## 1fraea2019002 ## Source details **Canonical URL:** [1fraea2019002](https://www.imf.org/-/media/files/publications/cr/2019/1fraea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1fraea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1fraea2019002.pdf.json) --- ### Recent developments - Real GDP growth: - 2.3 percent in 2017; 1.7 percent in 2018; growth slowed to 0.3 percent (q-o-q) in Q1:2019 (from 0.4 in Q4:2018). - Real GDP (change in percent): 2.3 (2017); 1.7 (2018); 1.3 (2019); 1.4 (2020). - Inflation and labor market: - CPI (year average): 1.2 (2017); 2.1 (2018); 1.2 (2019); 1.4 (2020). - Unemployment rate: 9.4 (2017); 9.1 (2018); 8.6 (2019); 8.3 (2020). Unemployment declined further to 8.7 percent at end-April 2019. - Employment creation broad-based with permanent contracts accounting for the lion’s share. - Financial and external conditions: - Bank credit growth around 5½ percent in 2018 and similar pace in 2019; bank credit growth: 5.6 percent in 2017; 5.5 percent in 2018; projected 5.0 percent in 2019; 4.6 percent in 2020. - Current account: -0.7 (2017); -0.6 (2018); -0.6 (2019); -0.5 (2020). Current account deficit reached 0.6 percent of GDP in 2018. - Domestic shocks in 2018: railroad-transport strikes and “yellow-vest” protests; inflation spike in 2018 due to rising oil prices and tax hikes. ### Outlook and risks - Growth projections: - Staff projects growth of 1.3 percent in 2019 and 1.4 percent in 2020; potential output around 1½ percent in the medium term. - Growth expected to reach 1.3 and 1.4 percent this year and next, respectively. - Medium-term real GDP growth path (selected): 1.5 (2022–2024 steady at 1.5). - Inflation: projected 1.2 (2019) and 1.4 (2020); return to ECB’s target only toward end of projection horizon. - Output gap: -0.1 (2017); 0.2 (2018); 0.1 (2019); 0.1 (2020). - Key risks (likelihood / impact as per Annex III): - Weaker-than-expected global growth — Likelihood: High; Expected impact: High. - Rising protectionism and retreat from multilateralism — Likelihood: High; Expected impact: High. - Sharp tightening of global financial conditions — Likelihood: Low; Expected impact: High. - Weakening of reform implementation in France — Likelihood: High; Expected impact: High. - Estimated impact of a disorderly Brexit: could lower France’s growth by some 0.2–0.3 percentage points by 2021; short-term impact could be larger if border disruptions in key ports are high. ### Public finance: outcomes, projections, and recommendations - Key fiscal stock and flows (general government, percent of GDP): - General government balance: -2.8 (2017); -2.5 (2018); projected -3.2 (2019); -2.3 (2020). - General government gross debt: 98.4 (2017); 98.4 (2018); 99.0 (2019); 98.6 (2020). - Revenue: 53.6 (2017); 53.5 (2018); 52.4 (2019); 52.1 (2020). - Expenditure: 56.4 (2017); 56.0 (2018); 55.6 (2019); 54.4 (2020). - Primary balance: -1.1 (2017); -0.9 (2018); -1.8 (2019); -0.9 (2020). - Structural balance (percent of pot. GDP): -2.6 (2017); -2.4 (2018); -2.3 (2019); -2.4 (2020). - Projections and scenarios: - Staff baseline fiscal balance (selected): -2.5 (2018); -3.2 (2019); -2.3 (2020); -2.5 (2021); -2.6 (2022); -2.7 (2023); -2.7 (2024). - Authorities’ projections (2019 Stability Programme, selected): Fiscal balance: -2.5 (2018); -3.2 (2019); -1.7 (2020); -1.3 (2021); -0.8 (2022); -0.4 (2023); -0.4 (2024). Public debt (authorities): 98.4 (2018); 99.0 (2019); 98.2 (2020); 96.8 (2021); 94.8 (2022); 92.2 (2023); 89.7 (2024). - Baseline public debt (staff): 98.4 (2018); 99.0 (2019); 98.6 (2020); 98.3 (2021); 97.9 (2022); 97.4 (2023); 97.0 (2024). - Debt dynamics and stress tests (selected): - Public debt projected to decline modestly to 97 percent of GDP by 2024 from 98 percent in 2018 (staff baseline decomposition). - Gross financing needs peak at 20.8 percent of GDP in 2022 and decline to 19.3 percent in 2024 (baseline). - Alternative scenarios: Constant primary balance scenario — public debt around 100 percent of GDP by 2024; Historical scenario — gross public debt approaching 108 percent of GDP by 2024. - Stress-test examples: - Growth shock: real output growth lowered by one standard deviation = 1.5 percentage points over 2020–21; public debt peaks at 105 percent of GDP in 2021 and declines to 104 percent by 2024. - Combined macro-fiscal shock: debt reaches 105 percent of GDP in 2021 and increases to 107 percent in 2024; gross financing needs peak at 25 percent of GDP in 2021. - Fiscal recommendations: - Pursue sustained, growth-friendly consolidation to reduce the deficit and put public debt on a firm downward path. - Anchor fiscal strategy in durable medium-term reforms to reduce public spending: pursue planned civil service, pension, and unemployment benefit reforms. - Complement spending reforms with additional measures to reconcile frontloaded tax relief, priority investment, and debt reduction. - Maintain fiscal space to respond to sharp downturns while balancing cyclical support and sustainability and protecting vulnerable groups. - IMF staff guidance: France requires an ambitious structural consolidation effort of around 2 percent of GDP during 2020–23; steady improvement in structural primary balance of around 0.5 percent of GDP per year during 2020–23. ### Spending composition, gaps, and efficiency opportunities - Spending levels relative to peers: - Total government spending: 56 percent of GDP at