Public Information Notice: IMF Concludes Article IV Consultation with France

November 13, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On October 27, 2000, the Executive Board concluded the Article IV consultation with France.1


Real GDP growth has been almost 3 percent on average since 1997, and the staff projects growth of 3¼ percent for 2000 and 2001. This momentum reflects the buoyancy of private consumption and investment, which have been sustained by supportive monetary conditions and high levels of household and business confidence. External demand has also contributed to the recent growth performance, owing to an improved external environment, the depreciation of the euro since its introduction, and competitive unit labor costs. In addition, several years of gradual but significant structural reform have improved labor market performance. However, growth was lower than expected in the second quarter of the year and more recently confidence indicators have declined somewhat, reflecting in part the rise in world oil prices.

A particularly positive feature of the current cyclical expansion has been the rapid pace of job creation. Employment has risen by a total of about one million since mid-1997 and by a record 450,000 jobs in 1999 alone. As a result, the unemployment rate declined from a peak of 12½ percent in 1997 to around 9½ percent in September 2000. New jobs were overwhelmingly concentrated in the services sector, with temporary employment and fixed-term contracts playing a prominent role. Even though an appreciable number of these jobs—one-fifth since 1997—were government subsidized, the employment performance also stems from the targeted reduction of social security contributions and labor market reforms carried out over a number of years.

Cost and inflation pressures have been muted despite diminishing margins of slack: capacity utilization rates, bottlenecks, and recruitment difficulties have all risen appreciably, although they remain below the levels of the previous cyclical peak. Wage settlements have been moderate, in part due to restraint as a counterpart to the reduction of working time (the 35-hour work-week initiative) introduced at the beginning of 2000. Although core inflation has been broadly stable at about 1 percent, rising oil prices have increased headline inflation to 2.3 percent in September, which has in turn intensified calls for further wage increases, particularly in the public sector.

On the fiscal front, the deficit in 1999 was 1.8 percent of GDP, compared with the target of 2.2 percent of GDP. Most of the overperformance was due to higher-than-expected collection of corporate taxes. For 2000, the general government deficit is expected to be 1.4 percent of GDP, taking into account revenue windfalls announced at mid-year as well as tax reductions on energy products and renewed slippages on health care outlays. At the end of August, the government announced a package of tax reductions amounting to about 1¼ percent of GDP, to be implemented over the 2001–03 period. The most important from a macroeconomic and structural perspective are reductions in all income tax brackets, rebates at the low end for the contribution sociale généralisée (a tax on all incomes to finance social security), and reductions in the corporate income tax. The draft 2001 budget, presented at end-September, targets a deficit of 1 percent of GDP, a reduction in the tax-GDP ratio and, consistent with the current Stability Program, real expenditure growth of 1.3 percent.

Reports on the Observance of Standards and Codes (ROSC) have been concluded regarding the Code of Good Practices on Fiscal Transparency and the financial component of the Code of Good Practices on Transparency in Monetary and Financial Policies.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities on the recent performance of the economy, which has been characterized by a continuation of strong growth in output and employment amidst low and stable inflation. Directors welcomed in particular the vigorous employment performance and the related rapid fall in unemployment. While pointing to the downside risks for the short run represented by the rise in oil prices and some indications of a softening of demand, they generally shared the view that the upswing would continue into 2001. The resilience of the recovery in a possibly less favorable external environment would, Directors noted, depend importantly on continued wage moderation and on the implementation of measures to invigorate the supply side of the economy.

In this regard, Directors commended the authorities for policies that have enhanced the employment response of the economy—particularly by reducing labor costs for the low-skilled—and that have thus helped to underpin the recovery. To support lasting growth, attenuate the inflationary risks inherent in a sustained expansion, and prepare for the demographic pressures that will begin to be felt as early as 2005, Directors urged the authorities to press ahead with product and labor market reforms, and to further consolidate the fiscal position. A few Directors pointed to the importance of building social consensus for reform efforts to be successful, which could require a more gradual approach to the implementation of reforms and fiscal consolidation.

Directors noted the continued narrowing of the general government deficit in recent years, while calling for further progress to ensure the soundness of the public finances before the pressures of population aging set in. In particular, pointing to the slow improvement in the cyclically-adjusted deficit despite strong growth in recent years, most Directors called for a stepped-up effort with respect to the deficit reduction path envisaged in the 2001–2003 Stability Program. They viewed the strengthening of the deficit target in the 2001 budget proposal as a step in this direction, and a number of Directors felt that—on present growth projections—achievement of budget balance by 2002 is both a feasible and a desirable objective.

Directors agreed that improving long-term economic performance will depend critically on significant reductions in the high tax burden. They accordingly welcomed the authorities’ emphasis on this objective and the announcement of a multi-year tax reduction package for 2001–2003.

Welcoming the reduction in the overall tax burden, Directors emphasized the importance that tax cuts be designed to maximize their supply-side impact. They commended the fact that several recent and announced measures had been explicitly designed to strengthen incentives to work, and urged that this be a continued policy priority. Besides tax reduction, several Directors also pointed to the need for simplification and streamlining of an overly complex tax system.

