## cr18243 ## Source details **Canonical URL:** [cr18243](https://www.imf.org/-/media/files/publications/cr/2018/cr18243.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18243.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18243.pdf.json) --- ### Estimating France’s Output Gap and Near-Term Outlook - 2017 growth accelerated to 2.3 percent, 1.2 percentage points higher than in 2016. - Drivers of 2017 growth: - Bank credit growth: 5.6 percent y-o-y. - Exports growth: 4.5 percent y-o-y. - Imports growth: 4.0 percent y-o-y. - Headline unemployment: just over 9 percent in 2018:Q1. - Private sector employment y-o-y growth: 1.0 percent in 2018:Q1. - CPI Inflation: 2.1 percent y-o-y at end-June 2018; core inflation 1.0 percent s.a. in May 2018. - Fiscal outcome: - Fiscal deficit: fell to 2.6 percent of GDP in 2017 (below EDP 3 percent limit). - In May 2018, the European Commission proposed France’s exit from the EDP. - Near-term projections: - Real GDP: 2018 1.8; 2019 1.7 (selected series: 2017 2.3; 2018 1.8; 2019 1.7; 2020 1.7; 2021 1.6; 2022 1.6; 2023 1.6). - CPI (year average): 2018 1.8; 2019 1.7 (series: 2017 1.2; 2018 1.8; 2019 1.7; 2020 1.7; 2021 1.8; 2022 1.9; 2023 1.9). - Unemployment rate: 2018 8.9; 2019 8.5 (series: 2017 9.4; 2018 8.9; 2019 8.5; 2020 8.1; 2021 7.8; 2022 7.6; 2023 7.4). - Output gap: should be largely closed in 2018; Output gap series: 2017 -0.1; 2018 0.1; 2019 0.3; 2020 0.4; 2021 0.4; 2022 0.4; 2023 0.4. - Medium-term potential output (conditional on reforms): - Potential output expected to converge towards around 1½ percent. - Contributions: capital ~¾ percent, labor ~¼ percent, TFP ~½ percent historically. - Reforms expected to boost potential growth by around ½ percentage points in the medium run. - Current account expected to return to balance in the medium run. ### Structural Reforms: Completed, Underway, and Expected Effects - Completed reforms (selected): - Labor market: expanded firm-level bargaining scope (excluding base wages); simplified social dialogue (September 2017). - Labor market: capped compensation for unfair dismissals; reduced time for labor court appeals; simplified collective dismissal rules (September 2017). - Product and service markets: reduced administrative burden (July 2017; January 2018); reformed railway company to open to competition (June 2018). - Structural reforms underway / planned: - Apprenticeship and professional training: centralize financing and monitoring; strengthen unemployment system (mid-2018); dedicated funds: €15 billion during 2018–22 for training of 1 million youth and 1 million long-term unemployed. - Privatizations, innovation policy, flexible compensation linked to firm performance, direct savings toward equity financing (end-2018). - Education reforms of primary, secondary and tertiary education (2018–20). - Second-stage labor-market reforms: “portable training accounts”; stronger incentives for apprentices; new national regulatory agency to verify training quality. - Expected reform effects: - Support competitiveness and employment, particularly in smaller firms and lower-skilled employees. - Reduce legal uncertainty, support hiring under permanent contracts, reduce labor-market duality. - Narrow current account gap and boost exports; staff expects current account to approach balance in medium term (staff CA gap in 2017: -1.6 percent of GDP). ### Structural Weaknesses and Distributional/Labor-Market Findings - Labor-market rigidities and structural unemployment drivers: - Education/training systems mismatched to business needs. - Elevated minimum wages relative to median wages. - Relatively generous unemployment benefits and an elevated labor tax wedge. - Affected groups and quantified disparities: - Youth, low-skilled, and non-EU immigrants exhibit higher unemployment and poverty incidence. - Low-education workers (below upper secondary) are between 30–50 percent less likely to find a job versus more educated groups. - Non-EU migrants: unemployment probability almost three times that of prime-age native workers; relative poverty risk about three times that of prime-age workers. - Relative poverty and inequality: Gini and People at Risk of Poverty indicators charted (2008–2016 series referenced). - Labor-market indicators and capacity: - Industry capital utilization, share of firms constrained by staff size, underemployment rate, and difficulties to recruit charted for 2000s–2018 (sources: European Commission, Eurostat, INSEE, Haver Analytics). ### Fiscal Policy: Current Outlook, Measures, and Required Adjustment - Public finances and pressures: - Public spending: 56.4 percent of GDP at end-2017 (highest in Europe). - Public debt: 96.8 percent of GDP at end-2017. - Gross private sector debt: around 180 percent of GDP; unconsolidated corporate debt 130 percent of GDP; consolidated corporate debt close to 80 percent of GDP. - 2018 budget measures (selected): - Labor tax wedge: replaced part of employee social contributions with a hike in general income tax; transformed CICE into a permanent employer social contribution deduction. - Corporate taxation: Lowered CIT rate gradually from 33 to 25 percent by 2022; redesigned capital taxation to incentivize investment. - Baseline expenditure and tax measures (cumulative, percent of GDP): - Spending reduction measures: 2018 0.6; 2019 1.2; 2020 1.5; 2021 1.8; 2022 2.0; 2023 2.3. - Main tax measures (cumulative): 2018 -0.3; 2019 -0.6; 2020 -1.1; 2021 -1.1; 2022 -1.1; 2023 -1.1. - Elimination of accommodation tax: 2018 -0.1; 2019 -0.3; 2020 -0.7; 2021 -0.7; 2022 -0.7; 2023 -0.7. - PIT exemption on overtime pay: 2018 0.0; 2019 -0.1; 2020 -0.1; 2021 -0.1; 2022 -0.1; 2023 -0.1. - Reduction in CIT rate: 2018 -0.1; 2019 -0.2; 2020 -0.3; 2021 -0.4; 2022 -0.4; 2023 -0.4. - Green taxes: 2018 0.2; 2019 0.2; 2020 0.3; 2021 0.4; 2022 0.5; 2023 0.5. - Size of required adjustment: - To achieve government’s debt and structural deficit objectives, spending-to-GDP must decline by some 4.2 percent between 2017 and 2023 (4½ percent in primary terms, excluding conversion of CICE). - Staff recommendation: frontloaded spending reduction of around 1 percent of GDP in spending measures per year during 2019–20, then gradually declining. - Implies average real spending reduction (excluding tax credits) averaging 0.3 percentage points per year during 2019–22 (compared to growth of 0.5 percentage points during 2012–16). - Corresponds to a structural adjustment of around 0.4 percent of GDP per year in 2019–20 (net of CICE reform), and around 0.3 percent thereafter. - Authorities’ targets and actions: - Aim to reduce debt below 90 percent of GDP and structural deficit to 0.4 percent by 2023 through spending reforms; specifics not yet provided. - Launched discussions on civil service reform, pension simplification/unification, and an expert-led spending review. ### Spending Reform Priorities and Sector-Specific Recommendations - Objectives: - Focus reforms on highest efficiency savings; modernize and improve quality of spending; take long-term view given population aging. - Efficiency via better targeting, reducing fragmentation across government levels, rationalizing programs and procurement. - Major areas and recommendations: - Social benefits: better means-testing (e.g., housing, family benefits); address fragmentation across levels of government. - Health system: centralize health procurement; enhance use of generic medicines; rationalize hospital and primary care; strengthen cost-effectiveness evaluation. - Tax expenditures: rationalize sizeable exemptions/rebates for investments and savings plans to reduce distortions. - Pension system: consider progressively raising effective retirement age or providing actuarial incentives; unify regimes to simplify and improve equity. - Civil service: complement planned mobility and merit-pay reforms with targeted reductions via attrition. - Local governments: introduce a ceiling on operating expenditure growth; merge small municipalities and eliminate overlaps. - Recommended policies scenario (assumes full implementation yielding total savings of about 4 percent of GDP by 2022): - Selected indicators (Recommended policies): - Revenues: 2018 53.9; 2019 53.7; 2020 52.6; 2021 52.4; 2022 52.2; 2023 52.0. - Spending: 2018 56.5; 2019 56.0; 2020 54.9; 2021 53.3; 2022 52.5; 2023 51.7. - Fiscal balance: 2018 -2.6; 2019 -2.3; 2020 -2.4; 2021 -0.9; 2022 -0.3; 2023 0.3. - Structural fiscal balance (excl. CICE conversion): 2018 -2.0; 2019 -1.9; 2020 -1.6; 2021 -1.4; 2022 -1.0; 2023 -0.6. - Public debt: 2018 97.0; 2019 96.4; 2020 96.2; 2021 94.7; 2022 92.3; 2023 89.2. ### Debt Sustainability Analysis (DSA), Scenarios, and Stress Tests - Baseline DSA projections: - Debt-to-GDP: 2017 96.8; gradually declining to 92.2 by 2023. - Gross financing needs: expected to peak at 8.2 percent of GDP in 2020 due to maturity structure. - Interest payments: 1.9 percent of GDP in 2017; projected to increase to 2.4 percent of GDP by 2023. - Benchmark 10-year yield: 0.79 percent end-May 2018. - Effective interest rate projected to increase after 2020 to around 2.6 percent in 2023. - Alternative scenarios and stress tests: - Constant primary balance scenario: public debt around 95 percent of GDP; gross financing needs 7–9 percent of GDP. - Historical scenario (2006–2016 averages): gross public debt approaching 108 percent of GDP by 2023; gross financing reaching 11.5 percent of GDP. - Growth shock (one standard deviation adverse): debt-to-GDP increases to 101.2 percent in 2020 then declines. - Interest rate shock (287 basis points increase across projection): deterioration back-loaded; gross financing needs increase. - Combined macro-fiscal shock: debt would reach 101.4 percent of GDP in 2020 and decline to 95.7 percent in 2023; gross financing needs would peak at 11.5 percent of GDP in 2020. - Real exchange rate shock (13 percent devaluation in 2019): debt-to-GDP remains very close to baseline. - Heat map and risk assessment: - Debt level risk: high (debt above 85 percent threshold in baseline and all stress tests). - Gross financing needs: remain below 20 percent of GDP benchmark in baseline and stress tests. - Public debt held by non-residents: 55.1 percent at end-March 2018 (peak early 2010: 70.6 percent; end-2016: 58.5 percent). - Key DSA numerical series (selected, in percent of GDP unless indicated): - Nominal gross public debt: 2016 84.9; 2017 96.6; 2018 96.8; 2019 96.2; 2020 95.8; 2021 94.6; 2022 93.6; 2023 92.2. - Public gross financing needs: 2016 8.9; 2017 8.8; 2018 8.0; 2019 6.8; 2020 8.2; 2021 8.8; 2022 7.4; 2023 6.8 (last column 7.2). - Real GDP growth (percent): 2018 2.3; 2019 1.8; 2020 1.7; 2021 1.7; 2022 1.6; 2023 1.6. - Inflation (GDP deflator, percent): 2018 0.5; 2019 1.4; 2020 1.6; 2021 1.7; 2022 1.8; 2023 1.8 (final 1.9). - Effective interest rate (percent): 2018 2.0; 2019 2.1; 2020 2.1; 2021 2.2; 2022 2.3; 2023 2.5 (final 2.6). - Stress-test parameter caps and metadata: - 1.3 is the max positive growth rate shock (percent). - 2 is the max positive primary balance shock (percent of GDP). - No restriction on interest rate shock or exchange rate shock in metadata. - Restrictions on upside shocks: Public Debt Held by Non-Residents 30, 45, 55 percent. ### Risks and Policy Responses - Risks (tilted to the downside): - Domestic: weaker-than-expected reform implementation; derailment of fiscal consolidation. - External: escalation of trade tensions; Brexit-related uncertainty; financial market volatility in Europe (including developments in Italy). - Financial: faster-than-expected interest rate normalization affecting public and private balance sheets. - Risk matrix highlights and responses: - Retreat from cross-border integration: Likelihood Medium; Expected impact High; Policy response: support multilateral rules, smooth UK–EU transition. - Tighter global financial conditions: Likelihood High; Expected impact High; Policy response: press on reforms, strengthen balance sheets, fiscal consolidation. - Weakening reform implementation or weak growth in other advanced economies: Likelihood High; Expected impact High; Policy response: accelerate structural reforms, strengthen private-sector balance sheets, identify spending reforms early. ### Authorities’ Views and Program - Authorities’ projections and views: - Stability Program projected growth around 2 percent in 2018–19 and around 1.7 percent medium run, assuming net structural fiscal adjustment of around 1½ percent of GDP in the medium term. - Central Bank expected growth around 1.8 percent near term. - Stability Program projected inflation to reach 1.4 percent in 2018 and converge to 1.8 percent medium term. - Authorities see risks as balanced, noting upside from stronger euro-area growth or euro depreciation and downside from trade tensions, Brexit, or political risks in the euro-zone. - Authorities’ reform commitments: - Comprehensive structural reform agenda over a five-year presidential mandate, including labour-market decentralization, tax reforms (CIT cut to 25 percent by 2022; flat tax of 30 percent on capital income from January 1, 2018; wealth tax limited to real estate), education reforms, and the PACTE draft law to spur investment and simplify SME rules. - Public finances and targets cited by authorities: - Public deficit fell to 2.6 percent of GDP; France exited the EDP. - Medium-term targets by 2022: public spending reduced by 3 points of GDP over five years; tax revenues reduced by 1 point of GDP over five years; debt-to-GDP decreased by 5 points by 2022. - Administrative and modernization measures: Action Publique 2022; contractual pacts with local authorities; ONDAM objective set at 2.3 percent for 2018. Italic: Source: IMF staff report (France, CR18243). ### 1. Estimating France’s Output Gap _______________________________________________________________ 23 ### 1. Estimating France’s Output Gap ### Context: A robust recovery - Growth accelerated in 2017, reaching 2.3 percent, 1.2 percentage points higher than in 2016. - Drivers of 2017 growth: - Private investment supported by improved business climate, strong bank credit growth (5.6 percent y-o-y), and corporate bond issuance. - Exports: y-o-y growth of 4.5 percent. - Imports: y-o-y growth of 4 percent. - Labor market: headline unemployment declined to just over 9 percent in 2018:Q1; private sector employment y-o-y growth of 1 percent in 2018:Q1. - CPI Inflation reached 2.1 percent y-o-y at end-June 2018; core inflation 1 percent s.a. in May 2018. - Fiscal outcome: - Fiscal deficit fell to 2.6 percent of GDP in 2017 (below the EDP limit of 3 percent for the first time since 2007). - In May 2018, the European Commission proposed France’s exit from the EDP. ### Supported by past and ongoing domestic reforms - Recent structural reforms (completed): - Labor market: expanded firm-level bargaining scope (excluding base wages) and simplified social dialogue (September 2017). - Labor market: capped compensation for unfair dismissals, reduced time for labor court appeals, simplified collective dismissal rules (September 2017). - Product and service markets: reduced administrative burden (July 2017; January 2018); reformed railway company to open to competition (June 2018). - Structural reforms underway: - Enhance apprenticeship and professional training; centralize financing and monitoring; strengthen unemployment system (mid-2018). - Continue reducing administrative burden; privatize state-owned enterprises; enhance innovation policy; incentivize flexible compensation linked to firm performance; direct savings toward equity financing (end-2018). - Education reforms of primary, secondary and tertiary education (2018–20). - Fiscal reforms (2018 budget): - Labor tax wedge: replaced part of employee social contributions with a hike in a general income tax; transformed CICE into a permanent employer social contribution deduction. - Corporate taxation: Lowered CIT rate gradually from 33 to 25 percent by 2022; redesigned capital taxation to incentivize investment. - Additional planned fiscal and administrative measures: - Reduce public employment through voluntary departures and fixed term contracts; introduce merit-based pay system (2019–22). - Negotiate limits on local government spending through contractual approaches with sanctions for non-compliance (mid-2018). - Pension and health sector reforms: unify pension regimes, increase efficiency of health spending (2019–22). ### Structural weaknesses and emerging challenges - Labor market rigidities and high structural unemployment driven by: - Education and training systems unable to match skills with business needs. - Elevated minimum wages relative to median wages. - Relatively generous unemployment benefits and a still elevated labor tax wedge. - Affected groups: youth, the low-skilled, and non-EU immigrants exhibit higher unemployment rates and higher incidence of poverty. - Competitiveness and external sector: - France lost about a third of its world market share since the early 2000s. - Current account deficit at end-2017 was 0.6 percent of GDP. - The deficit remains moderately weaker than the level implied by medium-term fundamentals (Annex II). - Large fiscal imbalances and public finances: - Public spending at 56.4 percent of GDP at end-2017 (highest in Europe). - Public debt reached 97 percent of GDP at end-2017. - Private sector debt: - Gross private sector debt around 180 percent of GDP. - Unconsolidated corporate debt reached 130 percent of GDP; consolidated corporate debt close to 80 percent of GDP. - Corporate debt concentrated in network sectors (e.g., transportation, utilities) and among relatively few large firms. - Faster-than-expected interest rate normalization could increase debt-service burdens. ### Outlook: positive prospects amid growing risks - Near-term projections: - Growth projected to fall to 1.8 percent in 2018, supported by investment and exports. - After Q1 growth of 0.2 percent q-o-q, activity expected to rebound as tax cuts take effect. - Growth projected at 1.7 percent in 2019. - Inflation projected to increase to 1.8 percent in 2018. - The output gap should be largely closed in 2018. - Medium-term projections (conditional on reforms): - Potential output expected to converge towards around 1½ percent. - Contributions to potential output: capital ~¾ percent, labor ~¼ percent, TFP expected to return to historical average of about ½ percent. - Reforms expected to boost potential growth by around ½ percentage points in the medium run. - Current account expected to return to balance in the medium run. - Selected economic indicators, France: 2017–23 (as reported) - Real GDP (change in percent): 2017 2.3; 2018 1.8; 2019 1.7; 2020 1.7; 2021 1.6; 2022 1.6; 2023 1.6. - CPI (year average): 2017 1.2; 2018 1.8; 2019 1.7; 2020 1.7; 2021 1.8; 2022 1.9; 2023 1.9. - Unemployment rate (percent): 2017 9.4; 2018 8.9; 2019 8.5; 2020 8.1; 2021 7.8; 2022 7.6; 2023 7.4. - General government balance (percent of GDP): 2017 -2.6; 2018 -2.4; 2019 -2.6; 2020 -2.0; 2021 -2.2; 2022 -2.3; 2023 -2.6. - Structural balance (percent of pot. GDP): 2017 -2.4; 2018 -2.2; 2019 -2.7; 2020 -2.2; 2021 -2.4; 2022 -2.6; 2023 -2.8. - General government gross debt (percent of GDP): 2017 96.8; 2018 96.2; 2019 95.8; 2020 94.6; 2021 93.6; 2022 92.8; 2023 92.2. - Current account (percent of GDP): 2017 -0.6; 2018 -0.8; 2019 -0.6; 2020 -0.4; 2021 -0.2; 2022 -0.1; 2023 0.1. - Potential output (change in percent): 2017 1.4; 2018 1.5; 2019 1.5; 2020 1.6; 2021 1.6; 2022 1.6; 2023 1.6. - Output gap (percent of pot. GDP): 2017 -0.1; 2018 0.1; 2019 0.3; 2020 0.4; 2021 0.4; 2022 0.4; 2023 0.4. - Risks (tilted to the downside; Annex III): - Domestic: weaker-than-expected reform implementation or lower reform gains; derailment of fiscal consolidation. - External: escalation of trade tensions; Brexit-related geopolitical uncertainty; financial market volatility in Europe (including developments in Italy). - Financial: faster-than-expected interest rate normalization affecting public and private balance sheets. ### Authorities’ views - Authorities’ Stability Program projected growth around 2 percent in 2018–19 and around 1.7 percent