among the worst hit.	High	High: Lower consumption and production (i.e. manufacturing industry) due to weakened consumer and business confidence. Lower investment due to heightened uncertainty and tightening of financial conditions.	Accelerate green transitions and diversify energy sources further. Conserve energy and provide targeted financial support to vulnerable households and firms.
Commodity price shocks. A combination of continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks causes recurrent commodity price volatility and social and economic instability.	High	Low: Gas shortages and further supply disruptions could lead to spikes in gas and electricity prices fueling higher and more persistent inflation, lowering the purchasing power of consumers and increasing input costs for firms. Rising commodity prices could also increase the current account deficit. Trade partner growth could also be affected, further weakening the external position.	Provide targeted financial support to vulnerable households and firms impacted by high energy prices. If inflation became substantially higher and/or more protracted, the policy mix may need to be rebalanced.
Systemic social unrest. Rising inflation, declining incomes, and worsening inequality amplify social unrest and political instability, slowing economic growth, and giving rise to economically damaging populist policies (e.g., preserving fossil fuel subsidies).	High	Medium: Social unrest could impact consumer and business confidence and slow growth.	Provide targeted financial support to vulnerable households and firms.
De-anchoring of inflation expectations and stagflation. Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. Central banks tighten monetary policy more than envisaged leading to weaker global demand. Together, this could lead to the onset of stagflation.	Medium:	Medium: Persistently high inflation, pressure for second-round effects, and lower purchasing power. Weaker confidence could reduce consumption and investment.	Diversify supply sources and undertake competitiveness enhancing reforms.
Abrupt global slowdown or recession. Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and financial channels, and downward pressures on some commodity prices. Europe: The fallout from the war in Ukraine is exacerbated by a gas shutoff by Russia, resulting in acute gas shortages and further supply disruptions, which triggers an EU recession.	High	Medium: Lower exports due to weakened external demand. Larger economic scarring and increase in unemployment, wiping out previous gains.	Fiscal policy could remain flexible and cushion shocks in the near term, including through targeted support to vulnerable households and firms. Fiscal policy should coordinate and be in accordance with the stance of monetary policy.
Local Covid-19 outbreaks. Emergence of more contagious vaccine-resistant variants force new lockdowns or inhibit commerce.	Medium	Medium: Tourist arrivals remain low, lowering the current account. Domestic demand especially in contact-intensive sectors will weaken. Larger economic scarring.	Targeted support to affected businesses and households. Maintain public health safeguard measures. Use available fiscal space to support households and firms and encourage reallocation of resources.
Structural risks: Deepening geo-economic fragmentation and geopolitical tensions. Broadening of conflicts and reduced international cooperation accelerate deglobalization, resulting in a reconfiguration of trade, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial system, and lower potential growth.	High	Medium: Increased geo-economic fragmentation could undercut France’s already decreasing trade market share and lower potential growth.	Diversify supply chains and undertake competitiveness enhancing reforms.
Structural risks: Cyberthreats. Cyberattacks on critical physical or digital infrastructure (including digital currency platforms) trigger financial instability and disrupt economic activities.	Medium	Medium/Low: Cyberattacks could trigger confidence shocks and threaten financial stability ultimately disrupting the real economy.	Strengthen the operational resilience of the financial system. Adopt best practices and prevention and crisis management tools and strengthen coordination at the European/international level.