At the same time—given the importance of continued deficit reduction—Directors stressed that tax cuts should not be allowed to outrun expenditure control. The long-term health of the public finances was seen to depend squarely on durable expenditure control. The use of multi-year real expenditure growth norms was thus viewed as useful, but it will be important—for the credibility and effectiveness of this approach—that implementation be strengthened, adherence improved, upward revisions to the norms avoided, and continuity between one stability program and the next ensured.

Directors underscored that effective expenditure control over the medium term will depend on reforms in health care, the civil service, and pensions. In particular, they noted that health care outlays continue to be a worrying source of budgetary overruns, and that such pressures will be aggravated by population aging. Regarding the civil service, Directors saw the wave of retirements over the coming decade as providing scope for selectively streamlining the public administration without undermining its high quality. They noted that the outlook for the pension system remains of concern. While some steps to reform the system have been taken or proposed, Directors stressed that more fundamental measures will be needed to ensure the viability of the system. These should include increases in the retirement age (or extensions in the contribution period) and the development of a complementary private sector pension pillar.

Directors noted the need to reform benefits as well as taxes, since the major disincentives to work at the low end of the income scale result primarily from the withdrawal of benefits, rather than from high income taxation. They recommended that basic income support schemes, such as the RMI, be reoriented toward providing temporary support while encouraging a return to work. In this regard, Directors strongly supported the “return-to-work” elements of the unemployment insurance reform proposed by the social partners, although they warned against those aspects of the proposal that risk instead blunting work incentives and increasing financing costs. Some Directors also considered that the extensive subsidized employment programs should be reconsidered in light of the buoyant job market.

Directors noted that the 35-hour work-week initiative has proceeded relatively smoothly to date, and welcomed the broader dialogue on work organization it has promoted. Given the tightening labor market, however, they urged that implementation be flexible. In particular, in order not to curtail labor supply further, many Directors saw a pressing case for relaxing restrictions on allowable annual overtime hours. Further, these Directors also argued that additional flexibility should be provided to smaller firms, which have much less scope to rearrange work practices to accommodate the shorter work week.

Directors welcomed the notable progress in privatization, but saw further scope in the opening up of key network sectors. Regarding the financial sector, they cautioned that its current strong position owes much to the cyclical recovery of the economy as a whole. Directors therefore stressed the importance of cost reduction by banks and continued vigilance by supervisors with regard to provisioning and credit developments, in order to ensure that the sector will be in a strong position to weather an eventual downturn. Several Directors also saw scope for a further liberalization of the financial system, with regard in particular to the continued presence of administered interest rates and the prohibition of interest on sight deposits.

Directors welcomed the work on France’s observance of the Fund’s Codes of Good Practices. They expressed satisfaction about the positive findings of the reports on compliance with the Code of Good Practices on Fiscal Transparency—Declaration on Principles, and on the financial policy component of the Code of Good Practices on Transparency in Monetary and Financial Policies. Directors encouraged the authorities to give careful consideration to the reports’ main recommendations.

Directors welcomed France’s comparatively high level of development assistance. They also noted the generally high quality, comprehensiveness, and timeliness of its economic statistics.

It is expected that the next Article IV consultation with France will be held on the standard 12-month cycle.

France: Selected Economic Indicators

  1996 1997 1998 1999 2000 1/

Real economy (change in percent)          
Real GDP 1.5 2.3 3.4 2.9 3.3
Domestic demand 0.9 0.8 3.8 2.9 3.1
CPI (year average) 2.1 1.3 0.7 0.6 1.9
Unemployment rate (in percent) 12.4 12.5 11.7 11.3 9.8
Gross national saving (percent of GDP) 18.7 19.7 19.9 21.5 22.1
Gross capital formation (percent of GDP) 17.4 17.1 17.2 18.8 19.0
Public finance (percent of GDP)          
Central government balance -3.7 -3.6 -3.0 -2.5 -2.3
General government balance -4.1 -3.0 -2.7 -1.8 -1.4
Public debt 57.1 59.3 59.7 58.9 58.1
Money and interest rates          
M3 (end of year, percent change) 2/ -3.5 1.6 4.3 7.3 4.6
Money market rate (in percent) 3/ 3.8 3.3 3.4 2.9 4.3
Government bond yield (in percent) 3/ 6.3 5.6 4.7 4.7 5.5
Balance of payments (in percent of GDP)          
Trade balance (percent of GDP) 1.0 2.0 1.8 1.4 0.5
Current account (percent of GDP) 1.3 2.8 2.7 2.7 2.3
Official reserves (US$ billion) 4/ 26.8 30.9 44.3 39.7 39.6
Exchange rates          
Exchange rate regime Member of euro area 5/
Nominal effective exchange rate (1995= 100) 6/ 99.9 96.7 97.2 95.6 93.1
Real effective exchange rate (1995 = 100) 6/ 7/ 96.6 92.3 90.8 90.9 85.2

Sources: IFS; data provided by the authorities and Fund staff estimates.

1/ Staff projections, unless otherwise noted.
2/ June 2000.
3/ July 2000.
4/ Excluding gold, as of June 2000; from 1999, eurosystem definition.
5/ While the franc to euro rate was irrevocably fixed on January 1, 1999, the external exchange rate of the euro is market determined. The franc will remain in circulation until 2002, when euro banknotes and coins will be issued.
6/ July 2000.
7/ Based on relative normalized unit labor costs in manufacturing.

1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100