end-2018; public spending increased by about 10 percent of GDP since early 1980s. - Social protection: 24 percent of GDP, higher by 4.2 percent of GDP than peers; social protection accounts for 44 percent of total government expenditure. - Areas above peers: social protection (pensions especially), economic affairs (tax expenditures and subsidies ~30 percent more than peers), health (40 percent more on medical products and equipment; almost 20 percent more on outpatient services), education (26 percent more on secondary education). - These four areas represent three-fourths of France’s total government expenditure and around 85 percent of the spending gap with peers. - Potential savings and reform options: - Staff analysis indicates potential efficiency gains saving some 1–1.5 percent of GDP in total in the medium term by: - Streamlining corporate tax expenditures and subsidies. - Rationalizing spending on medical products and hospital services while protecting public health and R&D. - Improving allocation of resources in education (tackle high teacher-student ratios and low teaching hours in secondary and upper education; improve primary where needed). - Better targeting social benefits (family, housing) and streamlining administrative costs. - Merging small municipalities — staff estimates savings of around 0.04 percent of GDP per year from merging small municipalities. - Design and credibility: - A credible consolidation plan requires credible commitment across government levels; 20 percent of total spending is undertaken by local governments. - Greater revenue decentralization at the subnational level and credible fiscal rules support fiscal adjustments. ### Structural reforms and labor-market policies - Reforms enacted and planned: - Labor tax and labor code reforms enacted in first year of the government’s mandate (2017 reforms: reduced labor tax rates, simplified social dialogue, facilitated firm-level bargaining, reduced judicial uncertainty around dismissals). - Apprenticeship and professional-training reforms enacted in fall 2018; early signals: France Compétence set up; cost of some 800 apprenticeship programs identified; number of high-school applicants for apprenticeship programs increased by 40 percent. - Business environment reforms (Loi PACTE) to facilitate firm creation and growth, promote entrepreneurship, support savings reallocation, and improve insolvency regime. - Authorities reaffirm intention to continue with planned structural reforms including unemployment benefits, civil service, and pensions. - Specific planned reforms and measures (timelines as provided): - Civil service reform expected legislated by mid-2019: encourage contractual employment, introduce temporary contracts, simplify social dialogue, voluntary dismissals, impose minimum 35 hour week for all civil servants, introduce merit-based pay. - Pension reform expected to kick-in gradually starting from 2025; law expected to be finalized and legislated in 2019 or early 2020: unify 42 pension systems under one points-based scheme; calculate pension rights over whole career; accelerate increase in effective retirement age (current system envisages gradual increase to 64 by 2040; acceleration to achieve 64 by 2030 could generate savings of 0.4–0.6 percent of GDP by 2024). - Unemployment benefit reform implemented summer 2019 with measures from November 2019 to mid-2020: compute benefits on average monthly salaries; ensure benefits between 65 percent and 96 percent of net monthly salaries; 30 percent reduction in benefits after six months for high-salary earners (above €4,500); maintain initial maximum benefit cap of €7,700 and introduce floor of €2,261; extend minimum contribution length to six months over past 24 months; raise from one to six months minimum working period to recharge rights; introduce bonus-malus scheme and €10 lumpsum tax for very short term contracts; expand rights for independent workers. - Healthcare reform in parliament expected legislated mid-2019: flat price system for certain hospital stays; create 1,000 territorial health centers by 2022; 4,000 new doctor assistant positions; finance reform costs by increasing ceiling on health spending from 2.3 to 2.5 percent in 2019. - Staff and Directors' recommendations: - Implement labor-market reforms resolutely, monitor effects carefully, and deepen if outcomes fall short. - Complement labor reforms with product and service market reforms (liberalize regulated professions, retail trade, sale of medicines). - Aim to boost potential growth by reducing structural unemployment, improving labor-force participation (especially among vulnerable groups), and enhancing productivity. ### Financial sector resilience, vulnerabilities, and policy priorities - System structure and size: - Total financial system assets about 600 percent of GDP. - Home to four global systemic banks (G-SIBs) and one global insurer; financial conglomerates operate in more than 80 countries. - Bank soundness indicators (exact figures): - Large banks’ CT1 ratio: 14.7 percent at end-2018. - NPLs: below 3 percent. - Liquidity-coverage ratio: well above 100 percent. - NSFR: around 100 percent (increased in 2018); NSFR in US dollars still well below 100 percent. - Corporate debt (unconsolidated): around 140 percent of GDP at end-2017; consolidated corporate debt: 90 percent of GDP. - Credit gap: 2.7 percent of GDP last year; 3.2 