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Public Information Notice (PIN) No. 98/84
November 11, 1998
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes Article IV Consultation with France

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 28, 1998, the Executive Board concluded the Article IV consultation with France.1


The recovery broadened in 1997, and by early 1998 domestic demand had taken over as the driving force. A robust expansion of private consumption developed in the second half of 1997, supported by rising real disposable income. In addition, household confidence improved, in part because the mid-1997 fiscal package cleared doubts about EMU without resorting to yet another increase in personal taxation. In the business sector, with profitability high, export growth strong, and costs well-contained, investment picked up markedly in the course of the year. From late 1997, export growth began to slacken under the impact of the Asian crisis, but by then the recovery of domestic demand had become firmly established.

Since September 1997, the rate of unemployment has been declining from a high level, and in September 1998 stood at 11.7 percent. Employment is currently rising at an annual rate of 2 percent. More than two-thirds of the jobs created have been in the private sector, mainly in market services and commerce. A majority of hiring was on a fixed-term or part-time basis—which may be seen as illustrating flexibility, but was not fully in line with employee preferences and may also reflect rigidities affecting full-time hiring. Meanwhile, long-term unemployment has showed little decline; and unemployment remains very high among the low-skilled and the young. Inflationary pressures have been non-existent in 1997 and the first half of 1998: consumer price inflation declined to 1.1 percent in 1997, the lowest rate recorded since 1955, and has recently been less than 1 percent year-on-year. Economy-wide, private sector wages rose at an annual rate of 3 percent in 1997 and early 1998, roughly corresponding to productivity gains. The current account surplus has been running at some 2½ percent of GDP in 1997 and is projected to be slightly lower in 1998.

For the third successive year, the fiscal deficit was cut by some 1 percent of GDP in 1997, albeit with the aid of a one-off transfer from France Télécom of ½ percent of GDP. In 1998, the3 percent deficit goal implies little further reduction on a cyclically adjusted basis since the favorable cyclical effect is roughly offsetting the absence of the Télécom transfer, but spending restraint is continued and progress made with tax reform. State budget spending is frozen in real terms, with continuing pay restraint and a reallocation of funds to employment, justice, and education at the expense of defense and investment. There is a shift from labor income taxation toward a broader base. The composition of growth should yield revenues at least ¼ percent of GDP higher than assumed in the budget, but slippages in health care threaten to offset at least in part the favorable revenue performance.

The state budget for 1999, together with plans to balance the general social security fund, should reduce the fiscal deficit to no more than 2.3 percent of GDP—an adjustment of ¼ percent of GDP on a cyclically adjusted basis. The budget assumes real GDP growth of 2.7 percent and inflation of 1.3 percent. Departing from the nominal and real freezes of the previous two years, state spending is to rise by 1 percent in real terms, reflecting increases in labor market and education programs. Given current projections for other levels of government, total spending is likely to rise in real terms by at least 1½ percent, compared with a 1998 target of 1¼ percent. The tax burden will decline slightly; reforms include an easing of local payroll taxation, which will reduce labor costs, and also a cut of one-third of the 1997 corporate tax surcharge.

Since their sharp decline to 3.3 percent in the course of 1996, nominal short-term rates have remained broadly constant, while long-term rates have declined by a further 160 basis points. In real terms (deflated by the 12-month change in the CPI), short-term interest rates rose by some 100 basis points over this period (although they declined somewhat, if measured with reference to the INSEE index of underlying inflation), while real long-term rates fell by about 60 basis points. The ULC-based real effective exchange rate depreciated by some 2 percent in the first half of 1997, reflecting the recovery of the U.S. dollar, lira, and pound sterling; it has since been broadly stable, albeit with a modest appreciation very recently as a result of the decline in the U.S. dollar. In asset markets, stock prices have risen by some 50 percent since end-1996, even after a setback since July. The monetary aggregates, in turn, have accelerated somewhat from earlier low or negative growth rates. Financial conditions, overall, thus appear to have changed little during the past year-and-a-half, and remain supportive of continuing economic expansion.

In labor market policies, the government acted on a number of commitments on taking office—reflected in a new public jobs program, legislation to cut the legal workweek from 39 to 35 hours, and a real minimum wage increase of some 3 percent, followed by a further real increase of 1 percent in 1998. More recently, however, the government has stressed the need not to raise labor costs when introducing the 35-hour week; made progress in streamlining employment support programs; and started to address unemployment traps.

The latest staff projections for France reflect the assessment of the external environment as portrayed in the Fund’s September World Economic Outlook (WEO). In that context, growth in1998 is estimated at around 3.1 percent, fueled by strong private consumption and business investment. The external contribution is projected to be negative, however, owing to the impact of the Asian crisis on exports and rising import demand. For 1999, the staff anticipates a slight slowdown in the growth rate to 2.8 percent, while the unemployment rate is projected to fall to 11.2 percent and inflation is expected to remain subdued at about 1.3 percent. Given the unstable external environment, however, particularly as regards emerging markets, the margin of uncertainty for the 1999 outlook is wide, with significant downside risks.

Executive Board Assessment

Executive Directors welcomed the strong fiscal consolidation and prudent monetary policy pursued in recent years, which had cleared the way to EMU and yielded impressive economic achievements. The firm management of macroeconomic policies had played a critical role in reviving private sector confidence and strengthening competitiveness, and had thus helped foster a broad-based economic expansion, low inflation, and a sizeable current account surplus.

Directors noted that, while weaknesses in the global environment were dampening the demand for French exports, domestic demand continued to show great dynamism. In this setting, Directors urged the authorities to move boldly in addressing structural problems, particularly in the labor market and the public finances.