Risks	Likelihood of Risk¹	Expected Impact of Risk	Policy Response
Intensifying spillovers from Russia’s war in Ukraine. Further sanctions resulting from the war and related uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe among the worst hit.	High	High: Lower consumption and production (i.e. manufacturing industry) due to weakened consumer and business confidence. Lower investment due to heightened uncertainty and tightening of financial conditions.	Accelerate green transitions and diversify energy sources further. Conserve energy and provide targeted financial support to vulnerable households and firms.
Commodity price shocks. A combination of continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks causes recurrent commodity price volatility and social and economic instability.	High	Low: Gas shortages and further supply disruptions could lead to spikes in gas and electricity prices fueling higher and more persistent inflation, lowering the purchasing power of consumers and increasing input costs for firms. Rising commodity prices could also increase the current account deficit. Trade partner growth could also be affected, further weakening the external position.	Provide targeted financial support to vulnerable households and firms impacted by high energy prices. If inflation became substantially higher and/or more protracted, the policy mix may need to be rebalanced.
Systemic social unrest. Rising inflation, declining incomes, and worsening inequality amplify social unrest and political instability, slowing economic growth, and giving rise to economically damaging populist policies (e.g., preserving fossil fuel subsidies).	High	Medium: Social unrest could impact consumer and business confidence and slow growth.	Provide targeted financial support to vulnerable households and firms.
De-anchoring of inflation expectations and stagflation. Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. Central banks tighten monetary policy more than envisaged leading to weaker global demand. Together, this could lead to the onset of stagflation.	Medium:	Medium: Persistently high inflation, pressure for second-round effects, and lower purchasing power. Weaker confidence could reduce consumption and investment.	Diversify supply sources and undertake competitiveness enhancing reforms.
Abrupt global slowdown or recession. Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and financial channels, and downward pressures on some commodity prices. Europe: The fallout from the war in Ukraine is exacerbated by a gas shutoff by Russia, resulting in acute gas shortages and further supply disruptions, which triggers an EU recession.	High	Medium: Lower exports due to weakened external demand. Larger economic scarring and increase in unemployment, wiping out previous gains.	Fiscal policy could remain flexible and cushion shocks in the near term, including through targeted support to vulnerable households and firms. Fiscal policy should coordinate and be in accordance with the stance of monetary policy.
Local Covid-19 outbreaks. Emergence of more contagious vaccine-resistant variants force new lockdowns or inhibit commerce.	Medium	Medium: Tourist arrivals remain low, lowering the current account. Domestic demand especially in contact-intensive sectors will weaken. Larger economic scarring.	Targeted support to affected businesses and households. Maintain public health safeguard measures. Use available fiscal space to support households and firms and encourage reallocation of resources.
Structural risks: Deepening geo-economic fragmentation and geopolitical tensions. Broadening of conflicts and reduced international cooperation accelerate deglobalization, resulting in a reconfiguration of trade, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial system, and lower potential growth.	High	Medium: Increased geo-economic fragmentation could undercut France’s already decreasing trade market share and lower potential growth.	Diversify supply chains and undertake competitiveness enhancing reforms.
Structural risks: Cyberthreats. Cyberattacks on critical physical or digital infrastructure (including digital currency platforms) trigger financial instability and disrupt economic activities.	Medium	Medium/Low: Cyberattacks could trigger confidence shocks and threaten financial stability ultimately disrupting the real economy.	Strengthen the operational resilience of the financial system. Adopt best practices and prevention and crisis management tools and strengthen coordination at the European/international level.

Annex V. OECD Phase 4 Report

1. A recent report by the OECD Working Group on Bribery evaluates France’s implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.¹ The report,² published in December 2021, highlights progress by France in combatting foreign bribery, but also identifies some critical shortcomings. France is a voluntary participant in the Fund’s assessment of transnational aspects of corruption under the Framework for Enhanced Engagement on Governance. France’s efforts to combat transnational corruption were last discussed in the 2019 Article IV staff report.

2. The Working Group on Bribery commended France for steps taken to strengthen legal and institutional frameworks and notable progress enforcing the foreign bribery offence. Since the last OECD evaluation, in 2012, France has introduced major legislative and institutional reforms aimed at strengthening the criminal justice framework and judicial bodies, some of which are described in the 2019 staff report.³ Important legal reforms since the 2019 staff report include amendments strengthening the plea-bargaining procedure, improving the operational autonomy of prosecutors, broadening the types of information to which judicial authorities have access, and prohibiting the tax deductibility of bribes paid to foreign public officials in overseas territories as well. France has also undertaken a reorganization of its criminal court system to improve efficiency in the delivery of justice. The report noted a marked increase in the number of criminal investigations and prosecutions, including proceedings resulting in sanctions against five legal persons. The report noted that the number of investigations initiated for foreign bribery increased by almost three and a half times since the last OECD evaluation. Moreover, concluded cases also involved larger corruption schemes than before.

3. The OECD report also noted some shortcomings and concerns that could undo the good progress made by France in recent reforms. A bill approved by the Parliament in November 2021 limits the duration of preliminary investigations to two or three years. This legislation could have a detrimental impact on complex and time-consuming cases, such as those involving foreign bribery. Further, while commending France’s progress initiating criminal proceedings against perpetrators of foreign bribery, the Working Group deemed the number of resolved cases – especially against legal persons – to be low considering France’s economic situation and the exposure of French companies to corruption risks, the Working Group found the number of cases against legal persons to be relatively low. The report also noted the increasing number of foreign bribery allegations that are not pursued. The Working Group therefore recommended France to take all necessary measures to enable the various components of the criminal justice system to proactively and effectively detect, investigate, prosecute, and sanction perpetrators of foreign bribery. The Working Group also recommended that France provide adequate resources to investigative and judicial bodies responsible for the investigation, prosecution, and sanctioning of foreign bribery and make full use of the confiscation measures provided for in law for both natural and legal persons.

