Transcript of a Conference Call on the Launch of the 2006 Article IV Consultation Report for France

International Monetary Fund
Washington, DC, November 1, 2006


Participants:
Alessandro Leipold, Deputy Director, European Department, IMF Luc Everaert, Division Chief, European Department, IMF

Organized and moderated by:
Lucie Mboto Fouda, Senior External Relations Officer, IMF


MS. FOUDA: Good morning everyone. I am Lucie Mboto Fouda, Senior Press Official with the IMF in Washington. I would like to welcome all of you to this conference call.

Today's conference call is on the launch on the 2006 Article IV report for France. This report, as you may know, was reviewed by the IMF Executive Board on October 25th, 2006.

Mr. Alessandro Leipold, Mission Chief for France and Deputy Director in the IMF's European Department and Luc Everaert, Division Chief in the same department, will be discussing with you, respectively from Rome for Alessandro and from Brussels for Luc.

The staff report and the Public information notice summarizing the discussion as well as other supporting documents were posted on our password-protected Media Briefing Center yesterday, and I hope you had a chance to cast a look over them.

Mr. Leipold will offer a few opening remarks and both he and Luke will take your questions.

MR. LEIPOLD: Hello, my line is not very clear at times, so I ask for your pardon if I don't hear everything.

Anyway, as Lucie just said, the IMF has finished its annual assessment of France's economic policies, and I hope you had a chance to look at the related papers that have been posted.

I would like to just say a few words in opening about the main points of this assessment, and Mr. Everaert and I will be happy to respond to any questions you may have. As you hear, I am speaking in English, but please feel free to ask your questions in French. We both understand French.

The first point I would like to make is that the Fund's overall view of France's recent economic performance and policies is positive. This has much to do with a reduction in the fiscal deficit that we have observed from 2004 onwards and also reforms in labor and product markets which have increased the growth potential of the economy. Indeed, these reforms have been broader and deeper than is commonly thought by observers of the French economy. The point that we make and was made at the Board Meeting is that France has changed more than is commonly perceived.

However, while France is certainly doing well, it needs to do better. Fiscal deficits are still high. The public sector is large. One person in four is employed in the public sector which is a very high ratio. The reduction in the debt burden has only just begun. Similarly, unemployment, which came down nicely, in fact, in September at 8.8 percent of the labor force was still high. It is much higher for the young and the elderly, and potential growth which, even though we have revised it upwards and so it is higher than what it was before, is still just about 2.25 percent per year. And so, one of the outcomes of the Board Meeting was that the Directors emphasized that much remains to be done.

In terms of the approach to reform, what drew a lot of attention and was very welcomed and supported at the Board was the approach towards consensus-building via pédagogie économique, in particular the approach consisting of issuing reports, establishing councils for debate, and achieving consensus has met with success, notably as regards the need to reduce deficits and debt. Attempts to short-circuit this process have met with failure. So there is an encouragement to continue along these lines.

However, it is equally important to advance consensus simultaneously in a number of priority areas, mainly because of the synergies this can cause and to balance the interests of different stakeholders. Our reports to the Board identified three areas as priorities to remain at the top of the agenda.

First, the fiscal deficit needs to be reduced, needs to be cut by reducing spending. From this perspective, given the tax cuts in 2007, we see the 2007 budget as marking an inopportune pause in fiscal adjustment. This doesn't imply that the tax burden should not be lowered, but it should be done through equivalent spending reduction which is not the case in the budget.

For the medium-term, the target to balance the budget by 2010 is fine, and there are mechanisms in place to achieve spending restraint, but still there will be a need to define specific measures to get there, and the government will need to take ownership of the planned fiscal consolidation.

The second priority, the labor market needs to be made much more flexible. Part of the recent improvement in unemployment is due to good reforms, but part is simply cyclical or the contribution of subsidized jobs in the non-market sector. The current reality of the labor market in which highly protected permanent jobs go hand-in-hand with precarious fixed term and temporary jobs needs to be resolved. To do this, judicial uncertainty surrounding the permanent labor context needs to be drastically reduced. In a globalized world, the cost of judicial uncertainty in the labor market is becoming prohibitive.

There is another reality in the labor market, and that is the one in which an increasing number of employees have become stuck at the minimum wage. There are 10.5 million minimum wagers in France. That also needs to be resolved. Minimum wagers certainly play a useful role, but when they are not highly skilled workers who consequently become trapped in long-term unemployment, this is costly to society because taxes need to be raised to provide a basic income to large numbers of people. These taxes tend to fall on the high skilled, in turn, discouraging them and inducing them to seek jobs outside France. This vicious circle needs to be broken.