percent level attained in 2017. - CCyB: introduced at 0.25 percent, raised to 0.5 percent this year; compliance deadline for banks: April 2020. - Stress-test findings: - Stress scenario assumptions: GDP 7.1 percent below baseline; asset prices lower by 25 percentage points; sovereign and corporate risk premia rise by 100 and 150 basis points. - Stress-test results: banks, corporates, and insurers broadly resilient to simulated shocks, though pockets of vulnerability remain. - Specific vulnerabilities: increase in wholesale funding costs could challenge profitability and solvency; large outflows of wholesale funding could strain liquidity; insurers vulnerable to concentrated exposures to parent banks and to combined rise in interest rates and mass-lapse events. - Policy and supervisory recommendations: - Bolster monitoring and oversight of financial conglomerates; improve cooperation among supervisory agencies; develop common reporting templates; increase oversight of liquidity including stress testing; set requirements at conglomerate level. - Intensify monitoring of insurers’ exposures toward parent banks; consider concentration limits on these exposures. - Build resilience against cyclical risk, including corporate indebtedness: stay vigilant; be ready to use additional micro- and macro-prudential policies; consider a systemic risk buffer and Pillar II capital measures calibrated to corporate exposure; further reduce fiscal tax bias favoring debt over equity. - Ensure adequate liquidity buffers: consider imposing liquidity buffers to cover at least 50 percent of wholesale funding outflows up to a five-day horizon for all currencies; monitor use of collateral swaps. - Enhance crisis management, resolution arrangements, and financial integrity: integrate crisis-preparedness tools by pooling safety-net resources; broaden recovery and resolution-planning exercises; enhance insurer-resolution framework by providing ACPR powers to mandate bail-in of liabilities and privately-financed resolution funding; continue to enhance AML/CFT supervision of smaller high-risk rated banks. ### External sector assessment and international investment position - Key 2018 external figures: - NIIP: -11.4 (% GDP). - Gross Assets: 289.9 (% GDP). - Gross Liabilities: 301.2 (% GDP). - Net FDI position: positive and over 20 percent of GDP. - NIIP improved from -20 percent of GDP in 2017 to -11 percent of GDP in 2018. - Bank debt maturing in 2019: estimated at €75 billion (3.2 percent of GDP). - Target 2 balances averaged around -€36 billion (-1.5 percent of GDP) in 2018. - Current account and REER: - Actual CA: -0.6 (% GDP) in 2018; Cycl. Adj. CA: -0.5 (% GDP); EBA CA Norm: 0.5 (% GDP); EBA CA Gap: -1.0 (% GDP); Staff CA Gap: -1.0 (% GDP). - REER: staff assesses REER gap to be in range of 2 to 5 percent; CPI-based REER depreciated by 1.6 percent through May 2019; ULC-based REER appreciated around 3–9 percent since late 1990s. - Assessment: - External position in 2018 broadly consistent with medium-term fundamentals and desirable policy settings. - France remains exposed to financial market risks owing to large refinancing needs of the sovereign and banking sector. - External debt outlook: - External debt projected to decline from 217 percent of GDP in 2018 to 206 percent of GDP in 2024 under baseline. - Baseline average external debt: 206 (percent of GDP) in projection horizon; Historical scenario average: 266 (percent of GDP). - External debt more vulnerable to real depreciation and growth shock; less affected by interest or non-interest current account shocks. ### Social protection, inequality, and human-capital issues - Redistribution and inequality: - Fiscal policies reduce market income inequality by 44 percent in France (OECD average: 36 percent). - Market income inequality reduction driven mainly by transfers rather than taxes: 37 versus 7 percent. - Gini coefficient of disposable income around 0.3. - Poverty rate: 8 percent in France. - Intergenerational mobility: takes 6 generations to move from bottom 10 percent to mean income in France (OECD average 4.5). - Social spending composition: - Social protection accounts for 44 percent of total government expenditure; pensions account for 15 percent of GDP in 2017 and one third of spending difference with peers. - Unemployment benefits: spending 1.9 percent of GDP; replacement rate 64 percent. - Housing: spending 1.3 percent of GDP on housing development and housing benefits. - Health: aggregate health spending 8 percent of GDP. - Education: higher spending on secondary education; teachers’ compensation 80 percent of secondary education spending. - Policy implications and recommendations: - Pensions: simplify system, address generosity, improve intra- and inter-generational equity, protect low pensions; planned reform could unify regimes and accelerate retirement-age increases. - Unemployment benefits: implement planned reform ambitiously, tighten eligibility, introduce degressivity for high benefits. - Health: obtain efficiency savings via preventive care, generics, improved procurement; ensure decentralization reform minimizes medium-term costs. - Education: align teacher-student ratios in secondary education with peers, increase teaching hours, reform teacher training. - Subsidies and tax expenditures: rationalize and simplify tax expenditures; continue shift from CICE to social contribution