Public Information Notice: IMF Concludes 2001 Article IV Consultation with France

October 31, 2001

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 26, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with France.1


The French economy enjoyed a vigorous upswing between 1997 and end-2000. By historical standards, and compared to other major euro area countries, per capita GDP and employment increased at high rates. At the same time, unemployment declined substantially, to 8½ percent in mid-2001 from 12¼ percent in mid-1997, without sparking inflationary pressures. This economic record is the result of a favorable external environment; supportive monetary conditions; gradual labor market reforms; protracted wage moderation; and substantial cuts in tax rates and social security contributions.

A number of adverse developments led to an abrupt slowdown of economic growth in the first half of 2001. Initially, the French economy showed more resilience than elsewhere because of a comparatively smaller terms-of-trade loss in 2000 and domestic tax measures that mitigated the impact of external shocks. However, the weakening of international business prospects induced a sharp downward revision of investment plans for 2001, dampening industrial production growth, and adversely affecting employment prospects and consumer confidence. Consumer and business confidence was further shaken by the September 11 terrorist attacks, leading to a likely further slowdown in growth through end-2001. However, supportive monetary and fiscal policies, a positive terms of trade effect, and receding uncertainty could underpin a pickup by the middle of 2002, barring further global weakness. On this basis, the staff expects average GDP growth to be 2 percent in 2001 but to slow appreciably in 2002.

According to the draft 2002 budget, the government intends to implement its medium-term tax reduction plan as envisaged, while allowing expenditure growth to exceed slightly earlier plans. Automatic stabilizers will be permitted to operate fully on the revenue side, implying that nominal deficit reduction will be on hold given the appreciably weaker growth outlook. Thus the 2002 draft budget—which is still based on 2.5 percent growth for 2002—anticipates a deficit of 1.4 percent of GDP, broadly unchanged from 2001 and on par with performance in 2000. In the staff's view the budget implies a marginally expansionary fiscal stance in 2002. On the basis of the staff's weaker outlook, the budget deficit would be significantly larger. From a structural perspective, the adoption of the new law on budgetary procedures, and the prospective implementation of a forward-looking personnel management system as a first step toward rationalizing the civil service, are noteworthy.

On other structural issues, the most important recent initiatives have been in the labor market with the introduction of an earned income tax credit and a new program to return the unemployed to work, though the latter also involved eliminating the tapering of unemployment benefits, and dismissal rules are set to be tightened somewhat. However, structural reforms in some other key areas (notably pensions and the health sector) have remained on hold. In the financial sector, the supervision of securities markets is set to be streamlined, and Fund staff found that banking supervision was in compliance with most of the Basel Core Principles for effective banking supervision and that the overall quality of supervision was high.

Executive Board Assessment

Executive Directors commended the authorities on their skillful economic management, which has supported robust economic growth with low inflation and declining unemployment in recent years. Directors welcomed, in particular, the role played by the steady implementation of structural reforms in contributing to the unprecedented job-richness of growth. Directors observed, however, that the economy is now also experiencing the impact of the global slowdown, recently exacerbated by the September terrorist attacks. In the circumstances, the timing and speed of a recovery are necessarily uncertain. Nevertheless, Directors agreed that the growth prospects for the French economy remain good, reflecting economic reforms that have improved economic resilience and efficiency. Directors stressed that, going forward, policies should continue to be firmly geared toward raising the growth potential of the economy by meeting the serious challenges remaining for lifting labor force participation, lowering structural unemployment, and further reducing the tax burden in a context of medium-term fiscal consolidation.

Directors broadly supported the authorities' policy response to the economic slowdown. In particular, they agreed that the automatic fiscal stabilizers should be allowed to play fully on the revenue side, and that the associated cyclical widening of the budget deficit should not be a cause for concern. They also supported the ongoing tax cuts as part of a medium-term tax reduction program, and a number of Directors saw merit in the recent measures proposed to counter the economic slowdown and provide temporary support to those sectors of the economy most affected by the fallout from the September 11th events.

Directors agreed that monetary conditions from the perspective of the French economy have been supportive, noting that further action by the ECB on monetary policy will be determined by euro area considerations.

Assessing the underlying fiscal position of France, Directors observed that only limited progress has been made with structural fiscal consolidation in recent years. They noted that expenditure pressures, especially in social security, have been difficult to contain and have translated into an upward revision of expenditure growth during 2001 and 2002. Pointing to the impending onset of demographic pressures, Directors welcomed the authorities' commitment to stay the course of fiscal consolidation. They stressed the importance of bringing the general government accounts to structural balance by 2004 as implied by the latest Stability Program, a target that, in updating the program later this year, should not be moved further into the future. They noted, however, that achieving this objective will require a significant deceleration of real expenditure growth during 2003 and 2004.

Directors considered that achievement of the authorities' medium-term fiscal objectives will also require that they enact timely reforms in key areas necessary to achieve lasting expenditure control and restraint—the civil service, the health care system, and pensions. They welcomed the new law on budgetary procedures which will improve public expenditure performance, and, together with a drive to put in place a forward-looking personnel management system, should encourage reform and rationalization of the civil service. Directors welcomed the efforts to build a broad-based consensus in favor of pension reform, and urged the authorities to move toward the implementation of a well-designed pension reform which, in tandem with benefits reform, should help raise labor force participation and promote a fair choice between work and retirement. Directors also encouraged the authorities to pursue reforms aimed at better containing the costs of health care.