Annex VI. Sovereign Risk and Debt Sustainability Analysis

The large fiscal response to successive shocks over 2020-22 pushed up deficit and debt levels that are expected to remain well-above precrisis baseline projections, reflecting permanent measures, output losses, and less favorable automatic debt dynamics. Having peaked at close to 115 percent of GDP in 2020, public debt is expected to bottom below 112 percent in 2022 before increasing to 116 percent over the medium term. With the primary deficit remaining well-above its debt-stabilizing level and the interest-growth differential narrowing, debt will remain on an upward path. However, moderate risk from debt non-stabilization and high gross financing needs are mitigated by France’s large institutional investor base, home bias, lack of foreign currency debt, and long maturity profile.

1. Background. Despite the much stronger recovery from the pandemic and lower deficit and debt levels in 2021 than anticipated last year, and unwinding of pandemic support, France’s fiscal position is not improving commensurately in 2022 and deteriorating in 2023 due to the large fiscal response to the energy shock, further permanent tax cuts, slowing activity, and reversal of temporary revenue windfalls. The debt ratio declined from its 2020 peak of 115 percent of GDP but remains 14 ppt of GDP above its pre-pandemic level in 2022 and is expected to resume its upward path from 2023. Borrowing costs have increased from historic lows as monetary policy started normalizing—with bond yields near 3 percent in late October (+270 bps since January and +310 bps since end-2020 lows) amid increased market volatility due to renewed sovereign debt concerns in Europe before subsiding to 2.3 by mid-December—and rising inflation pushed up the cost of inflation-indexed debt. Together with cyclical headwinds, this renders automatic debt dynamics less favorable.

2. Baseline. Staff’s baseline scenario is based on the initial 2022 budget law, amendments voted in August and November, the Stability Program 2022-27, and the draft 2023 budget and medium-term programming bills. It excludes insufficiently specified measures or spending targets that are not underpinned by concrete measures. The economy is projected to slow to 0.7 percent in 2023 and recover in 2024 and beyond, growing above potential until converging in the medium term as the output gap closes. Interest rates are projected to increase over the forecast horizon, with effective rates following with a lag. The deficit is projected to widen to 5.3 percent of GDP in 2023 before gradually narrowing to 4.5 percent in the medium term—a faster decline in the primary deficit as temporary measures expire is offset by a rising interest bill. The primary deficit is projected to stabilize at about 2.2 percent of GDP, some 1.5 ppt above its debt-stabilizing level. This, together with lower deficit financing from the cash buffer accumulated in 2020, will lead debt to continue to increase, exceeding 120 percent of GDP by the end of the decade.

3. Realism. Forecast errors point to some optimism in staff’s projections for near-term cyclical conditions, and medium-term primary balances, reflecting a larger and more persistent output gap in the aftermath of the GFC and smaller fiscal consolidation than anticipated despite conservative baseline assumptions. The projected fiscal adjustment and debt reduction are within the normal historical range observed in peer countries. While the maximum adjustment over any three years is an outlier, this reflects the unwinding of the large fiscal response to shocks over 2020-23.

4. Risks and mitigating factors. High and rising debt levels under a baseline where primary deficits remain well-above precrisis levels (¼ ppt of GDP above its 2019 level and 1 ppt above the medium-term level projected before the pandemic) erode fiscal buffers and expose France to a range of shocks. Higher and more persistent inflation would weigh on France’s debt service burden, as more than a tenth of debt is indexed to inflation—two thirds of which to European inflation. A faster normalization of monetary policy, with higher policy rates and lower reinvestment of maturing sovereign debt held by the ECB, would increase yields and possibly spreads were fragmentation risk to resurface (with investors penalizing a widening debt differential with EA peers). With tightening financial conditions and slowing activity eroding the debt service capacity of a highly-indebted private sector, contingent liabilities could be triggered, including through guarantees (bank loan guarantees under the PGE program amount to some 3.3 percent of GDP) or bailouts. However, mitigating factors include: a long average debt maturity that limits the pass-through from higher yields to effective interest rates; a large institutional investor base and home bias that mitigate liquidity risks; and low share of debt denominated in foreign currency that mitigates FX risks.

Insee estimates that these measures reduced inflation by 3.1 percent , accounting for both direct and indirect effects through the diffusion of cost-induced increases in prices of non-energy goods/services (1.9 percent and 1.2 percent , respectively, see Insee Analyses no. 75, September 1, 2022).

The household burden is based on direct effects from the estimated retail price increases and historical spending shares, and indirect effects from the increase in prices of non-energy products. See WP/22/152 for details on the methodology.

Entries in apprenticeships increased by 42 and 41 percent in 2020 and 2021.

Data cover the fiscal cost of measures over 2021-23, based on a November 2022 EUR desk survey.