cuts. ### Governance, anti-corruption, and institutional developments - Anti-corruption: - 2016 Loi Sapin 2 expanded jurisdiction for corruption offences, introduced mandatory compliance requirements, CJIP deferred prosecution mechanism, and created French Anti-Corruption Agency (AFA). - Enforcement developments: National Financial Prosecutor established; first CJIP in 2018 in cooperation with the United States. - As of December 2017, "15 natural persons and 2 legal persons had been convicted of foreign bribery and sanctioned since entry into force of the Convention in 2000." - OECD Working Group on Bribery concerns: foreign bribery enforcement "not commensurate" with size of economy; next assessment in 2020. - Data, transparency, and Fund relations: - France joined IMF on December 27, 1945; Article IV consultation on standard 12-month cycle; last Article IV consultation concluded July 25, 2018. - France subscribes to SDDS Plus; data dissemination and statistical practices generally high quality and timely. - IMF country-specific financial statistics and indicators are reported with stated frequencies and latest observations as of mid-2019 (e.g., GDP/GNP Q1:2019; IIP Q4:2018). ### Key selected statistics (exact figures preserved) - Real GDP (change in percent): 2.3 (2017); 1.7 (2018); 1.3 (2019); 1.4 (2020). - CPI (year average): 1.2 (2017); 2.1 (2018); 1.2 (2019); 1.4 (2020). - Unemployment rate (percent): 9.4 (2017); 9.1 (2018); 8.6 (2019); 8.3 (2020). - General government balance (percent of GDP): -2.8 (2017); -2.5 (2018); -3.2 (2019); -2.3 (2020). - General government gross debt (percent of GDP): 98.4 (2017); 98.4 (2018); 99.0 (2019); 98.6 (2020). - Current account (percent of GDP): -0.7 (2017); -0.6 (2018); -0.6 (2019); -0.5 (2020). - Exports of goods and services (% of GDP): 32.1 (2017); 32.6 (2018); 34.7 (2019); 34.7 (2020). - Imports of goods and services (% of GDP): -33.1 (2017); -33.7 (2018); -35.7 (2019); -35.7 (2020). - Potential output (change in percent): 1.3 (2017); 1.4 (2018); 1.4 (2019); 1.5 (2020). - Large banks’ CT1 ratio: 14.7 percent at end-2018. - NPLs: below 3 percent. - Credit gap: 2.7 percent of GDP last year; 3.2 percent in 2017. - Corporate debt (unconsolidated): around 140 percent of GDP at end-2017. - CCyB: 0.25 percent introduced, raised to 0.5 percent this year; banks compliance deadline: April 2020. *International Monetary Fund — Staff Report for the 2019 Article IV Consultation (France), extracted content unit 1fraea2019002.* ### 1.4 percent in 2020, after slowing last year on the back of decelerating global growth and ### 1fraea2019002 - 1.4 percent in 2020, after slowing last year on the back of decelerating global growth and ### Recent developments - Real GDP growth: 2.3 percent in 2017; 1.7 percent in 2018; growth slowed to 0.3 percent (q-o-q) in Q1:2019 (from 0.4 in Q4:2018). - Domestic factors that weighed on demand in 2018: railroad-transport strikes and “yellow-vest” protests. - Inflation: spiked in 2018 due to rising oil prices and tax hikes; CPI (year average) was 1.2 percent in 2017, 2.1 percent in 2018; moderated to 1.2 percent in 2019 and projected 1.4 percent in 2020. - Labor market: unemployment declined further to 8.7 percent at end-April 2019; employment creation was broad-based with permanent contracts accounting for the lion’s share. - Financial conditions: accommodative monetary policy and low borrowing costs supported asset prices; bank credit growth around 5½ percent in 2018 and similar pace in 2019. - External sector: current account deficit reached 0.6 percent of GDP in 2018 (narrowing by 0.1 percent of GDP vs. revised 2017) amid improved services and non-oil goods balances. ### Outlook and risks - Growth projection: staff projects growth of 1.3 percent in 2019 and 1.4 percent in 2020; potential output around 1½ percent in the medium term. - Risks have risen: disorderly Brexit, trade tensions, a softening of activity in the euro area, and a slowdown in the domestic reform agenda. - Output gap: -0.1 in 2017; 0.2 in 2018; 0.1 in 2019; 0.1 in 2020. ### Public finance and fiscal recommendations - Fiscal outcomes and stock: - General government balance: -2.8 percent of GDP in 2017; -2.5 percent in 2018; projected -3.2 percent in 2019; -2.3 percent in 2020. - General government gross debt: 98.4 percent of GDP in 2017; 98.4 percent in 2018; 99.0 percent in 2019; 98.6 percent in 2020. - Revenue: 53.6 percent of GDP in 2017; 53.5 percent in 2018; 52.4 percent in 2019; 52.1 percent in 2020. - Expenditure: 56.4 percent of GDP in 2017; 56.0 percent in 2018; 55.6 percent in 2019; 54.4 percent in 2020. - Primary balance: -1.1 percent of GDP in 2017; -0.9 percent in 2018; -1.8 percent in 2019; -0.9 percent in 2020. - Structural balance (percent of pot. GDP): -2.6 in 2017; -2.4 in 2018; -2.3 in 2019; -2.4 in 2020. - Staff and Executive Directors' advice: - Pursue sustained, growth-friendly consolidation to reduce the deficit and put public debt on a firm downward path. - Anchor fiscal strategy in durable medium-term reforms to reduce public spending: pursue planned civil service, pension, and unemployment benefit reforms. - Complement spending reforms with additional measures to reconcile frontloaded tax relief, priority investment, and debt reduction. - Maintain fiscal space to respond to sharp downturns while balancing cyclical support and sustainability and protecting vulnerable groups. ### Structural