Transcript of a Conference Call on the 2009 Article IV Consultation with France

With Anne-Marie Gulde, Senior Advisor in the European Department, and Erik De Vrijer, Assistant Director in the European Department

Washington, D.C., Friday, July 31, 2009


MS. GAVIRIA: Hello, everyone. I’m Ángela Gaviria with the External Relations Department at the IMF. Welcome to this conference call on the 2009 Article IV Consultation with France. The lead speaker today is Anne-Marie Gulde-Wolf. She’s the Mission Chief for France and also a Senior Advisor in the European Department. Also here with me is Erik De Vrijer. He’s Assistant Director in the European Department and a member of the mission for France.

Anne-Marie will have some brief remarks to make, and then both will be happy to take your questions. Anne-Marie?

MS. GULDE-WOLF: Thank you, Ángela.

As you know, we concluded the Article IV Consultation just two days ago, and I’d like to give you the main conclusions of the mission.

The global financial crisis and the contraction in world trade have put the French economy into a severe recession and its financial sector under strain. The near-term outlook is challenging. Real GDP for this year is projected to drop by 3 percent, followed by only a gradual recovery next year. The unemployment rate is likely to surpass 10 percent in 2010.

The French authorities responded to the deepening crisis of 2008 by adopting fiscal and financial sector measures. Structural features combined with early policy action have helped to soften the downturn. So, in fact, while we are in a severe recession, France is still doing much better than the Euro Area as a whole, which is expected to contract by more than 4 percent this year.

French banks also have been somewhat less affected than the rest of Europe, but the global financial crisis is not over, and the negative feedback loop between the financial sector and the real economy still has to unfold in France, as elsewhere. So our report recommends further actions to fully uncover and, if needed, address all underlying vulnerabilities in the banking sector, which concretely means, if necessary, to add to capital.

Going forward, we see significant further challenges for the French economy. In the fiscal area, France needs to look toward achieving fiscal sustainability even in the context of a possible small additional stimulus, if needed, next year. To achieve this, the short and medium-term measures clearly have to be weighed against each other. France also needs to look at continuing its labor market and product market reforms to boost competitiveness and economic growth.

Finally, we have other longstanding structural rigidities that need to be addressed, certainly in the areas of liberalizing professions and retail trade. These steps should be addressed even while the crisis management is still going on. So crisis management should not put the long-term reform agenda on hold.

I think with these opening remarks, we would be ready for your questions.

QUESTIONER: I just have one question, just a sort of technical question about definitions on your outlook. The outlook gives for the public finances a central government balance and a general government balance. Is the general government balance equivalent to the Maastricht criteria or is it slightly different? It looks like it should be the same.

MR. DE VRIJER: That’s correct. The general balance is the central government plus local government plus security administration. That general government is in line with the Maastricht criteria.

QUESTIONER: Could you elaborate a bit more on the concern that some of the Executive Directors had about the fiscal outlook? Do you think this is raised in part because there is concern that the French government doesn’t want to keep a fiscally sustainable position?

MR. DE VRIJER: No. I don’t think it’s a concern that the French government wouldn’t be committed to a sustainable fiscal position. It is more related to the fact that it is difficult to achieve if under current policies, as we indicate in the staff report, public debt would continue to increase. So you need to do a significant consolidation effort, including on local government and the social security administration, in order to sort of reverse that trend. I think a good part of the discussion was on that.

QUESTIONER: I would like to know if you could be a bit more precise regarding the kind of downside risks that are mentioned in the report and under what circumstances should the French government boost and increase the stimulus to the economy, since I see in the report that the Executive Directors were split on this issue.

MR. DE VRIJER: On the risks, you know one, an important one is that the French economy is very much integrated with the rest of Europe. So it is sensitive to what happens in Europe. Although there are some hopeful signs, if the recession in Europe is stronger, more severe than we see now, it would also have an effect on France, and that is a downside risk.

Second, as we indicate in the report, you know there are still risky assets in the banking system. And, although it seems that the banking system is resilient, that could also create problems and put pressure on the banks and then put pressure on credit provision to the economy. So that’s a risk.

There are some other risks, of course. As unemployment increases, it could happen that consumption, private consumption, which is sort of the bedrock under the economy, weakens. We don’t think that there is a big probability for a sharp decline in real estate prices, but the construction sector and the real estate sector also are important. So those are the risks.

Now, on how to respond to these risks, the authorities face a delicate balance between the need to take measures to do fiscal consolidation and, on the other hand, if the recession is more severe than we see it now, maybe take additional stimulus measures to prop up the economy. But we think that would only be outside of the baseline scenario.

If worse risks actually materialize, then there is the need to do something additional. That can only be modest. So, in that sense, everybody agrees that there is not much fiscal space in front. So whatever you can do has to be modest, and it has to be temporary. So once the dip is over, you have to reverse these measures.

MS. GAVIRIA: We conclude the conference call here. Thank you all for participating.



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