in the medium run, assuming a net structural fiscal adjustment of around 1½ percent of GDP in the medium term. - The Central Bank expected growth around 1.8 percent in the near term. - The Stability Program projected inflation to reach 1.4 percent in 2018 and converge to 1.8 percent in the medium term. - Authorities saw risks as balanced, citing upside from stronger euro-area growth or euro depreciation and downside from trade tensions, Brexit uncertainty, or political risks in the euro-zone. ### The policy agenda: growth, jobs, resilience - Overarching priority: ensure the recovery is job-rich and long lasting, while building buffers against shocks. - Key policy priorities recommended: - Lower structural unemployment and improve opportunities for disadvantaged groups by finalizing and implementing apprenticeship and professional-training reforms; ensure wages evolve in line with productivity; adjust unemployment system incentives; target training to those most in need, especially youth. - Improve business environment and strengthen competition in service sectors by reducing administrative burden, supporting innovation and start-ups, and further liberalizing regulated professions. - Put public debt on a sustained downward path through spending reforms at all levels of government, including social benefits, public administration, pensions, healthcare, and local governments; specify spending reforms starting with the 2019 budget. - Support financial sector resilience by implementing ongoing international regulatory changes and actively using macroprudential policies pre-emptively. *International Monetary Fund — France country report excerpt* ### 12. The ongoing recovery provides a favorable window to press ahead with these ### 12. The ongoing recovery provides a favorable window to press ahead with these ### A. Structural Reforms: Supporting Employment and Competitiveness - Context and objectives: - Authorities enacted a first stage of labor market and tax reforms to support investment, employment, and growth. - Reforms aim to address collective-bargaining rigidities, legal uncertainties regarding dismissals, and a relatively high tax wedge that dis-incentivizes employment and hampers competitiveness. - Collective bargaining: - Labor-code reform limits automatic extension of branch-level agreements on remuneration, working time and mobility; expands areas negotiated at firm level (excluding basic wages). - Merges representative bodies and reduces number and scope of company consultations. - Expected effects: support competitiveness and employment, particularly in smaller firms; benefit lower-skilled employees. - Employment protection: - Reform introduces mandatory caps for compensation for unfair dismissals and limits time for labor-court appeals; severance pay was increased. - Expected effects: reduce legal uncertainty, support hiring under permanent contracts, reduce labor-market duality. - Tax reforms and cost competitiveness: - 2018 budget measures: replaced the employee social contribution for health and unemployment insurance with an increase in a general tax; converted the CICE tax credit into a permanent cut in employers’ social contributions for low wage earners. - Reduction in the corporate income tax from 33 to 25 percent until 2022. - Reforms simplifying capital taxation. - Estimates: measures reduce France’s standard measure of the tax wedge by up to 8 percentage points (for workers at the lower side of the wage distribution); from an economic standpoint, reduction in labor costs is smaller (around 1.5 percent) due to CICE conversion being globally neutral for firms’ effective labor costs. - Second-stage labor-market reforms (expected this summer): - Focus on skills mismatches affecting young and disadvantaged groups; reforms of apprenticeship and professional-training systems to put companies at center of training provision. - Measures include “portable training accounts,” stronger incentives for apprentices (e.g. higher pay, tax-free overtime work, career coaching), new national regulatory agency to verify training quality, simplified and centralized management of training funds. - Dedicated funds: €15 billion to be used during 2018–22 for training of 1 million youth and 1 million long-term unemployed. - Education reforms: reduce class size in primary schools in disadvantaged areas; overhaul access to higher education by reforming the baccalaureate system and better linking university entry with qualifications. - Planned changes to unemployment insurance aimed at strengthening sanctioning and monitoring. - Product- and service-market reforms: - Restructuring public railway company to improve financial viability, support competition, and lower costs for consumers. - New reform to support the business environment (expected by end-2018) aiming to: - facilitate firm creation and growth via simplified administrative burdens and one-stop shop for firm registration; - simplify debt-restructuring procedures for small firms; - facilitate compensation schemes linked to firm performance; - further privatize state-owned firms (e.g. Paris Airport, Engie, state lotteries) to enhance efficiency and finance innovative technologies; - raise incentives to save for retirement and increase portability of pension products to reduce obstacles to job mobility. - Monitoring and possible further measures: - Reforms expected to boost competitiveness and exports and help bring the current account to around balance in the medium term, narrowing gap relative to estimated norm (1 percent of GDP surplus). - Additional measures to consider if reforms underperform: - Better integrate apprenticeship and education reforms with vocational high-schools and pre-apprenticeship programs. - Expand firm-level flexibility in setting base wages (currently excluded from reform). - Re-evaluate and restrict the scope of the minimum-wage mechanism (unique linkage in France to both inflation and average wage of less skilled workers). - Re-examine level and accumulation rate of unemployment benefits (options include lengthening qualifying work period, reducing maximum benefit level, avoiding possibility to cumulate benefits over discontinued spells). - Further reduce restrictions and barriers to competition in regulated professions (example: pharmacy monopoly on basic drugs). - Authorities’ stance: - Reiterated commitment to planned structural reforms as essential to support employment, growth, and competitiveness. - Emphasized importance of evaluating and monitoring reforms; open to further measures if current reforms do not deliver expected benefits. ### B. Fiscal Policy: Credibly Reducing Spending and Public Debt - Current outlook and challenges: - Fiscal deficit projected to remain below 3 percent of GDP, while public debt will exceed 90 percent in the medium run. - Tax reduction measures costing about 1 percent of GDP in net terms by 2020 have been enacted or announced. - Further spending reductions projected to broadly offset expected revenue decline through: (i) measures legislated in the 2018 budget law (0.6 percent of GDP); (ii) further announced measures expected in the 2019 budget (also 0.6 percent of GDP); and (iii) legislated contractual approach with local governments limiting nominal spending growth to 1.2 percent per year through 2022 (further savings of some 0.8 percent of GDP by 2022). - Public debt expected to decline only gradually, reaching 92 percent by 2023. - France has limited fiscal space under EU rules; deficit could approach 3 percent limit if downside risks materialize. - Authorities’ targets and actions: - Aim to reduce debt below 90 percent of GDP and the structural deficit to 0.4 percent by 2023 through spending reforms; specifics not yet provided. - Launched: (i) discussions on civil service reform (increased reliance on fixed-term contracts, voluntary departures, enhanced mobility, merit-based pay); (ii) consultations on pension reform simplifying and unifying special regimes; (iii) spending review by expert-led Commission to identify efficiency gains. - Fiscal risks remain significant due to time needed to specify and legislate reforms and enforce contractual approach with local governments. - Baseline expenditure and tax measures (cumulative, in percent of GDP): - Spending reduction measures: 2018: 0.6; 2019: 1.2; 2020: 1.5; 2021: 1.8; 2022: 2.0; 2023: 2.3. - Transfers to enterprises: 2018: 0.0; 2019: 0.1; 2020: 0.1; 2021: 0.2; 2022: 0.2; 2023: 0.2. - Contrats aides: 2018: 0.2; 2019: 0.4; 2020: 0.4; 2021: 0.4; 2022: 0.4; 2023: 0.4. - Housing benefits: 2018: 0.0; 2019: 0.1; 2020: 0.1; 2021: 0.1; 2022: 0.1; 2023: 0.1. - Local government current spending: 2018: 0.2; 2019: 0.3; 2020: 0.5; 2021: 0.7; 2022: 0.9; 2023: 1.1. - Health (ONDAM at 2.3 percent 2018-2019): 2018: 0.1; 2019: 0.2; 2020: 0.2; 2021: 0.2; 2022: 0.2; 2023: 0.2. - Wage scale frozen nominally 2018-2019: 2018: 0.1; 2019: 0.3; 2020: 0.3; 2021: 0.3; 2022: 0.3; 2023: 0.3. - Main tax measures (cumulative, in percent of GDP): 2018: -0.3; 2019: -0.6; 2020: -1.1; 2021: -1.1; 2022: -1.1; 2023: -1.1. - Elimination of accommodation tax: 2018: -0.1; 2019: -0.3; 2020: -0.7; 2021: -0.7; 2022: -0.7; 2023: -0.7. - PIT exemption on overtime pay: 2018: 0.0; 2019: -0.1; 2020: -0.1; 2021: -0.1; 2022: -0.1; 2023: -0.1. - Reduction in CIT rate: 2018: -0.1; 2019: -0.2; 2020: -0.3; 2021: -0.4; 2022: -0.4; 2023: -0.4. - Tax on dividends: 2018: -0.1; 2019: -0.1; 2020: -0.1; 2021: -0.1; 2022: -0.1; 2023: -0.1. - Narrowing of wealth tax base: 2018: -0.1; 2019: -0.1; 2020: -0.1; 2021: -0.1; 2022: -0.2; 2023: -0.2. - Flat tax on financial savings: 2018: -0.1; 2019: -0.1; 2020: -0.1; 2021: -0.1; 2022: -0.1; 2023: -0.1. - Green taxes: 2018: 0.2; 2019: 0.2; 2020: 0.3; 2021: 0.4; 2022: 0.5; 2023: 0.5. - Taxes on cigarettes: 2018: 0.0; 2019: 0.1; 2020: 0.1; 2021: 0.1; 2022: 0.1; 2023: 0.1. - Size of the required adjustment: - To achieve government’s debt and structural deficit objectives, spending as a ratio to GDP will need to decline by some 4.2 percent between 2017 and 2023 (4½ percent in primary terms, excluding