Minimum wagers should not be allowed to rise by more than inflation. The earned income tax credit needs to be strengthened and budgetary savings for moving people off benefits should be used to reduce the tax burden on labor. This will set in motion a virtuous circle.

The third priority is the opening up of the services sector to more competition through deregulation. This would include a faster adoption of E.U. Services Directive and an acceleration of financial integration in Europe. Expanding the consensus approach to reform to this area would allow us to crystallize the defused interests of consumers who stand to gain a great deal from product and financial market reforms. In fact, the one and only group that consistently loses out from lack of competition is the consumer.

I will be happy to take questions now.

QUESTIONER: I would like to find out a little bit about the estimate of growth potential of 2.2 percent you gave for the next five years. Do you think that France could actually do a lot better? In what areas also would you like to see more spending cuts in the budget?

MR. EVERAERT: We have now projected the potential growth at 2.2 percent> I think there is room for this to be higher in the future. We have already increased this estimate by a quarter percent of GDP because we see there are improved demographics that will increase labor supply. I think it is going to be important, if we want to see this go up even further, to continue to increase labor supply, and this goes back to our main advice on labor market reforms.

First of all, on the low end of the skill scale, the minimum wage tends to be so high that a number of people cannot be employed, and that is artificially cutting off our labor supply. We would like to see a little bit of moderation there as well.

The second thing is the existence of the duality in the labor market where permanent contracts are still quite expensive because of judicial uncertainty. So if we can reduce this uncertainty, the costs for firing people will come down and the costs for hiring people will come down and we will see a much more dynamic labor market. It is quite possible with good reforms that at least for a little while, the French potential growth rate could go as high as 3 percent, but this would require quite a number of sustained reforms in the next couple of years.

In terms of areas for cutting spending in the budget, I think one should recognize that the government consists of three large areas. One is the central government, and there is a new law in place that allows medium-term spending programming and it is up to each of the ministries to save on resources. I think adoption of information technology is going to be key for making further savings there.

The second block of the spending is in social security. Again, two major components, one is healthcare. All countries are struggling to contain healthcare spending. France has a pretty good system in place. There may be a need to shift a little bit towards more co-payments in the future to work on the demand side, and there is going to be a continuous need to do budgeting, especially for hospitals to contain the cost increases. On the rest for social security, mainly an unemployment component if labor markets proceed, we could see there could be substantial savings there as well.

The third part of the government has to do with the local authorities. It is very hard there to give a straight guideline on where spending can be cut, but we have just observed that local authority spending is going very fast and that we will have to contain that spending in order to limit the size of the public sector.

QUESTIONER: Is there any sort of idea of how the pick-up in overall Europe in euros and growth is going to feed into the French economy?

MR. LEIPOLD: Before we turn to that, could I just add another item on the expenditure side? Of course, there is also further pension reform. There is a rendezvous, as they call it, on that scheduled for next year. Even though quite a lot has been done on the pension side, there is a need for further pension reform.

On the outlook, certainly, France stands to benefit from the uptake in Europe. That is one of the reasons also that we revised between the staff report and the supplement. That is one of the complicated things in finding your way through our document. I would like to say that if you want to see our latest forecast, you have to look at the table in the supplement, and there we have growth of 2.5 percent in 2006 and of 2.3 percent in 2007. If the positive signs of growth in Europe continue to accumulate as they seem to be, there may be some upward drifts to those forecasts.

QUESTIONER: Yes, I wanted to ask about from this perspective, the tax cuts in 2007 represent an inopportune pause in reducing fiscal deficit. Could you elaborate on that, please?

MR. LEIPOLD: Well, the way you have cast it is perhaps maybe the way that I said it, but the overall budget is really the inopportune pause in fiscal adjustment. By that, we mean that by our calculations, there is no structural or underlying improvement in the budget between 2006 and 2007 after several years of actually quite substantial improvement, a cumulative improvement from 2004 to 2006 of something like, I believe, 1.25 percentage points of GDP, which is a pretty good pace of underlying improvement. We have tended to recommend improvement of at least a half percentage point per annum in the underlying cyclically-adjusted deficit, and France is actually one of the few large European countries that has observed that pace of adjustment. But it comes to an end in 2007 and part of the reason is, of course, that there are tax cuts not compensated by equivalent expenditure cuts.

