Transcript of Teleconference Call on the International Monetary Fund’s 2010 Article IV Review of France with Anne-Marie Gulde-Wolf, IMF Mission Chief to France and Erik de Vrijer, IMF Deputy Mission Chief to FranceWashington, D.C.
Thursday, July 30, 2010
MS. BECKMAN: Good morning. This is Jennifer Beckman with the IMF External Relations Department, and I’m here today with Anne-Marie Gulde-Wolf, who is the Mission Chief for France, and Erik De Vrijer who is the Deputy Mission Chief for France. They’re here to talk about the Article IV for France, and Anne-Marie will start with a brief statement. Just as a reminder, the material is embargoed until 10:00 Eastern time, which is 14:00 GMT. Now I’ll turn over to Anne-Marie.
MS. GULDE-WOLF: Thank you, Jennifer. Let me just give you a brief summary of where France stands right now and where we see the main challenges. France has been among the first countries, to exit from the recession. Growth has been positive since the second quarter of 2009. This has been achieved with the help of adequate government policies, including an appropriate fiscal stimulus in 2009 and 2010. Nevertheless, the recovery is quite fragile and it’s now being challenged by still weak domestic and European demand. However, the French recovery will most likely be somewhat faster than the average for the Euro area as a whole. Growth is expected to be sluggish in 2010 and to pick up only slightly in 2011. Our current projections are for 1.4 percent of growth in 2010 and 1.6 percent in 2011 with the risks still tilted somewhat to the downside.
Now, a few factors that are challenging demand include unemployment and the rate increased significantly as a result of the recession, but it has started to come somewhat down. It is still about 9.5 percent so that is still quite negative for domestic demand. We also see now the gradual withdrawal of stimulus and the imminent fiscal consolidation in France, which while necessary, will weigh on demand. Similarly, the fiscal consolidation in the rest of Europe will have a negative impact.
Financial conditions have improved and credit growth has recently turned positive. But credit growth remains sluggish and some uncertainty about credit availability still persists. There is an uncertainty about the depreciation of the euro, but the depreciation that we have already seen will provide some relief to exporters.
Now, in our policy recommendations to strengthen France’s recovery, we focus on three particular areas. We think to safeguard fiscal sustainability without jeopardizing the recovery, the efforts on fiscal consolidation need to be on measures that have the least detrimental impact on economic activity. Those would include entitlement reforms in the pension and health care system. We also recommend laying out a credible multi-year consolidation plan underpinned by the announced pension reform and cemented by a fiscal rule. This plan would ensure that the fiscal debt of France remains manageable. Efforts at all levels of government will be needed, state social security administration and local government, efforts at all these levels are critical to achieve a successful consolidation.
The announced consolidation measures for 2011 are encouraging, but further action will be needed to achieve the medium-term fiscal objective of debt and deficit reduction.
The second area is the financial sector. Here we think policies should support the full recovery of the financial system and further strengthen the financial stability to allow financial sector to play its critical role in the recovery. The newly released EU-wide stress test results have confirmed the overall resilience of the French banks. It’s now crucial for France to remain engaged in the international regulatory reform process and to continue to participate in discussions on the appropriate design of regulatory reforms.
And finally on the structural side, we would need visible and accelerated structural reforms. The areas that we think are critical are to work further on flexible labor markets and enhanced competition. The EU Services Directive should be fully implemented.
MS. BECKMAN: We can take questions anytime now. Thank you.
QUESTIONER: Hi there. I was just wondering how you would assess the government’s chances of making its 3 percent deficit target by 2013?
MR. DE VRIJER: Thank you for this question. As you can see in our report on page 17, there is a table that shows what we project the deficit to be on the basis of the currently announced measures, but not yet including the pension reform because that still needs to be discussed and decided in September. And there you see that the overall deficit in 2013 is 3.9 percent of GDP, so the government would need additional measures of about 1 percent of GDP over these three years and with the pension reform included, there is a good chance that they will actually reach the 3 percent of GDP deficit target by 2013.
QUESTIONER: I was just wondering if I could ask you to follow up on the recommendations on the banks and the financial sector. I have the impression that essentially what you’re saying is that the situation now currently is fine and the French financial sector has weathered the crisis fairly well and so on, but that essentially the government needs to stand ready to step in should something else happen. Is that right?
MS. GULDE-WOLF: That’s a very good characterization of where we stand. At this stage the banks have weathered the crisis. They have raised additional capital. All but one bank have already exited from the government support measures, but the overall environment remains fragile. And if downside risks were to materialize, it’s important that the safeguards that have helped in the past would be reactivated, if needed.
QUESTIONER: How do you think France sits relative to its peers overall? You called the outlook very uncertain, and I’m just sort of wondering do you think it’s more uncertain for France than for other developed economies?
MS. GULDE-WOLF: This is somewhat difficult to answer because the nature of uncertainties in different countries is different. France is comparable in many different aspects to different European countries. Taking growth forecast, for example, growth projections are quite similar to what we see in Germany. But, on other specific issues there are risks, for example in the periphery of Europe that are more pronounced than what we see in France. At the same time, France may be facing more structural risks, structural challenges, than some of the other European countries, including in labor markets where peer countries have already been faster in reforms.
QUESTIONER: When you think of structural challenges, you’re essentially thinking of competitiveness and essentially structural deficit, no?
MS. GULDE-WOLF: Yes. Labor markets which is an element in the competitiveness picture.
QUESTIONER: Fair enough. Thank you.
QUESTIONER: One thing that struck me when I was looking at your synopsis of the report was that your growth estimates are quite a bit lower than the government’s growth estimates for 2011, 12, and 13, which I think is 2.5 percent a year. Did you have any dialog with the government on that, and do you think that, the government is aware that their forecasts are considered optimistic by many economists?
MR. DE VRIJER: Yes, we did discuss these projections and, of course, the government is aware of it -- also the views that were given by the European Commission and by the consensus forecast. And what we understand is that the government will still revise its growth forecast for next year in the context of the presentation of the budget -- and I think that will be happening in October -- and that will give them the opportunity to wait for the release of the actual GDP outcome in the second quarter. That will happen -- I think it will happen, the first half of August. So, on that basis, they will revise their growth forecast. We hope to come closer together.
MS. BECKMAN: Was there anything that you guys didn’t get to talk about that you thought was an important point? I don’t know, maybe about the fiscal or --
MR. DE VRIJER: Well, maybe one thing on the fiscal that I could add is that I mentioned that in our baseline projection, the pension reform is not yet included. This pension reform is a very important one and not only for the next few years, but also to put the pension system on a sustainable basis for the longer period. And so that is one of the ways in which to make the fiscal consolidation not having a detrimental impact on for growth by tackling really the longer term issues and put the public finances on a sustainable basis, looking further into the future. So in that sense, the pension reform is a key element of the government strategy to reduce the debt and the deficits.
MS. BECKMAN: Okay, well if there are no further questions, then we will conclude the conference call on France and France’s Article IV report. Just as a reminder, the material is embargoed until 10:00 Eastern, which is 1400 GMT. And we had today Anne-Marie Gulde-Wolf, the Mission Chief for France, and Erik De Vrijer, the Deputy Mission Chief for France, participating. Thank you.