the conversion of the CICE into a tax cut). - Staff recommends frontloaded spending reduction: around 1 percent of GDP in spending measures per year during 2019–20, with the effort gradually declining thereafter. - Implies average real spending reduction (excluding tax credits) averaging 0.3 percentage points per year during 2019–22, compared to growth of 0.5 percentage points during 2012–16. - Corresponds to a structural adjustment of around 0.4 percent of GDP per year in 2019–20 (net of the effect of the CICE reform), and of around 0.3 percent thereafter. - Authorities should clarify plans for spending reforms early, starting with the 2019 budget, resist pressures to reduce taxes further (especially housing taxes on more affluent households), and be ready to take compensatory measures in case of overruns. *International Monetary Fund* ### 22. Spending reforms should focus on areas ### 22. Spending reforms should focus on areas ### Spending reform objectives and rationale - Focus reforms on areas that can lead to the highest efficiency savings, while modernizing and improving the quality of spending. - Take a long-term perspective given population aging challenges that will put pressure on pension and health spending as the workforce financing these items will shrink. - Efficiency gains can be obtained by better targeting, reducing fragmentation across levels of government, and rationalizing programs and procurement. ### Major areas for efficiency savings (sector-specific recommendations) - Social benefits - France has the highest level of social expenditure among OECD countries, but outcomes in terms of reduction in inequality due to transfers are about the EU average. - Social benefits tended to evolve asymmetrically over the cycle: they increased during downturns but did not decline as much in upturns. - Recommendations: - Better target social benefits to those who need it when they need it, including through better means-testing (e.g. housing, family benefits). - Address fragmentation of social programs across levels of government to obtain efficiency savings. - Health system - Health spending in France is high compared to peers; population aging poses further challenges. - Recommendations: - Further centralize health procurement. - Enhance the use of generic medicines. - Rationalize hospital and primary care and better integrate various levels of care. - Strengthen cost-effectiveness evaluation. - Tax expenditures - Firms and individuals benefit from sizeable tax exemptions/rebates for investments, including for real estate, life insurance, and other savings plans. - Such tax expenditures may create distortions in the allocation of savings and could be rationalized and made more efficient. - Pension system - The pension system is complex (42 different mandatory retirement schemes), generous (high replacement rates compared to peers), and retains one of the lowest statutory retirement ages in Europe. - The planned reform unifying different regimes and simplifying the system could consider progressively raising the effective retirement age in line with longevity and closer to European peers either by raising the statutory age, or by providing actuarial incentives to increase the effective retirement age. - Civil service - Public-sector wage bill is about 13 percent of GDP; public employment is about 20 percent of the labor force. - While public-sector wages are not high compared to the private sector, mobility is low and civil servants benefit from job protection through their special statute. - Recommendations: - Government’s planned reform to facilitate mobility, rely on fixed contracts, and introduce merit-based pay could be complemented by targeted reductions in the number of civil servants through attrition (e.g., not replacing all retiring civil servants). - Local governments - Spending in local governments has continued to rise; some functions are duplicated between the state and local governments. - Recommendations: - Introduce a ceiling on operating expenditures growth. - Merge small municipalities and eliminate overlaps between local and central government functions so the state sets policy and control while local governments focus on implementation. ### Projected fiscal outturns and recommended policies scenario - Note: Recommended policies scenario assumes full implementation of spending reforms yielding total savings of about 4 percent of GDP (excluding CICE conversion) by 2022 and of additional labor and product market reforms broadly aligned with staff advice. - Baseline projections (table entries as provided): - Revenues 53.8 53.5 52.2 51.7 51.2 51.0 50.9 - Spending 56.4 55.9 54.9 53.7 53.5 53.3 53.5 - Real spending growth (excl CICE) 1.3 0.5 -0.5 1.2 1.2 1.3 2.1 - Fiscal balance -2.6 -2.4 -2.6 -2.0 -2.2 -2.3 -2.6 - Structural fiscal balance -2.4 -2.2 -2.7 -2.2 -2.4 -2.6 -2.8 - Change in structural fiscal balance (excl. CICE) 0.4 0.2 0.4 -0.4 -0.2 -0.1 -0.3 - Real GDP growth 2.3 1.8 1.7 1.7 1.6 1.6 1.6 - Potential output growth 1.4 1.5 1.5 1.6 1.6 1.6 1.6 - Output gap -0.1 0.1 0.3 0.4 0.4 0.4 0.4 - Public debt 96.8 96.2 95.8 94.6 93.6 92.8 92.2 - Current account balance -0.6 -0.8 -0.6 -0.4 -0.2 -0.1 0.1 - Authorities' projections (table entries as provided): - Revenues 53.8 53.5 52.2 51.7 51.2 50.8 50.8 - Spending 56.4 55.9 54.9 53.1 52.2 51.6 51.3 - Real spending growth (excl CICE) 1.3 0.5 -0.5 -0.3 -0.2 0.3 1.0 - Fiscal balance -2.6 -2.4 -2.6 -1.4 -1.1 -0.8 -0.5 - Structural fiscal balance -2.4 -2.2 -2.7 -1.4 -1.0 -0.7 -0.4 - Change in structural fiscal balance (excl. CICE) 0.4 0.1 0.4 0.4 0.4 0.3 0.3 - Real GDP growth 2.3 2.0 1.9 1.4 1.4 1.5 1.5 - Potential output growth 1.4 1.5 1.6 1.6 1.7 1.7 1.7 - Output gap -0.1 0.1 0.3 0.0 -0.2 -0.4 -0.5 - Public debt 96.8 96.4 95.7 94.2 92.3 90.0 87.5 - Current account balance -0.6 -0.8 -0.6 -0.1 -0.1 0.0 0.0 - Recommended policies (selected indicators as provided): - Revenues 53.9 53.7 52.6 52.4 52.2 52.0 . - Spending 56.5 56.0 54.9 53.3 52.5 51.7 . - Nominal spending growth (excl tax credits) 2.5 1.8 1.4 1.7 2.0 1.9 . - Fiscal balance -2.6 -2.3 -2.4 -0.9 -0.3 0.3 . - Structural fiscal balance (excl. CICE conversion) -2.0 -1.9 -1.6 -1.4 -1.0 -0.6 . - Change in structural fiscal balance (excl. CICE) 0.5 0.1 0.3 0.3 0.4 0.4 . - Real GDP growth 2.3 2.0 1.9 1.7 1.7 1.7 . - Potential output growth 1.3 1.3 1.3 1.3 1.3 1.4 . - Output gap -0.9 -0.2 0.4 0.9 1.3 1.6 . - Public debt 97 96.4 96.2 94.7 92.3 89.2 . - (Table source: IMF staff estimates and 2018 France Stability Programme.) ### Authorities' views on spending reforms - Authorities reiterated commitment to improve spending efficiency through comprehensive reforms to achieve medium-term debt and deficit objectives. - They highlighted positive fiscal developments in 2017 expected to pave the way for a decision on France’s exit from the Excessive Deficit Procedure (EDP) this summer and committed to maintain the deficit below the EDP limit in the short term. - In the medium run, they acknowledged additional structural spending reforms at all levels of government will be needed, focusing on reviewing the role of the state and on efficiency savings while preserving social protection. - They welcomed staff’s suggestions and looked forward to the recommendations of the expert-led spending review. ### Links to fiscal consolidation, competitiveness, and broader reform agenda (staff appraisal highlights) - Spending reforms at all levels of government are needed to support ambitious debt and deficit-reduction objectives and to modernize and enhance public service efficiency. - Reforms should be specified early, starting with the 2019 budget, to support credibility of the strategy. - Combined with labor and product market reforms and recent tax reforms reducing the labor tax wedge, spending reforms can help increase competitiveness and reduce external imbalances. - Recommended labor market and product market reforms remain key to reducing unemployment and supporting durable, job-rich, inclusive growth. *Source: IMF staff report (France, CR18243).* ### Box 1. Estimating France’s Output Gap (concluded) ### Box 1. Estimating France’s Output Gap (concluded) ### Labor market capacity and recruitment indicators - Industry Capital Utilization: charted series for 2010–2017 (source: European Commission). - Share of Companies Constrained by Staff Size: percent of industrial firms reporting lack of manpower limiting expansion, series shown for 1995–2017 for France, Germany, Italy (source: Eurostat (DG ECFIN)). - Underemployment rate: series 2003–2017 (Percent of underemployed in total employment) (source: INSEE, Enquête Emploi). - Difficulties to Recruit: percent of companies reporting, series 2000–2018 by sector (Industry, Construction, Services) (source: Haver Analytics (INSEE, Quarterly Business Survey)). ### Key labor-market findings (from Box 2) - France’s aggregate income inequality is around the OECD average; after increasing during the crisis, inequality returned to its pre-crisis level and is at similar levels as in Germany. - Relative youth poverty is much higher than that of the elderly and has risen recently, while elderly poverty declined steadily. - Low-skilled workers and non-EU immigrants have had weaker labor market performance compared to prime-age native workers, exacerbated by the crisis. ### Quantified disparities and probabilities - Workers with low educational attainment (below upper secondary) have tended to be between 30–50 percent less likely to find a job compared to more educated groups. - Non-EU migrants face even worse job prospects: probability almost three times as large as the probability of being unemployed faced by prime-age native workers. - Relative poverty risk: non-EU immigrants is about three times as large as that of prime-age workers; the relative poverty for the low-skilled is about 50 percent higher than for other groups. - Government planned investment: €15 billion in the training of one million youngsters neither in education nor in employment and one million long-term unemployed. ### Unemployment probability