The list of EU sanctions adopted following Russia’s invasion of Ukraine is available here. An analysis of the global spillovers of sanctions can be found here. In line with the recently revised Institutional View on the liberalization and management of capital flows, some of the sanctions imposed on Russia can be capital flow management measures (CFMs) imposed for national and international security reasons.

For a discussion on the design of cost-effective and targeted fiscal support that preserve incentives for energy conservation, see Ari et al. (2022).

Through another exceptional energy voucher, like in 2021, but with eligibility widened to cover 12mn instead of 6mn households and amounts increased from €100 to €100-200, varying with income.

This transposes the European Council decision of September 30, 2022, to tax rents of energy producers above €180/MWh, effective from December 2022 (duration and thresholds have been adjusted).

Assistance to firms is compliant with EU state aid rules that have been amended and extended until end-2023 under the Temporary Crisis Framework.

A low incidence of old-age poverty, both relative to peers and to the rest of the population, mitigates concerns regarding the poverty impact of a temporary pension indexation below inflation (as in 2019-20 and foreseen for the complementary regime).

Unemployment benefit and pension reform are underway. The 2021 organic budget law introduced a new fiscal framework requiring medium-term programming bills to set annual real spending targets and corresponding nominal targets for the general government and each sublevel, broadly in line with Staff advice (IMF Country Report No. 22/18).

France’s fiscal watchdogs, the Cour des Comptes (La situation et les perspectives des finances publiques, 2022) and High Council for Public Finances (HCFP Avis 2022-3 PSTAB), criticize optimistic assumptions underpinning the macro baseline that tend to inflate the deficit reduction and undermine the credibility of the adjustment path. The HCFP reiterated this in its assessment of the draft 2023 budget and medium-term programming bills.

Under active policies (based on Stability Programs), France will not reduce its deficit below 3 percent until 2027 while Germany does so in 2023 and other EA countries with a similar starting position in 2025 (i.e., Belgium, Italy, Portugal, and Spain have a deficit around 5 percent of GDP and debt in excess of 100 percent in 2022).

The 2022 Supplementary Budget Act of August 2022 allocated €12.7bn to the State Financial Holding special appropriation account (CAS FPE), with a €9.7bn provision for the simplified tender offer for EDF’s equity shares. This is recorded as a below-the-line transaction, with a corresponding increase in gross public debt.

Earlier staff estimates show that bringing the increase in the effective retirement age to 64 forward from 2040 to 2030 could yield about ¼ percent of GDP in savings over the medium-term (IMF Country Reports 22/18; 19/245). The OECD (2021) estimates that increasing it to 64 by 2025 would yield 0.9 percent of 2019 GDP in savings, while increasing GDP per capita by 0.5 percent through employment and productivity gains.

Law governing emergency measures to improve the functioning of the labor market to attain full employment enacted in December 2022.

Subject to two safeguards: (i) a floor of 6 months minimum duration; and (ii) an extension of the duration in case the labor market deteriorates.

Studies show the positive effect of the R&D tax credit on R&D spending, investment and innovation but with a relatively low additionality ratio (CNEPI 2021, OECD 2021). Introducing a ceiling on the R&D tax credit and reducing overlap between R&D incentives could improve its effectiveness (Cour des Comptes 2021, 2022; CPO 2022). The R&D tax credit is the single largest tax expenditure, accounting for ½ percent of GDP. Fossil fuel and housing-related tax expenditures account for about ¼ and ⅓ percent of GDP. Tax breaks on household savings add another ½ percent of GDP. Rationalizing these tax expenditures could yield some ¼-1 percent of GDP.

See also the ESRB’s general warning on heightened financial stability risks within the European Union.

Direct exposures to Russia and Ukraine are low (at about €30 billion), which reduced further after Société Générale sold its Russian subsidiaries in April 2022 without significant hit to its capital.

European power producers are estimated to face costs of over €1tn in margin calls (Baringa, Equinor) and several countries have extended enlarged loan guarantees to affected firms to mitigate this (e.g., Germany, Denmark). The French gas producer Engie faced an increased margin requirement of over € 4 billion in recent quarters. This was mitigated to some extent by its reliance on the liquidity swap program and stand-by credit arrangements with core banks, but the risk is passed on to banking partners with possible financial stability implications.

The usury rate is adjusted every three months following a backward-looking formula that calculates the effective interest rates charged by banks over the past quarter and adds one third.

Adjustment measures include: (i) creation of additional duration strata for fixed-rate loans for local authorities (ii) extension of the collection period of the Banque de France in order to reduce the delays in transmitting market conditions to usury rates, iii) reminding credit institutions that the rates are declared at the irrevocable signature of the loan, without waiting for the funds to be made available.