reforms and labor-market policies - Reforms enacted and planned: - Revamped vocational training and professional development to foster labor market participation, especially for low-skilled workers. - Labor tax and labor code reforms enacted in first year of the government’s mandate. - Business environment reform enacted to spur competition, innovation, and productivity growth. - Authorities reaffirmed intention to continue with planned structural reforms including unemployment benefits, civil service, and pensions. - Staff and Directors' recommendations: - Implement labor-market reforms resolutely, monitor effects carefully, and be ready to deepen them if outcomes fall short. - Complement labor reforms with product and service market reforms, including liberalizing regulated professions, retail trade, and sale of medicines. - Aim to boost potential growth by reducing structural unemployment, improving labor force participation (especially among vulnerable groups), and enhancing productivity. ### Financial sector resilience - Systemic risk and policy actions: - Authorities raised the countercyclical capital buffer and lowered the large exposure limit of banks to large indebted companies to address corporate leverage buildup. - Bank credit growth: 5.6 percent in 2017; 5.5 percent in 2018; projected 5.0 percent in 2019; 4.6 percent in 2020. - Directors' priorities: - Continue monitoring systemic risks and be ready to deploy additional macro- and micro-prudential policies. - Further integrate monitoring and oversight at the conglomerate level; strengthen liquidity-risk management within conglomerates and ensure adequate liquidity buffers. - Enhance AML/CFT supervision of smaller banks and continue to enhance crisis management, resolution, and safety nets. ### Key statistics (selected) - Real GDP (change in percent): 2.3 (2017); 1.7 (2018); 1.3 (2019); 1.4 (2020). - CPI (year average): 1.2 (2017); 2.1 (2018); 1.2 (2019); 1.4 (2020). - Unemployment rate (percent): 9.4 (2017); 9.1 (2018); 8.6 (2019); 8.3 (2020). - General government balance (percent of GDP): -2.8 (2017); -2.5 (2018); -3.2 (2019); -2.3 (2020). - General government gross debt (percent of GDP): 98.4 (2017); 98.4 (2018); 99.0 (2019); 98.6 (2020). - Current account (percent of GDP): -0.7 (2017); -0.6 (2018); -0.6 (2019); -0.5 (2020). - Exports of goods and services (percent of GDP): 32.1 (2017); 32.6 (2018); 34.7 (2019); 34.7 (2020). - Imports of goods and services (percent of GDP): -33.1 (2017); -33.7 (2018); -35.7 (2019); -35.7 (2020). - Potential output (change in percent): 1.3 (2017); 1.4 (2018); 1.4 (2019); 1.5 (2020). - Output gap: -0.1 (2017); 0.2 (2018); 0.1 (2019); 0.1 (2020). *International Monetary Fund — Staff Report for the 2019 Article IV Consultation (France), July 1, 2019.* ### 8. Growth is expected to reach 1.3 and 1.4 percent this year and next, respectively. ### 8. Growth is expected to reach 1.3 and 1.4 percent this year and next, respectively. ### Growth outlook and inflation - Growth is expected to reach 1.3 and 1.4 percent this year and next, respectively. - Projections are predicated on a gradual resumption of quarterly growth through 2019–20, as the effect of temporary factors fades, and regional and global growth recovers. - Private consumption is expected to increase, supported by recent fiscal measures to boost household disposable income, lower oil prices, and improving labor market conditions. - Investment and export growth are expected to remain subdued in the near term—as external demand in the Euro Area remains moderate and macroprudential policies dampen credit growth—and pick up gradually over the medium run. - Given the level of the cyclically-adjusted current account (CA) relative to the revised model norm, the external position is now assessed to be broadly consistent with medium-term fundamentals and desirable policy settings, even as France’s estimated CA gap of -1 percent of GDP is in the upper range for this category, with a real effective exchange rate (REER) gap of 2 to 5 percent (Annex II). - Inflation is projected to remain subdued at 1.2 and 1.4 percent this year and next, returning to the ECB’s target only toward the end of the projection horizon. ### France: Selected Economic Indicators, 2017–24 (Real economy and key aggregates) - Real GDP: 2.3 1.7 1.3 1.4 1.5 1.5 1.5 1.5 - Domestic demand: 2.3 1.0 1.3 1.4 1.5 1.5 1.6 1.6 - Private consumption: 1.4 0.9 1.4 1.6 1.6 1.6 1.6 1.6 - Public consumption: 1.5 0.8 0.6 0.4 0.6 0.6 0.9 1.2 - Gross fixed investment: 4.7 2.8 2.0 2.1 2.3 2.3 2.3 2.2 - Foreign balance (contr. to GDP growth): -0.1 0.7 0.0 -0.1 0.0 0.0 -0.1 -0.2 - Exports of goods and services: 3.9 3.5 3.5 3.5 3.8 3.8 3.6 3.5 - Imports of goods and services: 3.9 1.2 3.5 3.6 3.6 3.7 3.8 3.8 - CPI (year average): 1.2 2.1 1.2 1.4 1.4 1.6 1.8 1.8 - Unemployment rate (percent): 9.4 9.1 8.6 8.3 8.1 8.0 8.0 8.0 - Output gap (percent of pot. GDP): -0.1 0.2 0.1 0.1 0.0 0.0 0.0 0.0 - Sources: Haver Analytics, INSEE, Banque de France, and IMF staff calculations. ### Medium-term prospects and risks - Long-term growth prospects: Output growth expected to converge to its long-run potential level of around 1½ percent on the back of recovering domestic demand. - Labor productivity: Growth has declined over past two decades, largely reflecting falling multi-factor productivity growth, and is expected to recover only somewhat over the medium term