coefficients (marginal changes compared to base categories) - Age (base 25–54 years): - 15–24 years: 6.3, 7.8, 3.3, 4.2, 6.4, 13.7 (entries shown as table values for 2005-07 and 2012-14 across comparator groups). - Country of birth (base Native): - Non-EU born: 6.0, 7.1, 5.1, 4.8, 3.0, 5.7 (table entries for 2005-07 and 2012-14 across comparator groups). - Education (base Lower secondary): - Tertiary: -4.5, -5.6, -3.4, -4.0, -3.3, -9.2 (table entries). - Lower secondary (base): 9.0, 11.0, 5.4, 6.8, 7.6, 18.0 (table entries). - Job sector (base Services): - Manufacture: 1.3, 2.0, 0.0, 0.1, 2.2, 5.8 (table entries). - Years of residency (base Less than 1 year): - 4 years or more: -11.8, -22.1, -4.2, -2.4, -2.4, -9.5 (table entries). - Headline employment rate: 63.9, 63.9, 69.0, 69.4, 63.9, 58.3 (values shown in table). (Note: coefficients indicate the margins — change in the probability of being unemployed — compared to the base category. Country groupings labeled “Crisis-Resilient Comparators” and “Crisis-Impacted Comparators” are used in the table.) ### Poverty and inequality indicators (charted) - Gini Coefficient of Equivalised Disposable Income: series shown for 2008–2016 comparing France, Euro area, Germany, Italy, United Kingdom (scale 0–100) (source: Eurostat). - People at Risk of Poverty or Social Exclusion by Age: series 2008–2016 for TOTAL, 15–24, 25–54, 55+, Low-skilled, NON-EU (Percent of specified population) (source: Eurostat). ### Policy analysis and recent reforms (Box 2 conclusions) - Labor market rigidities (higher labor tax wedge and relatively higher minimum wage) have been linked to weaker outcomes for youth, migrants, and the low-skilled. - Recent and upcoming labor market reforms (including reform of professional training and apprenticeship) could improve incentives for firms to hire youngsters and raise social mobility over time. The government aims to invest €15 billion to train one million youngsters neither in education nor in employment and one million long-term unemployed. - On the fiscal side, France’s tax-and-benefit system is relatively more effective at redistributing market income than Germany’s or the Nordic countries’. Reforms passed in 2014–2016 (increase in the tax rebate for couples, introduction of new mean-tested benefits, better targeting of family allowances) are expected to reduce France’s net income inequality. - More recent fiscal reforms replacing part of employee social contributions with an increase in a general income tax on both workers and retirees could help address intergenerational inequality and mitigate the negative impact on inequality of other recent tax measures, such as the reduction in wealth taxes. ### Large fiscal consolidations in France (Box 3 summary) - Experience with spending-based fiscal consolidations in France has been mixed. Three notable adjustment episodes since 1980: - Virage de la rigueur (launched 1983): primary expenditures to GDP were reduced by 2.8 percentage points between 1985 and 1989. Measures included broad-based spending restraints (wage bill at central government level and social security administrations) and restraint in social benefits. - EMU entry (Guidance Law on Public Finance Control adopted 1994): the ratio of primary expenditures to GDP declined by 2.5 percentage points between 1996 and 2000, enabled by declines in capital spending, a freeze of the pay scale of civil servants, and cuts in defense spending and social transfers. - EDP-related fiscal consolidations (2003–07): measures included legally binding zero real spending growth at the central government level and health and pension reforms; overall spending did not decline due to overruns at the local level and in social benefits. - International evidence: Blöchliger, Song and Sutherland identify eight consolidation episodes involving a reduction in primary expenditures of at least 4 percent of GDP within 5 years starting from a peak year; the average primary spending reduction across these eight episodes averaged 7.2 percent of GDP. These episodes were accompanied by relatively strong real GDP growth (averaging almost 3 percentage points) and full exchange rate flexibility. The three largest spending reductions were those of Sweden, Finland and Canada. *International Monetary Fund* ### Box 3. Large Fiscal Consolidations: How Successful Have They Been? (concluded) ### Box 3. Large Fiscal Consolidations: How Successful Have They Been? (concluded) ### Selected historical consolidation episodes - Sweden, (1993): the spending based consolidation (12 percent of GDP) followed a sharp recession. Current central government spending was frozen for three years and transfers to local governments were frozen at their nominal 1994 level until 2000 and local government borrowing was barred. Various social benefits were reduced and eligibility tightened. The consolidation was achieved in the context of average real growth of about 3 percentage points. - Finland, (1993): the fiscal consolidation (11 percent of GDP) followed a financial crisis. The strategy involved substantial cuts in the government wage bill, social security payments and transfers to local governments. Real growth averaged close to 5 percent during this period. - Canada, (1992): The consolidation (8 percent of GDP) followed a deterioration in growth and fiscal positions, and was based on reducing spending both at the central and local government levels by reducing the wage bill, reforming unemployment insurance and reducing benefits reduced, and improving control of inter-governmental transfers. Real growth was around 3 percentage points. ### France: required consolidation and context - The needed reduction in spending to achieve France’s medium-term objective and put debt on a sustained downward part is estimated at 4.2 percent of GDP, excluding the conversion of the CICE, and 4½ percent in primary spending terms (excluding tax credits). - This required reduction is larger than previous consolidations in France, but still below the median in the cross-country sample analyzed. - The expenditure restraint is expected to take place in a lower real growth environment compared to all of the listed episodes. - Policy implication: deepening growth-enhancing structural reforms is underscored as important to reinforce the success of the fiscal strategy in reducing public debt. ### Episodes of large fiscal consolidations — key statistics (preserved exactly) - Sweden, 1993-12.0-0.83.3 - Finland, 1993-11.31.54.7 - Canada, 1992-8.2-1.03.1 - Spain, 2012-6.4-1.31.9 - Denmark, 1982-6.20.43.2 - Spain, 1993-4.90.73.4 - Italy, 1993-4.80.01.8 - Germany, 2003-4.0-1.11.9 - Average-7.2-0.22.9 - Median-6.3-0.43.2 - Staff recommended policies scenario-4-0.11.6 Notes on the statistics: - Columns correspond to: Reduction in primary expenditures, in percent of GDP 1/; Annual real primary spending growth 2/; Annual real GDP growth. - Footnotes in source: 1/ Reduction over 2017-2023, excluding CICE tax credit. 2/ Excluding CICE tax credit. *International Monetary Fund — Box 3. Large Fiscal Consolidations: How Successful Have They Been? (concluded)* ### Annex I. Authorities’ Response to Past IMF Policy ### Annex I. Authorities’ Response to Past IMF Policy ### IMF 2017 Article IV Recommendations — Fiscal Policy - Recommendation: Identify and implement deep structural spending reforms at all levels of government, including by reducing the wage bill, consolidating local governments, improving the targeting of social benefits, and making health spending more efficient. - Authorities’ response: - The authorities have set nominal spending growth ceilings for local authorities and health spending. - Structural spending reforms needed to put debt on a firm downside path still need to be specified. - The government has commissioned a new comprehensive spending review by an expert committee (CAP 2022), but the conclusions of this report are not yet available. ### IMF 2017 Article IV Recommendations — Structural Reforms - Recommendation: Enhance firm-level flexibility in wage negotiations, reform the mechanism governing the minimum wage, strengthen job search requirements for those receiving unemployment insurance, and better link education systems to labor market needs. - Authorities’ response: - The 2017 ordinances ended the automatic extension of branch agreements and gave primacy to firm-level agreements in some areas (e.g., non-wage remuneration and working time, but not in what concerns base wages). - The authorities strengthened the monitoring and sanctions of those receiving unemployment insurance, although they have expanded coverage. - Reforms of the education system are ongoing, and a reform of training and apprenticeship is in the works. - Recommendation: Simplify business regulations, address disincentives to company growth, and enhance competition in services. - Authorities’ response: - Legislated a restructuring of the public railway company and further simplified regulations. - The Loi Pacte, expected to be passed in 2019, will simplify further administrative burdens for firms, particularly for smaller firms. ### IMF 2017 Article IV Recommendations — Financial Sector - Recommendation: Closely monitor financial risks, in particular the rise in corporate debt. - Authorities’ response: - Introduced a macroprudential policy limiting banks’ exposures to large individual indebted corporates. - Activated a countercyclical capital buffer. - Recommendation: Review guaranteed interest rates under the regulated savings schemes. - Authorities’ response: - Allowed for a formula-based alignment of regulated savings sates to inflation and market interest rates starting in 2020. ### Overall Assessment — External Asset and Liability Position - Background findings: - NIIP averaged near balance in 2000–2005, deteriorated during the global financial crisis, and has remained below -13 percent of GDP since 2013, reaching a low of -20 percent of GDP in 2017. - Gross asset position: 289 percent of GDP in 2017 (banks’ non-FDI related assets account for about a third; other non-bank