Most European countries have interest caps only on personal loans; very few (e.g., Italy, Belgium) maintain the mortgage interest cap.

Under conditions when stabilizing inflation comes at the cost of lost output, there is a case for macroprudential policy to be used alongside monetary policy so as to limit systemic risk stemming from the expansion in leverage (see IMF Policy Paper, The Interaction of Monetary and Macroprudential Policies).

This could also be consistent with strategy of having a neutral rate in periods when credit supply is not associated with elevated systemic risks has been followed by the UK, Finland and Sweden among others. See also recent communication from the Basel Committee on Banking Supervision that supports a positive cycle-neutral countercyclical capital buffer rate.

See IMF Financial Sector Assessment for France, 2018 for more details on the strong corporate-bank nexus.

Information relating to supply-side corruption in this section of the Report draws on the OECD Working Group on Bribery in International Business Transaction’s Phase 4 report of France. The IMF provided additional views and information whose accuracy have not been verified by the WGB or the OECD Secretariat, and which do not prejudice the Working Group’s monitoring of the implementation of the OECD Anti-Bribery Convention.

Implementing the OECD Anti-Bribery Convention: Phase 4 Report—France.

Staff Report for the 2019 Article IV Consultation.

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France: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for France

Author:

International Monetary Fund. European Dept.

Volume/Issue:: Volume 2023: Issue 056

Publisher:: International Monetary Fund

ISBN:: 9798400232336

ISSN:: 1934-7685

Pages:: 84

DOI:: https://doi.org/10.5089/9798400232336.002

Keywords
Context and Recent Developments
Outlook and Risks
- Authorities’ Views
Policy Discussions
Staff Appraisal
Annex I. Authorities’ Response to Past IMF Policy Recommendations
Annex II. 2019 Key FSAP Recommendations—Implementation Status
Annex III. External Sector Assessment
Annex IV. Risk Assessment Matrix
Annex V. OECD Phase 4 Report
Annex VI. Sovereign Risk and Debt Sustainability Analysis

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^{Figure 1.}

France: Economic Recovery, Confidence, and Supply-Side Difficulties

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^{Figure 2.}

France: Energy Supply, Gas Imports, and Gas Storage

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^{Figure 3.}

France: Inflation, Wages, and Effect of the Energy Shock on Households Burdens

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EDF Nuclear Energy Production

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Change in Primary Balance

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Spending Gap Relative to Peers

(Difference between France and peers in percent of GDP, 2019)^1/

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French Banks - Exposure to Vulnerable Sectors

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French Non-Financial Corporate debt

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^{Figure 4.}

France: Emissions and Targets for ETS and ESR Sectors by 2030

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Loss from Stranded Assets

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Net Capital Stock under Transition Scenarios

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^{Figure 5.}

France: Real Sector Developments

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France: Labor Sector Developments

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France: External Sector Developments