as recent and ongoing structural reforms start to bear fruit. - Key downside risks (Annex III): - Weaker-than-expected growth in Europe and deteriorating market sentiment could weigh on export growth and confidence in France. - Rising protectionism and retreat from multilateralism, including a further escalation of trade tensions between the United States and the European Union (including a possible response to EU subsidies to Airbus and potential car tariffs), could induce firms to postpone investment, weighing on employment and activity. - Sharp tightening of global financial conditions, related to a disorderly Brexit or concerns about debt levels in some euro-area countries, could affect France’s growth outlook. A disorderly Brexit could lower France’s growth by some 0.2–0.3 percentage points by 2021, largely through real sector channels. If border disruptions in key ports are high, the short-term impact could be larger. - Domestic risks: potential resistance to reforms, which could compromise fiscal objectives, dampen confidence, and, through higher financing costs, have second-round effects on growth. - Inflation risks: downside risk that inflation does not converge to target in the medium run, which could weigh on private and public debt burdens. ### Authorities’ views - Authorities expect growth at 1.4 percent this year and next, driven by a strong effect on private consumption of fiscal measures supporting purchasing power in the near term. - Authorities broadly shared staff’s view that external risks have risen—including trade tensions and Brexit—but considered that France is relatively more insulated than some other European neighbors due to a less open economy. - At the domestic level, authorities remained committed to pursue their reform agenda and viewed the conclusions of the grand national debate as supportive of a strong reform process. ### Fiscal position, projections, and risks - Public debt has reached historical highs, having increased by about 80 percent of GDP between 1980 and 2018. - Staff’s baseline projections use legislated and announced policies (including recent measures to boost purchasing power amounting to close to 1 percent of GDP in the medium run). - Key revenue measures cost around 1.3 percent of GDP this year, and a cumulative 2.1 percent during 2018–24. - Legislated spending-containment measures estimated at 2.2 percent of GDP largely offset ongoing tax relief in the medium run. - Deficit projections: deficit of 3.2 percent of GDP this year, and 2.7 percent by 2024. - Primary structural deficit is projected to deteriorate by about 0.3 percent of GDP over the medium term, compared to a recommended improvement of 0.5 percent per year over 2019–22 in the 2018 Article IV Consultation. - Public debt projected to stay elevated, at 97 percent of GDP by 2024. - The measures in response to the "yellow vest" movement imply a deterioration in the fiscal balance of about 0.4 percent of GDP in 2019 and 0.9 percent of GDP in the medium run. ### Fiscal projections and scenarios (selected staff and authorities numbers) - Staff baseline projections (selected rows from table): - Fiscal balance: -2.5 -3.2 -2.3 -2.5 -2.6 -2.7 -2.7 - Structural fiscal balance (percent of potential GDP): -2.4 -2.3 -2.4 -2.5 -2.6 -2.7 -2.7 - Structural primary balance (percent of potential GDP): -0.8 -0.8 -0.9 -1.0 -1.1 -1.1 -1.1 - Change in structural primary balance: -0.1 -0.1 -0.1 -0.1 0.0 0.0 - Public debt: 98.4 99.0 98.6 98.3 97.9 97.4 97.0 - Authorities' projections (2019 Stability Programme, selected rows): - Fiscal balance: -2.5 -3.2 -1.7 -1.3 -0.8 -0.4 -0.4 - Structural fiscal balance (percent of potential GDP): -2.4 -2.3 -1.8 -1.3 -0.8 -0.4 -0.4 - Structural primary balance (percent of potential GDP): -0.8 -0.8 -0.3 0.2 0.7 1.2 1.2 - Change in structural primary balance: -0.1 0.5 0.5 0.5 0.5 0.0 - Public debt: 98.4 99.0 98.2 96.8 94.8 92.2 89.7 - Baseline projections (alternate column, selected rows): - Fiscal balance: -2.5 -3.1 -2.0 -1.6 -1.2 .. - Structural fiscal balance (percent of potential GDP): -2.1 -2.1 -1.9 -1.6 -1.3 .. - Structural primary balance (percent of potential GDP): -0.4 -0.6 -0.4 0.0 0.4 .. - Change in structural primary balance: -0.2 0.2 0.4 0.4 - Public debt: 98.4 98.9 98.7 98.1 96.8 .. ### Fiscal policy recommendations and structural reforms - France requires an ambitious structural consolidation effort of around 2 percent of GDP during 2020–23 to place debt on a firm downward path and achieve the MTO. - Achieving the required adjustment will require a steady improvement in the structural primary balance of around 0.5 percent of GDP per year during 2020–23. - Policy guidance if downside risks materialize: - In a mild downside scenario generating a small output gap, automatic stabilizers should be allowed to operate fully around the recommended structural adjustment path. - In a sharp downturn where all risks materialize and France and the euro area fall into recession, in addition to automatic stabilizers, a moderate and temporary structural relaxation could be appropriate, financing conditions allowing; it will be critical to preserve policy credibility and sustainability by pre-specifying future reforms to bring down debt and deficit in the medium run while protecting vulnerable groups. - Fiscal strategy should focus on specifying credible reforms to reduce public spending over the medium term and