financial institutions close to another third). - More than three-quarters of French banks’ foreign assets are in advanced economies (40 percent in other eurozone economies) and 7 percent in large emerging markets. - Gross liabilities: 309 percent of GDP in 2017; external debt estimated at 194 percent of GDP (public-sector accounts for 55 percent of GDP, banks for 87 percent of GDP). - Target 2 balances: -€9.4 billion (-0.4 percent of GDP) at end-2017. - Assessment: - NIIP is negative but its size and projected stable trajectory do not raise sustainability concerns. - Vulnerabilities exist due to external public debt and banks’ financing on the liability side, given significant bank debt maturing in 2018 (€60 billion, or 2.6 percent of GDP) and sizeable financial derivatives (about 30 percent of GDP). ### External Position Assessment (2017) - Overall Assessment: The external position in 2017 was moderately weaker than that implied by medium-term fundamentals and desirable policy settings. - Recent measures expected to strengthen the external position over the medium term: labor tax wedge cuts, CIT tax cuts, and labor and product market reforms. - Potential policy responses: - Steady fiscal consolidation and steadfast implementation of planned structural reforms (e.g. apprenticeship and vocational training reforms, as well as other product and service market reforms) to improve competitiveness, reduce external imbalances, and support long-run growth. ### Current Account (CA) - Background findings: - CA fell from a surplus before the global financial crisis to a deficit of 0.6 percent of GDP in 2017. - CA deficit reflects a persistent trade deficit (around 1 percent of GDP, on average, since 2012) which has outweighed a positive (but declining) income balance. - Over the last year, the CA balance improved by 0.2 percent of GDP on account of strong service export growth. - Assessment: - 2017 cyclically-adjusted CA deficit: -0.6 percent of GDP. - EBA-estimated norm: 0.9 percent. - Staff assesses the CA gap in 2017 was between -2 to -1 percent of GDP and projects the CA gap to narrow further over the medium run. - CA Assessment 2017 (exact figures): - Actual CA: -0.6 - Cycl. Adj. CA: -0.6 - EBA CA Norm: 0.9 - EBA CA Gap: -1.6 - Staff Adj.: 0.0 - Staff CA Gap: -1.6 ### Real Exchange Rate (REER) - Background findings: - ULC-based REER appreciated by around 3–11 percent since the late 1990s; France lost about a third of its export market share in the 2000s. - CPI-based and ULC-based REER appreciated by around 0.3–0.9 percent during 2017, and an additional 1.5–2.9 percent through May 2018 (relative to the 2017 average). - Assessment: - CPI-based index and level REER EBA models do not point to REER overvaluation (REER gap ranges between -1.5 to 4.0 percent). - EBA CA gap model points to an overvaluation of around 4–8 percent (given an elasticity of 0.25 percent). - Staff assessment: REER overvaluation in the range of 0 to 8 percent. ### Capital and Financial Accounts; FX Intervention and Reserves - Background findings: - CA deficit has been financed mostly by debt inflows (portfolio and other investment); outward direct investment generally higher than inward investment. - Financial derivative flows have grown sizably on both asset and liability sides since 2008. - Capital account is open. - Assessment: - France remains exposed to financial market risks owing to large refinancing needs of the sovereign and banking sector. - FX intervention and reserves: - The euro has the status of a global reserve currency. - Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Sources of Risk — Risk Assessment Matrix (summary) - Risk: Retreat from cross-border integration - Likelihood: Medium - Expected impact: High - Key impacts: Retaliatory trade restrictions; hit to exports and investment; rise in euro skepticism and political opposition. - Policy response: Support multilateral rules-based trading system; re-double efforts to secure benefits of economic integration across the EU; strong collaboration for smooth transition UK–EU. - Risk: Policy and geopolitical uncertainties - Likelihood: Medium - Expected impact: High - Key impacts: Two-sided risks to U.S. growth; intensification of fragmentation/security dislocation; socio-economic disruptions. - Policy response: Integrate refugees rapidly into labor markets; accommodate temporary refugee costs within fiscal targets case-by-case; new system to relocate refugees. - Risk: Tighter global financial conditions - Likelihood: High - Expected impact: High - Key impacts: Abrupt changes in global risk appetite could sharply increase interest rates and tighten financial conditions, weighing on balance sheets and growth. - Policy response: Press on with structural reforms, strengthen balance sheets, and fiscal consolidation to build buffers. - Risk: Further pressure on traditional bank business models - Likelihood: Medium - Expected impact: Medium - Key impacts: Profitability challenges could lead to distress at major banks and wider sovereign yield spread increases. - Policy response: Follow ECB guidance on NPL management with strict supervisory monitoring; insolvency reform; develop distressed debt markets; cost-cutting; banking consolidation. - Risk: Weakening of reform implementation in France; weak growth in other advanced economies; slowdown in China - Likelihood: High (for weakening reform implementation and weak growth in other advanced economies), Low-Medium (for China slowdown) - Expected impact: High - Key impacts: Non-implementation of reforms could undermine confidence and raise financing costs; lower medium-term growth; deterioration in public finances and private balance sheets. - Policy response: Accelerate structural reforms to spur investment, productivity and competitiveness; strengthen private-sector balance sheets; early identification of deep spending reform to put debt on a downward path. ### Annex IV — Debt Sustainability Analysis (DSA) — Baseline and Scenarios - Baseline projections: - Debt-to-GDP ratio projected to moderately decline to 92.2 percent of GDP by 2023 from 96.8 percent in 2017. - Gross financing needs expected to peak at 8.2 percent of GDP in 2020 due to maturity structure. - Interest payments were 1.9 percent of GDP in 2017. - Benchmark 10-year yield: 0.79 percent end-May 2018 (from 4.7 percent end-June 2008). - Spreads over German Bunds: 27 basis points end-May 2, 2018. - Effective interest rate projected to increase after 2020 to around 2.6 percent in 2023. - Interest payments projected to increase to 2.4 percent of GDP by 2023. - Macroeconomic assumptions: - Growth: 2.3 percent in 2017; expected to be around 1.8 percent in 2018 and 1.7 percent in 2019; gradually stabilize to 1.6 percent (medium-term). - Fiscal outlook: - Structural adjustment: averaged 1 percentage point per year in 2011–13; slowed to 0.2 percentage points per year in 2014–16; reached 0.4 percentage points in 2017. - Projected structural adjustment to average 0.1 percent during 2018–20 and -0.2 percentage points in 2021–23. - The primary balance would remain above its debt stabilizing level. - Realism of projections: - Median forecast error for real GDP growth during 2008–16 is -0.7 percent (42nd percentile rank), indicating upward bias in staff projections. - Median forecast error of 0.6 percent for the primary balance; -0.24 percent median forecast bias for inflation. - Largest projected adjustment over any three years: 1.9 percent of GDP (below threshold of 3 percent of GDP). - Maximum average level of cyclically-adjusted primary deficit for any consecutive 3-year period: 1.3 percent of GDP (below threshold of 3.5 percent of GDP). - Alternative scenarios: - Constant primary balance scenario: public debt around 95 percent of GDP; gross financing needs 7–9 percent of GDP. - Historical scenario (2006–2016 averages): gross public debt approaching 108 percent of GDP by 2023; gross financing reaching 11.5 percent of GDP. - Shocks and stress tests: - DSA framework suggests government debt-to-GDP would stay on a downward path, though peaking at 101.4 percent of GDP and remaining high during the projection horizon. - Growth shock: real output growth rates lower by one standard deviation over 2019–20 (i.e., 1.4 percentage points relative to baseline); under this shock debt-to-GDP would increase to 101.2 percent of GDP in 2020 but decline thereafter. - Primary balance shock: cumulative 1.5 percent deterioration in the primary balance over 2019–23; under this scenario debt-to-GDP would decline at a slower pace with an impact of 1.6 percent of GDP in 2023. - Interest rate shock: assumes a 287 basis points increase in the cost of debt throughout the projection period; deterioration of public debt and gross financing needs are back-loaded as old debt matures and new debt is contracted at higher interest rates. In 2023, the impact on gross financing needs is 0.9 percent of GDP. *Source: Annex I. Authorities’ Response to Past IMF Policy (cr18243).