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^{Figure 8.}

France: Fiscal Sector Developments

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^{Figure 9.}

France: Financial Sector Developments

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^{Figure VI.1.}

France: Risk of Sovereign Stress

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^{Figure VI.2.}

France: Debt Coverage and Disclosures

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^{Figure VI.3.}

France: Public Debt Structure Indicators

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^{Figure VI.4.}

France: Baseline Scenario

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^{Figure VI.5.}

France: Realism of Baseline Assumptions

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^{Figure VI.6.}

France: Medium-Term Risk Analysis

Foresee

Risks	Likelihood of Risk¹	Expected Impact of Risk	Policy Response
Intensifying spillovers from Russia’s war in Ukraine. Further sanctions resulting from the war and related uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe among the worst hit.	High	High: Lower consumption and production (i.e. manufacturing industry) due to weakened consumer and business confidence. Lower investment due to heightened uncertainty and tightening of financial conditions.	Accelerate green transitions and diversify energy sources further. Conserve energy and provide targeted financial support to vulnerable households and firms.
Commodity price shocks. A combination of continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks causes recurrent commodity price volatility and social and economic instability.	High	Low: Gas shortages and further supply disruptions could lead to spikes in gas and electricity prices fueling higher and more persistent inflation, lowering the purchasing power of consumers and increasing input costs for firms. Rising commodity prices could also increase the current account deficit. Trade partner growth could also be affected, further weakening the external position.	Provide targeted financial support to vulnerable households and firms impacted by high energy prices. If inflation became substantially higher and/or more protracted, the policy mix may need to be rebalanced.
Systemic social unrest. Rising inflation, declining incomes, and worsening inequality amplify social unrest and political instability, slowing economic growth, and giving rise to economically damaging populist policies (e.g., preserving fossil fuel subsidies).	High	Medium: Social unrest could impact consumer and business confidence and slow growth.	Provide targeted financial support to vulnerable households and firms.
De-anchoring of inflation expectations and stagflation. Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. Central banks tighten monetary policy more than envisaged leading to weaker global demand. Together, this could lead to the onset of stagflation.	Medium:	Medium: Persistently high inflation, pressure for second-round effects, and lower purchasing power. Weaker confidence could reduce consumption and investment.	Diversify supply sources and undertake competitiveness enhancing reforms.
Abrupt global slowdown or recession. Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and financial channels, and downward pressures on some commodity prices. Europe: The fallout from the war in Ukraine is exacerbated by a gas shutoff by Russia, resulting in acute gas shortages and further supply disruptions, which triggers an EU recession.	High	Medium: Lower exports due to weakened external demand. Larger economic scarring and increase in unemployment, wiping out previous gains.	Fiscal policy could remain flexible and cushion shocks in the near term, including through targeted support to vulnerable households and firms. Fiscal policy should coordinate and be in accordance with the stance of monetary policy.
Local Covid-19 outbreaks. Emergence of more contagious vaccine-resistant variants force new lockdowns or inhibit commerce.	Medium	Medium: Tourist arrivals remain low, lowering the current account. Domestic demand especially in contact-intensive sectors will weaken. Larger economic scarring.	Targeted support to affected businesses and households. Maintain public health safeguard measures. Use available fiscal space to support households and firms and encourage reallocation of resources.
Structural risks: Deepening geo-economic fragmentation and geopolitical tensions. Broadening of conflicts and reduced international cooperation accelerate deglobalization, resulting in a reconfiguration of trade, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial system, and lower potential growth.	High	Medium: Increased geo-economic fragmentation could undercut France’s already decreasing trade market share and lower potential growth.	Diversify supply chains and undertake competitiveness enhancing reforms.
Structural risks: Cyberthreats. Cyberattacks on critical physical or digital infrastructure (including digital currency platforms) trigger financial instability and disrupt economic activities.	Medium	Medium/Low: Cyberattacks could trigger confidence shocks and threaten financial stability ultimately disrupting the real economy.	Strengthen the operational resilience of the financial system. Adopt best practices and prevention and crisis management tools and strengthen coordination at the European/international level.