So, whereas we are in favor of the tax cuts per se and actually there is some passages in the staff report in which we say, we explain how we think they have improved efficiency in a number of ways and incentives, but we would have liked to see them accompanied by offsetting expenditure cuts which is not the case.

QUESTIONER: I was just wondering what do you precisely mean by judicial uncertainty regarding some permanent contracts. Is it a reference to the last contracts that have been created, if you could just elaborate?

MR. LEIPOLD: No; and perhaps, Luke, you can elaborate further.

But, in essence, for a long time in France, there was considerable uncertainty, jurisprudential uncertainty, if you want, regarding labor relations. We are not thinking of the CNE even though in some ways it does have some implications for that too because that is being contested in the courts and one doesn't know the outcome. We are thinking rather of individual labor contracts where the outcome of judicial proceedings, other than being protracted, is always uncertain.

Luc, if you want to elaborate a little bit more.

MR. EVERAERT: I can briefly perhaps add that since you seem familiar with the background, this uncertainly has been in the press for example, as the Moulinex case where basically the judiciary decides on the economic merits and companies are not allowed to lay off staff to improve their profitability but only to maintain their profitability. The question with that is you are putting really the judiciary in the driving seat in terms of judging what are business plans, and I don't think that this is very useful.

The second part is that these things tend to be very drawn out. This is a process that takes a very long time, and enterprises are reluctant to hire people on these permanent contracts because they see this uncertainty on the other side.

QUESTIONER: In the report, you are calling for a more flexible labor market to be part of the debate in the 2007 elections. Can you just maybe expand on that in the sense that, obviously, it is quite a difficult concept to sell in a Presidential election in France?

MR. LEIPOLD: I wouldn't disagree that it is difficult, but precisely because of that, it is something that we think ought to be in the public debate. In fact, the authorities, to some extent, are trying to do that. They have created one of these councils of main stakeholders to try to look into the causes of unemployment and possible remedies to bring these into the public debate and more at the forefront of the analysis.

It is an area which you rightly say is more difficult than some others. In France, they were quite successful with a similar council to come to agreement on pension reform because they performed a diagnostic of what the problem was and the possible solutions were relatively more limited and straightforward, not that there are not differences there as well but certainly there is less room for such differences. On an issue such as labor market performance and employment performance, the differences can be larger.

The fact that it is difficult shouldn't make one shirk away from discussing it, and there has been progress. The terms of the debate, at least, have been clarified in France on the labor market through good work by academics and success, as I say, of pédagogie économique by the government. But, certainly, there is the need to take it further.

QUESTIONER: You were talking also about the possibility that some of the recent reduction in unemployment was linked to government-sponsored job creation. Could you maybe give a bit more detail about that?

I mean do you think that maybe some of the recent decline in unemployment has been a slightly artificial decline?

MR. LEIPOLD: I don't actually really have the numbers at hand with me, I am afraid probably due to the fact that I am in Rome at the moment. No, I wouldn't qualify it as an artificial decline. There certainly has been a decline in structural unemployment. Our own estimates have been coming down. There is a cyclical component as well, of course, which is not artificial in that sense. But, yes, there is also a part of subsidized jobs in the public sector.

Another factor that we didn't mention is that it seems that employment services are working more effectively. There have been improvements there. The unemployment insurance scheme is also better oriented towards a return to work and making sure that there is a genuine search for jobs on the part of recipients. So, all of these factors together, some structural, some cyclical, some perhaps slightly artificial, the way you put, but the weight, I think, is really on the first part.

MR. EVERAERT: I just wanted to say that there are indeed structural improvements. We can compute these numbers, but they are always subject to large uncertainty. Certainly, 0.2 to 0.3 percentage points of a decline in unemployment is due to structural improvements.

The issue that is really at stake is what could have happened, for example, if the minimum wage had not increased so strongly over the past five years? I think that has been really a key factor that has prevented much more structural improvement in the unemployment rate.

Ms. Fouda: Before we conclude, Alessandro, if I may, I would just like to remind our participants that the conference call and the supporting documents which were posted on the web site yesterday are embargoed until 9:00 a.m. Washington time, 14 GMT.

MR. EVERAERT: Thank you very much.

MR. LEIPOLD: No, I have nothing to add. I thank all participants. I am very happy that this transatlantic complicated call went well apart from the initial interruption.



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