* ### 1.9 percent of GDP for the debt-to -GDP ratio. ### cr18243 - 1.9 percent of GDP for the debt-to -GDP ratio. ### Scenario: Real exchange rate shock - Assumption: 13 percent devaluation of the real exchange rate in 2019. - Impact channel: examines impact on debt through the inflation channel. - Outcome: Under this scenario, the debt-to -GDP ratio would remain very close to the baseline. ### Scenario: Combined macro-fiscal shock - Composition: aggregates shocks to real growth, the interest rate, the exchange rate, and the primary balance. - Debt path: - Debt would reach 101.4 percent of GDP in 2020. - Debt would gradually decline to 95.7 percent of GDP in 2023. - Gross financing needs: would peak at 11.5 percent of GDP in 2020. ### Heat map and risk assessment - Debt level risk: - Risks levels from the debt level are deemed high given that France’s debt is above the threshold of 85 percent under baseline and all stress test scenarios. - Gross financing needs: - France’s gross financing needs remain below the benchmark of 20 percent of GDP in the baseline and all stress test scenarios. - Public debt held by non-residents: - As of end-March 2018, non-residents held 55.1 percent of French debt. - This is lower than the peak of 70.6 percent reached early 2010. - This is also lower than the end-2016 level of 58.5 percent. ### Technical notes and indicators (as presented) - Interest rate shock construction: Interest rate is increased by the difference between average real interest rate level over the projection period and maximum real historical level. - Debt maturity: As of end-April 2018, the average maturity of debt is 7 years and 322 days. - Heat map legend and benchmarks referenced: - Debt burden benchmark: 85 percent. - Gross financing needs benchmark: 20 percent of GDP. - Bond spread benchmarks mentioned: 400 and 600 basis points. - External financing requirement benchmarks: 17 and 25 percent of GDP. - Change in the share of short-term debt benchmarks: 1 and 1.5 percent. - Public debt held by non-residents benchmarks: 30 and 45 percent. - External financing requirement definition: sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period. *Source: IMF staff (from the provided content unit).* ### 1.3 is the max positive growth rate shock ### 1.3 is the max positive growth rate shock ### Upside shock caps and metadata - 1.3 is the max positive growth rate shock (percent) - no restriction on the interest rate shock - 2 is the max positive pb shock (percent GDP) - no restriction on the exchange rate shock - Restrictions on upside shocks: 30, 45, 55% Public Debt Held by Non-Residents (in percent of total) ### Realism of baseline assumptions and forecast track record - Figures illustrate realism of baseline assumptions using surveillance-country distributions and percentile ranks. - Forecast errors (median, 2009–2017) and percentile ranks: - Real GDP Growth forecast error: -0.30 (in percent, actual-projection); Has a percentile rank of: 50% - Primary Balance forecast error: -0.45 (in percent of GDP, actual-projection); Has a percentile rank of: 53% - Inflation (Deflator) forecast error: -0.31 (in percent, actual-projection); Has a percentile rank of: 55% - Forecast track record plotted against interquartile range (25-75) and median for surveillance countries (2009–2017). ### Boom-Bust analysis and CAPB metrics - Real GDP growth paths are shown in pessimistic and optimistic scenarios across t-5 to t+5 horizons. - 3-Year Adjustment in Cyclically-Adjusted Primary Balance (CAPB) (Percent of GDP): - Distribution indicates 3-year CAPB adjustment greater than 3 percent of GDP in approx. top quartile. - France has a percentile rank of 46%. - 3-Year Average Level of CAPB (Percent of GDP): - Distribution indicates 3-year average CAPB level greater than 3.5 percent of GDP in approx. top quartile. - France has a percentile rank of 71%. ### Public Sector DSA — Baseline scenario (selected series; in percent of GDP unless otherwise indicated) - As of May 30, 2018 - Nominal gross public debt: 2016: 84.9; 2017: 96.6; 2018: 96.8; 2019: 96.2; 2020: 95.8; 2021: 94.6; 2022: 93.6; 2023: 92.8; (final shown) 92.2 - Public gross financing needs: 2016: 8.9; 2017: 8.8; 2018: 8.0; 2019: 6.8; 2020: 8.2; 2021: 8.8; 2022: 7.4; 2023: 6.8; 2023 (last column): 7.2 - Real GDP growth (in percent): 2016: 0.8; 2017: 1.1; 2018: 2.3; 2019: 1.8; 2020: 1.7; 2021: 1.7; 2022: 1.6; 2023: 1.6; 2023 (last): 1.6 - Inflation (GDP deflator, in percent): 2016: 1.2; 2017: 0.3; 2018: 0.5; 2019: 1.4; 2020: 1.6; 2021: 1.7; 2022: 1.8; 2023: 1.8; 2023 (last): 1.9 - Nominal GDP growth (in percent): 2016: 2.0; 2017: 1.4; 2018: 2.8; 2019: 3.1; 2020: 3.3; 2021: 3.5; 2022: 3.5; 2023: 3.5; 2023 (last): 3.5 - Effective interest rate (in percent) 1/: 2016: 3.2; 2017: 2.0; 2018: 2.0; 2019: 2.1; 2020: 2.1; 2021: 2.2; 2022: 2.3; 2023: 2.5; 2023 (last): 2.6 - Ratings (Foreign/Local): Moody's Aa2 / Aa2; S&Ps AAAA; Fitch AAAA ### Contribution to changes in gross public sector debt (selected) - Cumulative change in gross public sector debt (2016–2023): 3.4, 1.0, 0.2, -0.6, -0.4, -1.2, -1.0, -0.8, -0.6, -4.6 - Identified debt-creating flows (2016–2023): 3.2, 2.4, 0.1, -0.4, -0.3, -1.1, -0.9, -0.7, -0.5, -3.9 - Primary deficit (2016–2023): 2.3, 1.8, 0.9, 0.6, 0.8, 0.1, 0.2, 0.2, 0.3, 2.2 - Primary (noninterest) revenue and grants (percent of GDP): 2016: 51.3; 2017: 52.9; 2018: 53.7; 2019: 53.4; 2020: 52.1; 2021: 51.6; 2022: 51.1; 2023: 50.8; cumulative: 50.8; final: 31.0 - Primary (noninterest) expenditure (percent of GDP): 2016: 53.6; 2017: 54.7; 2018: 54.5; 2019: 54.0; 2020: 52.9; 2021: 51.7; 2022: 51.3; 2023: 51.0; cumulative: 51.2; final: 12.1 - Automatic debt dynamics (2016–2023): 1.0, 0.6, -0.8, -1.0, -1.0, -1.1, -1.1, -0.9, -0.8, -6.0 - Of which: real interest rate contribution: 1.6, 1.6, 1.4, 0.6, 0.5, 0.4, 0.4, 0.6, 0.7, 3.2 - Of which: real GDP growth contribution: -0.6, -1.0, -2.2, -1.7, -1.5, -1.6, -1.5, -1.5, -1.5, -9.2 - Exchange rate depreciation contribution: 0.0 across projection years - Other identified debt-creating flows: 0.0 across projection years - Residual, including asset changes (2016–2023): 0.2, -1.4, 0.2, -0.2, -0.1, -0.1, -0.1, -0.1, -0.1, -0.8 Notes from table footnotes (preserve exact definitions as in source): - 1/ Public sector is defined as general government. - 2/ Based on available data. - 3/ Long-term bond spread over German bonds. - 4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year. - 5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). - 6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g. - 7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r). - 8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period. - 9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. ### Composition of public debt and alternative scenarios (selected assumptions and outcomes) - Baseline underlying assumptions (in percent) — sample years 2018–2023: - Real GDP growth (Baseline): 2018: 1.8; 2019: 1.7; 2020: 1.7; 2021: 1.6; 2022: 1.6; 2023: 1.6 - Inflation (Baseline): 2018: 1.4; 2019: 1.6; 2020: 1.7; 2021: 1.8; 2022: 1.8; 2023: 1.9 - Primary Balance (Baseline): -0.6; -0.8; -0.1; -0.2; -0.2; -0.3 - Effective interest rate (Baseline): 2.1; 2.1; 2.2; 2.3; 2.5; 2.7 - Historical scenario: - Real GDP growth: 2018: 1.8; 2019: 0.8; 2020: 0.8; 2021: 0.8; 2022: 0.8; 2023: 0.8 - Primary Balance: -0.6; -2.3; -2.3; -2.3; -2.3; -2.3 - Effective interest rate: 2.1; 2.1; 2.4; 2.6; 2.9; 3.2 - Constant Primary Balance scenario: - Primary Balance constant at -0.6 for 2018–2023 - Effective interest rate: 2.1; 2.1; 2.2; 2.3; 2.5; 2.7 - Composition charts (by maturity and by currency) indicate the split by medium & long-term vs short-term, and local vs foreign currency denominations across 2007–2023 (visual compositions shown in figure). ### Stress tests — Macro-fiscal scenarios (selected outcomes) - Stress tests include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, plus additional stress tests. - Selected scenario parameter snapshots (2018–2023): - Baseline Real GDP growth: 1.8, 1.7, 1.7, 1.6, 1.6, 1.6 - Real GDP Growth Shock path (example): 1.8, 0.2, 0.2, 1.6, 1.6, 1.6 - Inflation under shocks varies (examples): 1.4, 1.2, 1.4, 1.8, 1.8, 1.9 - Primary balance under shocks (examples): Baseline -0.6; under Real GDP Growth Shock: -1.8, -2.0, -0.2, -0.2, -0.3 - Effective interest rate under Combined Shock: 2.1, 2.1, 2.5, 2.8, 3.2, 3.5 - Stress-test outcome charts report: - Gross Nominal Public Debt (in percent of GDP) paths under Baseline and adverse scenarios for 2018–2023. - Gross Nominal Public Debt (in percent of Revenue) and Public Gross Financing Needs (in percent of GDP) under baseline and stress scenarios for 2018–2023. ### Fund relations and financial metadata (as of mid-2018) - IMF membership: Joined December 27, 1945; Article VIII. - Quota: 20,155.10 (SDR Million) — 100.00 percent of Quota - Fund Holding of Currency (Exchange Rate): 18,552.72 (SDR Million) — 92.05 percent of Quota - Reserve Tranche Position: 1,602.44 (SDR Million) — 7.95 percent of Quota - Net Cumulative SDR Allocation: 10,134.20 (SDR Million) — 100.00 percent of Allocation - Holdings of SDRs: 8,011.07 (SDR Million) — 79.05 percent of Allocation - Projected Charges/Interest payments to Fund (SDR million): 2018: 9.81; 2019: 19.72; 2020: 19.73; 2021: 19.71; 2022: 19.72 - Latest financial arrangements (historical Stand-By arrangements listed with dates and amounts). ### Statistical issues and data adequacy for surveillance - General: Database is comprehensive and of high quality; data provision adequate for surveillance; France subscribes to SDDS Plus and uses SDMX. - National Accounts: Adopted ESA 2010 in May 2014; historical series available from 1949. - Government Finance Statistics: From September 2014, GFS compiled on ESA 2010 methodology; revised time series for general government deficit and debt from 1995 onwards. - Monetary and Financial Statistics: Monetary data reported for IFS based on ECB framework; monthly preparation and timely dissemination. - External Sector: Since June 2014, monthly balance-of-payments statistics published under BPM6; consistent quarterly BOP and IIP data from 1999:Q1 onward. - Table of Common Indicators Required for Surveillance (as of June 2018): Latest observations and frequency for Exchange Rates, International Reserves, IIP, Reserve/Base Money, Broad Money, Central Bank Balance Sheet, Consolidated Banking Balance Sheet, Interest Rates, CPI, Government revenue/expenditure/balance (general government and central government), Stock of Central Government Debt, External Current Account, Exports and Imports, GDP/GNP, Gross External Debt. ### Authorities' statement and reform program (extracts) - Growth reached 2.3 percent in 2017 — highest since 2007; rebound broad-based, driven by strong investments and positive export contribution. - Structural reforms and a more benign external environment contributed to improvements in profit margins and public deficit reduction. - Authorities committed to comprehensive structural reform agenda over a five-year presidential mandate to transform the French economy and modernize the social protection system. - Key reforms highlighted: - Labour market reforms: decentralization of collective bargaining to firm level; simplification and cost reduction of dismissal procedures; aim to enhance job creation and reduce labor market duality. - Tax reforms: gradual reduction of corporate income tax rate from 33 percent to 25 percent by 2022; comprehensive flat tax of 30% on capital income from January 1, 2018; personal wealth tax limited to real estate assets; elimination of employees’ social contributions to health insurance offset by increase in broad-base part of personal income tax (CSG). - Education reform: university reform to strengthen guidance and matching; halving of 1st years classroom size in most vulnerable neighborhoods in primary education. - Draft law PACTE (approved by Cabinet in June) to be adopted by end-2018, aiming to spur investments, promote innovation, simplify SME regulatory thresholds, channel savings to productive investment, and streamline firms’ insolvency regime. _Source: IMF staff._ ### introduction of cross class cram down in the regulatory framework). ### introduction of cross class cram down in the regulatory framework) ### Labor costs, CICE, and minimum wage dynamics - CICE (so far, a tax credit reducing the labor cost at the lower end of the wage distribution) will be transformed in a permanent cut in social contributions in order to enhance transparency as regards the effective tax wedge. - Over the past decades, the tax wedge has continuously declined at the minimum wage (SMIC) level. - Recommendation: staff should compare the total labor cost at the minimum wage level with the total labor cost at the median wage level rather than comparing minimum wage (SMIC) to median wages ratios. - Rationale: otherwise the impact of the continuous decrease of the tax wedge at the SMIC level is not taken into consideration and the assessment of the impact of the SMIC indexation formula can be misguided. - Key statistic: The ratio of the total labor cost at the minimum wage level to the total labor cost at the median wage level dropped below 50% in 2014 and remained below that level since then. - Impact: The conversion of the CICE into a social contribution cut will exacerbate the decrease of labor cost at the minimum wage. - Broad labor-productivity context: - Apart from the crisis period in 2008-2010, France’s real wages have evolved in line with productivity both pre- and post-crisis (real unit labor cost being flat both between 2000-2008 and between 2010-2017). - Most of the gap between labor cost and productivity growth that appeared during the crisis has been reduced by the CICE and other measures that have reduced social contributions. - France’s nominal unit labor cost has been in line with the average of the euro area since early 2000. - The ULC gap with Germany which increased between 2000-2008 due to wage moderation in Germany is now, even if gradually, closing thanks to a more vibrant wages dynamic in Germany and price competitivity measures implemented in France. ### Professional and vocational training reform - The draft law on professional and vocational training is currently examined by the Parliament. - Objectives: revamping France’s social model to equip all individuals with necessary skills for employment and to reap benefits of technological change. - Measures: - Simplify and increase the rights to training of professionals. - Rationalize the governance structure of the system and simplify its financing. - Creation of a new agency to certify that training programs impart genuine and appropriate skills; financing will be discontinued for non-certified programs. - Dedicated funding: 15 billion euros will be dedicated to the training of the low-skilled workers and long-term unemployed over 5 years. ### Education reforms and early childhood measures - A reform of the educational system has been launched with the main objective of improving the acquisition of basic knowledge. - Measures: - Reduction of class sizes for children in the first year of primary school in most vulnerable neighborhoods (corresponding to 12 or 13 students per class in the 2,500 classes concerned). - Extension of reduced class sizes to the second year of school and more geographical areas in the coming years. - Lowering the compulsory school attendance age to three years in 2019. - Reform of the baccalauréat in 2021. ### Labor market segmentation, unemployment insurance, and social mobility - France has to deal with the hysteresis effect of the crises on the unemployment rate. - Some features of the unemployment insurance system encourage regular rotations between short-term contracts and unemployment, contributing to the segmentation of the labour market. - Social partners are currently discussing a potential reform of the unemployment insurance system. - Policy priority articulated by authorities: enhance equality of opportunity; tax-and-transfer system strongly reduces market income inequality and poverty. - Key statistic: France’s poverty rate was 13.6 percent in 2016 against 17.3 percent in EU. - Counterfactual: The poverty rate would be 10 percent higher without social transfers. ### Pension system consultation and sustainability - A wide consultation has been initiated on a reform of the French pay as you go pension system. - Main aims: increase transparency for future pensioners and equity by ensuring that one euro of contribution opens the right to the same level of pension for all. - Financial sustainability: The last report of the independent authority in charge of financial projections of the pension regime (Conseil d’Orientation des Retraites) concludes that the sustainability of the system is assured over the long term. - Contributing factor: past reforms, notably the automatic increase of the minimum number of quarters necessary to retire with a full-rate pension (to reach 43 years for individuals born from 1973 onwards). ### Public finances, spending strategy, and modernization of public administration - Fiscal outcomes and targets: - Due to measures taken immediately after the presidential election and accelerating growth, the public deficit fell to 2.6 percent of GDP, well below the 3 percent European threshold. - France has exited the excessive deficit procedure under the European rules. - Even with the one-off fiscal impact of the transformation of CICE into permanent social contributions cuts in 2019, France will remain below the 3 percent threshold. - For the first time since the global financial crisis, the debt to GDP ratio is on a downward trend and it will continuously decrease until 2022 according to our authorities’ last projections. - Medium term targets by 2022: - public spending will be reduced by 3 points of GDP over five years; - overall, tax revenues will be reduced by one point of GDP over five years; - the debt to GDP ratio will decrease by 5 points by 2022. - Strategy: Curtail public spending growth to create conditions for a lasting decline of the ratio of public spending to GDP, relying on structural choices and transformative reforms of the administration and social protection model rather than across-the-board cuts. - Concrete administrative-level measures: - Central government spending: In real terms, total spending will increase by 1.7 percent in 2018, a significant slow-down compared to the growth level in 2017 (+ 3.7 percent). - Local authorities: An innovative contractual pact to limit the growth of operating expenses has been subscribed by main local authorities. - Social protection health sector (ONDAM) objective set at 2.3 percent for 2018. - Modernization measures: - “Action Publique 2022” Committee proposals are being used to design spending curtailment measures. - Proposed measures already put forward: modernization and streamlining of public services broadcasters; digitalization of the tax administration to reduce number of public agents for those tasks. - A large consultation has been initiated regarding the evolution of the civil service to enhance internal and external mobility and better link compensation with merit. - Authorities’ view: gradual fiscal consolidation is appropriate in a context of rising external risks so as not to endanger the recovery. ### Rail system reform - A profound reform of the rail transportation system was adopted in June 2018. - Objectives: modernize French National Railways (SNCF) and ensure its profitability over the medium-term by modifying its status (transformation into a public limited company). - Effect: level the playing field for new competitors, consistent with the European regulatory framework. ### Financial sector resilience and risks - International standards adopted since the Global Financial Crisis have been diligently implemented in France, partly through the European regulatory framework. - Supervisory framework: Since the creation of the Single Supervision Mechanism, the ECB and Banque de France jointly exert a close supervision on the banking sector. - Capitalization and loss-absorption: - Capitalization of the banking sector increased from around 10 percent of RWAs before the crisis to almost 19 percent in 2017. - The French banking system is well advanced in the issuance of bail-inable instruments (MREL requirements) that would allow for the implementation of resolution plans if need be. - Asset quality and liquidity: - Non-performing loans ratio at 3.1 percent in 2017 and on a downward trend. - Household debt level at 58.5 percent of GDP in 2018. - LCR in USD for the top 5 French banks (which represent 99 percent of USD liabilities) was on average close to 80 percent in 2017 and reached 109 percent at the end of May 2018. - Macroprudential action: Authorities activated the counter-cyclical buffer in July 2018 in a context of dynamic lending to non-financial corporates. - Note on corporate debt: while corporate debt has been overall dynamic, the increase is much more moderate when debt is consolidated among non-financial corporations due to the magnitude of intercompany loans. *IMF staff report excerpt* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18243.pdf_