Overall Assessment: On a preliminary basis, the external position in 2022 is moderately weaker than the level implied by medium-term fundamentals and desirable policies. The CA balance is expected to decline in 2022 driven by the large terms-of-trade shock and lower external demand from trading partners affected by the war in Ukraine, as well as through supply-chain effects. Over the medium term, the CA deficit is expected to shrink as the effects of the pandemic and the war fade and fiscal consolidation and structural reforms to improve competitiveness of the economy are implemented. This assessment is preliminary; a final assessment for 2022 will be presented in the 2023 External Sector Report. Potential Policy Responses: In response to the energy crisis, France deployed significant fiscal resources to shield households from the impact of high energy prices. Maintaining consistency of the external position with medium-term fundamentals will require structural reforms to continue enhancing productivity and sustain higher private investment to facilitate the green transition and digitalization, while rebuilding fiscal space once the shock dissipates.
Foreign Asset and Liability Position and Trajectory	Background. The NIIP stood at 26 percent of GDP in the second quarter of 2022, only slightly below the range observed during 2014–19 (between -16 and -23 percent of GDP). The NIIP improved by about seven percent of GDP since the end of 2021, largely driven by an increase in direct and portfolio investment. While the net position is moderately negative, gross positions are large. Gross assets stood at 329 percent of GDP in the second quarter of 2022, of which banks’ non-FDI-related assets accounted for about 43 percent, reflecting their global activities. Gross liabilities fell to 354 percent of GDP in the second quarter of 2022, of which external debt was about 228 percent of GDP (56 percent accounted for by banks and 23 percent by the public sector). About three-quarters of France’s external debt liabilities are denominated in domestic currency. The average TARGET2 balance in 2022 was about €61.4 billion. Assessment. The NIIP is negative, but its size and projected stable trajectory do not raise sustainability concerns. However, there are vulnerabilities coming from large public external debt (52 percent of GDP in the second quarter of 2022) and banks’ gross financing needs—the stock of banks’ short-term debt securities was €96 billion in the second quarter of 2022 (3.5 percent of GDP), and financial derivatives stood at about 43.5 percent of GDP.
2022 (% GDP)	NIIP: -34.3			Gross Assets: 341	Debt Assets: 194.3	Gross Liab.: 375.2	Debt Liab.: 237.2
Current Account	Background. The CA balance is expected to move to a deficit of 1.5 percent of GDP (from a surplus of 0.4 percent in 2021), driven by the large terms-of-trade shock and lower external demand. Temporary COVID-19 factors are expected to gradually normalize (for example, services balance, including business and tourism travel). Despite limited direct trade and investment linkages with Russia and Ukraine, the CA balance is expected to move to a deficit of 1.5 percent of GDP in 2022, driven by a large terms-of-trade shock (increase in the energy bill of about 1 percent of GDP in 2022) and lower external demand from trading partners affected by the war as well as through supply-chain effects. Over the medium term, the IMF staff projects the CA deficit to shrink by 2026 as temporary factors from the pandemic dissipate, the effects from the war fade, and reforms to improve France’s competitiveness start to pay off. Fiscal consolidation will help reduce the CA deficit over the medium term. Assessment. The 2022 cyclically adjusted CA balance is estimated at -0.8 percent of GDP compared with an EBA-estimated norm of 0 percent. The IMF staff estimates CA net adjustments related to COVID-19 at -0.8 percent of GDP, driven by transport (-1 percent of GDP), and exports of aeronautics (0.2 percent of GDP). On this basis, the IMF staff assesses that the CA gap in 2022 is between -2.1 and -1.1 percent of GDP (compared with -0.5 to 0 percent of GDP in 2021), with a midpoint of -1.6 percent of GDP. Despite an important domestic gap from looser fiscal policy of about -1.1 percent of GDP, the total policy gap is zero.
2022 (% GDP)	CA: -1.5	Cycl. Adj. CA: -0.8	EBA Norm: 0	EBA CA Gap: -0.8	COVID-19 Adj.: -0.8	Other Adj.: 0.0	Staff CA Gap: -1.6
Real Exchange Rate	Background. Following an appreciation in 2020 of the REER based on the ULC of 4.7 percent and a depreciation of the REER based on the CPI of 0.9 percent, both REER measures depreciated in 2021 and in H1 2022. The ULC-based REER depreciated by 2.3 percent with respect to the 2021 average, while the CPI-based REER depreciated by 3.9 percent. From a longer-term perspective, although both REER measures depreciated by about 7 to 9 percent between 2008 and 2020, France has not managed to regain the loss of about one-third of its export market share registered in the early 2000s (while the export market share of the euro area remained broadly stable between 2000 and 2020). As of September 2022, the REER was 6.8 percent below the 2021 average. Assessment. The IMF staff CA gap implies a REER gap of 6.1 percent in 2022 (applying an estimated elasticity of 0.26). The EBA REER index model points to a REER gap of -5.3 percent, while the EBA REER level model points to a REER gap of 4.2 percent. Consistent with the IMF staff CA gap, the IMF staff assesses the REER to be overvalued in the range of 4.2 to 8 percent, with a midpoint of 6.1 percent.
Capital and Financial Accounts: Flows and Policy Measures	Background. Inward foreign direct investment normalized in 2021 after decreasing significantly between 2019 and 2020, by 2.3 percent of GDP. The capital account is open. Assessment. France remains exposed to financial market risks owing to the large refinancing needs of the sovereign and banking sectors.
FX Intervention and Reserves Level	Background. The euro has the status of a global reserve currency. Assessment. Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating.