Directors saw scope for strengthening the current framework for multi-year expenditure control embedded in France's Stability Programs. They considered that such a strengthening could be obtained from backing the expenditure norm by a more explicit political commitment, instituting in the annual budget process a clear and transparent mechanism to correct deviations from multi-year norms, and avoiding upward revisions of the norms between Stability Programs. Some Directors suggested that it would also be helpful to set the expenditure norm in terms of the level of expenditure, and to clarify the respective roles of the central government, the social security administration, and local authorities in contributing to overall expenditure restraint.

Directors highlighted the success of ongoing labor market reforms in raising the demand for labor, and expected that the recent supply-side measures, including the institution of an earned income tax credit, will help to reduce inactivity traps. They also welcomed the newly expanded emphasis on helping the unemployed return to work and encouraged further supply-side oriented reforms, while ensuring that their fiscal costs remain modest. A number of Directors cautioned that recent proposals to tighten dismissal rules could discourage hiring by enterprises, and that the effects of the abolition of the tapering of unemployment benefits will need close monitoring. Noting that the wage moderation, together with labor market reform, has been one of the key factors underlying the job-rich nature of France's growth record during the second half of the 1990s, Directors underscored the need to preserve these gains in the years ahead. In this context, they welcomed the intention to relax overtime limits as small and medium-sized enterprises switch to the reduced work week next year. It would also be important to avoid a sharp increase in labor costs as a result of the prospective alignment of minimum wages and income guarantees.

Directors underscored that, despite recent progress in product market liberalization, the supply-role potential of the economy would benefit from more decisive action in this area. Many Directors encouraged the authorities to commit to specific timetables for opening up the energy and transportation sectors.

Directors commended the authorities on the high quality of banking supervision. They looked forward to the completion of reforms aimed at consolidating securities supervision and ensuring sufficient cooperation between the various supervisory institutions. Several Directors saw merit in phasing out administrative intervention in the operation of financial sector activity at the retail level, particularly as regards the continued existence of administered interest rates. Some Directors suggested that the ongoing process of consolidation in the domestic banking sector should be seized as an opportunity for the public sector to withdraw from banking. Directors welcomed France's strong efforts to combat money laundering.

Directors welcomed the generally high quality, comprehensiveness, timeliness of French economic statistics.

Directors commended the authorities for their continued support for trade liberalization in a multilateral context, and their emphasis on improved market access for developing countries' exports. A few Directors urged the authorities to encourage further reform of the agricultural sector in the context of the EU. While welcoming France's relatively high contribution to development assistance, Directors encouraged the authorities to raise the level of development assistance to the U.N. target of 0.7 percent of GNP.

France: Selected Economic Indicators

  1997 1998 1999 2000 20011

Real economy (change in percent)          
Real GDP 1.9 3.5 3.0 3.4 2.0
Domestic demand 0.7 4.2 3.0 3.6 1.7
CPI (year average) 1.3 0.7 0.6 1.8 1.8
Unemployment rate (in percent) 12.3 11.8 11.2 9.5 8.7
Gross national saving (percent of GDP) 20.7 21.7 21.9 22.4 22.0
Gross capital formation (percent of GDP) 17.9 18.4 19.0 19.6 19.8
Public finance ((percent of GDP)          
Central government balance -3.6 -3.7 -3.0 -2.4 -2.5
General government balance -3.0 -2.6 -1.6 -1.4 -1.5
Public debt 59.3 59.5 58.5 57.2 57.9
Money and interest rates          
M3 (end of year, percent change)2 2.0 2.7 6.9 4.9 9.1
Money market rate (in percent)3 3.3 3.4 3.0 4.4 4.5
Government bond yield (in percent)4 5.6 4.7 4.7 5.5 5.3
Balance of payments (in percent of GDP)          
Trade balance (percent of GDP) 2.0 1.7 1.4 0.2 0.3
Current account (percent of GDP) 2.8 2.6 2.6 1.8 1.9
Official reserves (US$ billion)5 30.9 44.3 39.7 37.0 36.7
Exchange rates          
Exchange rate regime Member of euro area
Nominal effective exchange rate (1995=100)6 96.7 97.2 95.8 92.7 92.4
Real effective exchange rate (1995=100)6 7 92.9 92.5 91.7 88.2 86.6

1IMF Staff projections, unless otherwise noted.
2Data for France until 1998 and for the euro area from 1999 onwards. 2001 figure refers to the 12-month percent change as of June.
32001 figure refers to July.
4Average yield to maturity on public sector bonds with original maturities of more than five years. 2001 figure refers to July.
5Excluding gold, end-of-the period; from 1999, eurosystem definition. 2001 figure refers to June.
6While 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 end-2001, when euro banknotes and coins will be issued. 2001 figure refers to July.
7Based 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. This PIN summarizes the views of the Executive Board as expressed during the October 26, 2001 Executive Board discussion based on the staff report.


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