Directors noted that monetary policy had long displayed impressive credibility and had helped to foster one of the lowest interest rates in Europe, providing an environment conducive to growth. Inflation was currently very low, and the main risk to the outlook lay in uncertainties about the global situation. While Directors generally agreed with the present interest rate policy, they also considered that there might be a case for a cut in interest rates if external developments were to threaten the recovery. With economic conditions broadly paralleling the euro area average, the move to a common monetary policy in 1999 should not raise difficult transitional problems.

Directors urged the authorities to aim for sufficient restraint in public spending to allow for a sizeable cut in the burden of taxes and social contributions on labor income needed to foster more satisfactory job creation. Welcoming the authorities’ intention to develop guidelines for public spending, Directors advised giving a high priority to streamlining the civil service and to deepening health care and pension reforms. A fiscal strategy along these lines should enhance economic performance and employment creation over the medium and long term—thus setting in motion a virtuous circle in the public finances.

Judged in a medium-term perspective, the authorities’ fiscal plans for 1998, involving an unchanged deficit target of 3 percent of GDP, were viewed by some Directors as unambitious. They noted, however, that the outcome was likely to be slightly below this deficit. For 1999, Directors welcomed the authorities’ goal of balancing the social security accounts, and offurther shifting the burden of taxation away from labor income by reforming local taxation (the taxe professionnelle). However, Directors noted the lack of progress in reforming the personal income tax—tax rates remained very high, while the base was narrow due to the many deductions and allowances catering to special interests. Several Directors considered that a somewhat greater reduction in the deficit should have been targeted for 1999 (with, of course, a readiness to let automatic stabilizers operate if the economy weakened). Some other Directors, however, pointed to the heightened downside risks facing France and the world economy at the present juncture, and considered that care must be taken not to jeopardize the strength of domestic demand in France. Nevertheless, they shared the view of other Directors and the staff that, over the medium term, fiscal consolidation efforts should be commensurate with the objective of achieving fiscal balance, with public expenditure growing at a rate significantly lower than that of GDP.

With regard to labor market policies, Directors urged the authorities to address the root sources of structural unemployment, taking advantage of the present upswing in labor demand. They noted that, while labor market conditions had been improving recently and there had been some gains in employment, the unemployment rate remains at a very high level. Directors saw a need for much stronger incentives for the jobless to seek work, training to improve their skills, or—in the case of long-term benefit recipients—participation in forms of workfare. Continued attention should also be paid to upgrading skills and productivity, as well as to mitigating the unemployment traps associated with high marginal tax rates. In addition, Directors argued that the minimum wage remained an obstacle to employment of the adult unemployed without recent experience or adequate skills. Broader programs involving lower minimum wage costs were needed, with employers offering experience and on-the-job learning, and such programs should be available to adults as well as youths.

With regard to the 35-hour legal work week, Directors stressed the importance of ensuring that the scheme will not hinder growth and employment prospects, and that care should be taken not to distort the employment structure. They emphasized that the scheme should not detract from the necessary focus on creating new jobs. Directors urged flexibility in implementation, including a substantial increase in the limit on overtime hours, and stressed the need for wage moderation. Directors also emphasized the importance of avoiding an increase in the cost of low-skilled labor paid at the hourly minimum wage.

Directors welcomed the progress, over the past year, in cutting back the involvement of the state in the services sector, and urged the authorities to pursue their efforts regarding other publicly-owned companies.

Noting the growing risks in the international financial environment, Directors urged the authorities to intensify their supervision of banks’ risk management systems and to ensure full cooperation among domestic regulators of the financial sector. They also noted the need for continuing vigilance over the condition of the domestic financial system in light of the risks in global financial markets.

Directors praised France’s generous development assistance—which remained high compared with other advanced economies, despite the impact of budgetary stringency—and they urged that assistance be maintained at a high level.

Directors noted that France maintained high standards of data provision, including through subscription to the Special Data Dissemination Standard and the posting of metadata on the Dissemination Standards Bulletin Board.

France: Selected Economic Indicators

  1994 1995 1996 1997 19981

Real economy (change in percent)  
Real GDP 2.8 2.1 1.5 2.3 3.1
Domestic demand 3.0 1.8 0.9 0.9 3.5
CPI (year average) 1.7 1.8 2.0 1.2 1.1
Unemployment rate (in percent) 12.3 11.6 12.4 12.5 11.8
Gross national saving (percent of GDP) 18.6 19.0 18.4 19.6 19.4
Gross capital formation (percent of GDP) 18.0 18.3 17.1 16.8 17.2
Public finance (percent of GDP)  
Central government balance -4.6 -4.0 -3.5 -2.8 -2.7
General government balance -5.8 -4.9 -4.1 -3.0 -2.9
Public debt 48.5 52.7 55.7 58.1 58.9
Money and interest rates  
M3 (end of year, percent change)2 1.7 4.3 -3.5 1.6 5.1
Money market rate (in percent)3 5.8 6.6 3.8 3.3 3.5
Government bond yield (in percent)3 7.2 7.6 6.3 5.6 4.9
Balance of Payments (in percent of GDP)  
Trade balance (percent of GDP) 0.5 0.7 1.0 2.0 1.5
Current account (percent of GDP) 0.6 0.7 1.3 2.8 2.2
Official reserves (US$ billion)4 26.3 26.9 26.8 30.9 36.5
Exchange rates  
Exchange rate regime Member of ERM
Present rate (October 28, 1998) F5.53 per US$1
Nominal effective exchange rate (1990 = 100)5 106.0 109.2 109.1 105.6 106.1
Real effective exchange rate (1990 = 100)5 6 98.0 97.8 95.0 91.3 91.8

1IMFstaff projections, unless otherwise noted.
2July 1998.
3August 1998.
4Excluding gold, as of April 1998.
5August 1998.
6Based on relative normalized unit labor costs in manufacturing.

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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