Overall Assessment: On a preliminary basis, the external position in 2022 is moderately weaker than the level implied by medium-term fundamentals and desirable policies. The CA balance is expected to decline in 2022 driven by the large terms-of-trade shock and lower external demand from trading partners affected by the war in Ukraine, as well as through supply-chain effects. Over the medium term, the CA deficit is expected to shrink as the effects of the pandemic and the war fade and fiscal consolidation and structural reforms to improve competitiveness of the economy are implemented. This assessment is preliminary; a final assessment for 2022 will be presented in the 2023 External Sector Report. Potential Policy Responses: In response to the energy crisis, France deployed significant fiscal resources to shield households from the impact of high energy prices. Maintaining consistency of the external position with medium-term fundamentals will require structural reforms to continue enhancing productivity and sustain higher private investment to facilitate the green transition and digitalization, while rebuilding fiscal space once the shock dissipates.
Foreign Asset and Liability Position and Trajectory	Background. The NIIP stood at 26 percent of GDP in the second quarter of 2022, only slightly below the range observed during 2014–19 (between -16 and -23 percent of GDP). The NIIP improved by about seven percent of GDP since the end of 2021, largely driven by an increase in direct and portfolio investment. While the net position is moderately negative, gross positions are large. Gross assets stood at 329 percent of GDP in the second quarter of 2022, of which banks’ non-FDI-related assets accounted for about 43 percent, reflecting their global activities. Gross liabilities fell to 354 percent of GDP in the second quarter of 2022, of which external debt was about 228 percent of GDP (56 percent accounted for by banks and 23 percent by the public sector). About three-quarters of France’s external debt liabilities are denominated in domestic currency. The average TARGET2 balance in 2022 was about €61.4 billion. Assessment. The NIIP is negative, but its size and projected stable trajectory do not raise sustainability concerns. However, there are vulnerabilities coming from large public external debt (52 percent of GDP in the second quarter of 2022) and banks’ gross financing needs—the stock of banks’ short-term debt securities was €96 billion in the second quarter of 2022 (3.5 percent of GDP), and financial derivatives stood at about 43.5 percent of GDP.
2022 (% GDP)	NIIP: -34.3			Gross Assets: 341	Debt Assets: 194.3	Gross Liab.: 375.2	Debt Liab.: 237.2
Current Account	Background. The CA balance is expected to move to a deficit of 1.5 percent of GDP (from a surplus of 0.4 percent in 2021), driven by the large terms-of-trade shock and lower external demand. Temporary COVID-19 factors are expected to gradually normalize (for example, services balance, including business and tourism travel). Despite limited direct trade and investment linkages with Russia and Ukraine, the CA balance is expected to move to a deficit of 1.5 percent of GDP in 2022, driven by a large terms-of-trade shock (increase in the energy bill of about 1 percent of GDP in 2022) and lower external demand from trading partners affected by the war as well as through supply-chain effects. Over the medium term, the IMF staff projects the CA deficit to shrink by 2026 as temporary factors from the pandemic dissipate, the effects from the war fade, and reforms to improve France’s competitiveness start to pay off. Fiscal consolidation will help reduce the CA deficit over the medium term. Assessment. The 2022 cyclically adjusted CA balance is estimated at -0.8 percent of GDP compared with an EBA-estimated norm of 0 percent. The IMF staff estimates CA net adjustments related to COVID-19 at -0.8 percent of GDP, driven by transport (-1 percent of GDP), and exports of aeronautics (0.2 percent of GDP). On this basis, the IMF staff assesses that the CA gap in 2022 is between -2.1 and -1.1 percent of GDP (compared with -0.5 to 0 percent of GDP in 2021), with a midpoint of -1.6 percent of GDP. Despite an important domestic gap from looser fiscal policy of about -1.1 percent of GDP, the total policy gap is zero.
2022 (% GDP)	CA: -1.5	Cycl. Adj. CA: -0.8	EBA Norm: 0	EBA CA Gap: -0.8	COVID-19 Adj.: -0.8	Other Adj.: 0.0	Staff CA Gap: -1.6
Real Exchange Rate	Background. Following an appreciation in 2020 of the REER based on the ULC of 4.7 percent and a depreciation of the REER based on the CPI of 0.9 percent, both REER measures depreciated in 2021 and in H1 2022. The ULC-based REER depreciated by 2.3 percent with respect to the 2021 average, while the CPI-based REER depreciated by 3.9 percent. From a longer-term perspective, although both REER measures depreciated by about 7 to 9 percent between 2008 and 2020, France has not managed to regain the loss of about one-third of its export market share registered in the early 2000s (while the export market share of the euro area remained broadly stable between 2000 and 2020). As of September 2022, the REER was 6.8 percent below the 2021 average. Assessment. The IMF staff CA gap implies a REER gap of 6.1 percent in 2022 (applying an estimated elasticity of 0.26). The EBA REER index model points to a REER gap of -5.3 percent, while the EBA REER level model points to a REER gap of 4.2 percent. Consistent with the IMF staff CA gap, the IMF staff assesses the REER to be overvalued in the range of 4.2 to 8 percent, with a midpoint of 6.1 percent.
Capital and Financial Accounts: Flows and Policy Measures	Background. Inward foreign direct investment normalized in 2021 after decreasing significantly between 2019 and 2020, by 2.3 percent of GDP. The capital account is open. Assessment. France remains exposed to financial market risks owing to the large refinancing needs of the sovereign and banking sectors.
FX Intervention and Reserves Level	Background. The euro has the status of a global reserve currency. Assessment. Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating.

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Abstract

Context and Recent Developments

Outlook and Risks

Authorities’ Views

Policy Discussions

A. Fiscal Policy: Focusing Crisis Support and Reducing the Deficit

Authorities’ Views

B. Maintaining Financial Sector Stability in Choppy Waters

Authorities’ Views

C. Structural Policies to Increase Potential Growth

Authorities’ Views

Staff Appraisal

Annex I. Authorities’ Response to Past IMF Policy Recommendations

Annex II. 2019 Key FSAP Recommendations—Implementation Status

Annex III. External Sector Assessment

Annex IV. Risk Assessment Matrix

Annex V. OECD Phase 4 Report

Annex VI. Sovereign Risk and Debt Sustainability Analysis

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