increase spending efficiency. - Planned fiscal structural reforms that could support consolidation while improving efficiency, equity, and growth: - Civil service reform: target ambitious decline in workforce through attrition, especially at local government level. (Example: a reduction in the number of public employees by 120,000 over five years would require halving the replacement ratio of retiring government workers (from 1¼ over the last five years to ¾), yielding 0.1–0.2 percent of GDP in savings.) - Pension reform: unify multiple existing pension systems under one umbrella with common rules to improve transparency, efficiency, and equity; accelerate increase in effective retirement age and link to life expectancy to generate savings and boost labor-force participation. (Current system envisages gradual increase in effective retirement age to 64 by 2040. An acceleration to achieve 64 by 2030 could generate savings of 0.4–0.6 percent of GDP by 2024.) - Unemployment benefit reform: tighten eligibility requirements, revise rules to calculate and cumulate benefits, and introduce degressivity in benefits for high-salary workers to generate limited fiscal savings while supporting employment and growth. - Reorganization of the health system could bring long-run benefits but should be carefully implemented to minimize medium-run costs. *Italic: Source — IMF staff report (France), extracted content unit 1fraea2019002.* ### 20. Ongoing efforts should be complemented with additional spending reforms, several of ### 20. Ongoing efforts should be complemented with additional spending reforms, several of which are being considered by the authorities ### Spending gaps and efficiency opportunities - Areas where France’s level of spending is high relative to peers (Annex VI): - Social protection (especially pensions, where France spends almost 20 percent more than peers; also housing and family benefits). - Economic affairs (including tax expenditures and subsidies, where France spends about 30 percent more than peers). - Health (including 40 percent more spending on medical products and equipment, and almost 20 percent more on outpatient services). - Education (including 26 percent more on secondary education). - Together these four spending areas: - Represent three-fourths of France’s total government expenditure. - Account for around 85 percent of the spending gap between France and peers. ### Potential savings and reform options - Staff analysis indicates potential efficiency gains saving some 1–1.5 percent of GDP in total in the medium term, obtainable by: - Streamlining corporate tax expenditures and subsidies. - Rationalizing spending on medical products and hospital services, while protecting the quality of public health and R&D spending. - Improving allocation of resources in education: - Tackling high teacher-student ratios and low teaching hours in secondary and upper education. - Improving teacher-student ratios in primary education where needed. - Better targeting social benefits (e.g. family, housing) to those most in need and streamlining administrative costs; evidence in Annex VI suggests some of France’s social benefits are less targeted compared to peers. - Merging small municipalities and eliminating overlaps between the local and central government. - Staff estimates savings of around 0.04 percent of GDP per year from merging small municipalities. ### Design and credibility of a consolidation plan - A credible plan to reduce spending requires careful identification of potential efficiency gains (see list above) and credible commitment across government levels. - Staff’s cross-country empirical analysis finds that successful fiscal adjustments require strong coordination across all government levels. - In France, 20 percent of total spending is undertaken by local governments. - Greater revenue decentralization at the subnational level and credible fiscal rules support fiscal adjustments. - Recent local government spending rule results: current real spending of local administrations increased by 0.7 percent last year (against the objective of 1.2 percent). Sustaining these gains is essential while ensuring provision of key public services and support for vulnerable groups is not compromised. ### Authorities’ views on spending and consolidation - Authorities concurred with the need to reduce the deficit and debt through durable spending reforms but favored a more gradual pace of consolidation than that recommended by staff. - Their strategy prioritizes addressing structural challenges upfront, while pursuing consolidation in a more gradual manner. - They reiterated commitment to fiscal structural reforms that support growth and achieve fiscal savings in the medium run, such as the unemployment and pension reforms. - They agreed on continuing to reduce public spending and increase its efficiency over the medium term, including to make space for priority investment (e.g. environment, innovation). - They noted recent progress including through the local government contractual approach and a better and more transparent budgeting process. - In a downside scenario where external risks materialized simultaneously, authorities saw a need for domestic fiscal policy to support growth while ensuring sustainability and for a more coordinated policy response at the European level. --- ### Structural reforms: supporting inclusive growth — summary findings - Living standards have been sluggish; France’s real GDP per capita increases have been modest over the last two decades. - Market income inequality is high; France lags peers on intergenerational mobility: 6 generations versus the 4.5 OECD average to move from the bottom 10 percent to mean income (Annex V). - France’s unemployment and participation challenges have been magnified by the global crisis; structural unemployment remains high relative to peers. ### Labor-market reforms and implementation - Reforms enacted in 2017: - Reduced labor tax rates, simplified social dialogue, facilitated bargaining at the firm level, and reduced judicial uncertainty around dismissals. - Apprenticeship and professional-training reforms enacted in fall 2018 aimed at improving opportunities especially for vulnerable groups. - Early implementation signals: - The regulating agency France Compétence has been set up. - The cost of some 800 apprenticeship programs has been identified. - Some firms have created their own centers. - The number of high-school applicants for apprenticeship programs increased by 40 percent. - Implementation tasks remaining: - Regulating new training centers. - Fully rolling out the training app. - Government funding: setting aside €15 billion for the training of 1 million unemployed and 1 million low-skilled youth until 2022. - Gender gap measures: a novel index measuring gender pay inequality with penalties for non-compliant companies (Annex V). - Unemployment benefit reform underway: - Aims to reduce structural unemployment by tightening eligibility requirements and improving work incentives. - Constitutes an important step in bringing minimum contribution requirements and maximum benefit levels closer to those of peers, though the new system will remain relatively more generous in international comparison. - Recommendation: Implement reforms ambitiously, closely monitor effects (including of the unemployment benefit reform), and be ready to adjust if outcomes fall short of objectives. ### Product and service market reforms - 2018 railway reform increased competition in passenger transport. - Loi PACTE aims to: - Facilitate firm creation and growth. - Promote entrepreneurship and innovation. - Support reallocation of savings toward longer term investment. - Improve the insolvency regime. - Remaining restrictive regulations hamper productivity growth: France lags peers on dimensions including professional services (entry restrictions), retail services (registration and licensing requirements, opening-hour restrictions, retail-price regulations, online-sales limitations), and network sectors. - Consequences: rising productivity gap between French firms and best-performing global firms, particularly in the service sector. - Potential gains from aligning with OECD best practices: - Staff model analysis suggests boosting the level of potential output per capita by up to 1.6 percentage points over 10 years (equivalent to up to 0.16 percent additional growth per year), which could modestly lower the public debt ratio. - Recommended measures: - Ease administrative burden on start-ups. - Foster competition in regulated professions (e.g. accountants, lawyers, architects). - Liberalize retail trade authorization/registration, opening hours, and online sales (including medicines). - Government planned measures include liberalizing personal transport (driving schools and auto parts) and online sales of medicines. - Continued implementation of both labor and product market reforms can create synergies, reduce real and nominal rigidities, facilitate reallocation of labor and capital, and lead to milder downturns. ### Addressing corruption - Corruption can distort competition, damage the business climate, and lead to suboptimal resource allocation. - France’s recent actions: - 2016 Law on Transparency, the Fight Against Corruption, and the Modernization of the Economy (Loi Sapin 2). - Introduced a deferred prosecution resolution mechanism (Convention Judiciaire d’Intérêt Public CJIP). - Created the French Anti-Corruption Agency. - Bolstered enforcement capacity including creation of a National Financial Prosecutor. - Recommendation: Continue enhancing enforcement capabilities, be proactive when French companies have been sanctioned by foreign authorities, and ensure sanctions are effective, dissuasive, and proportionate. ### Financial sector: resilience highlights - France’s financial system is complex and global: - Home to four global systemic banks (G-SIBs), and one global insurer. - Banks, insurance companies, and investment funds are interlinked in complex financial conglomerate structures. - Total financial system assets are about 600 percent of GDP. - French financial conglomerates operate in more than 80 countries. - Bank asset and liability structure: - Asset side: highly diversified including reliance on domestic credit and a sizeable share of traded assets, with significant exposure to sovereign debt—highlighting the importance of safeguarding fiscal sustainability. - Liability side: banks are relatively more reliant than peers on wholesale funding, which has declined but remains high (including in USD). *From IMF staff report excerpt provided.* ### 31. Banks have improved capital positions ### 31. Banks have improved capital positions ### Bank capital, asset quality, liquidity, and profitability - Capital and leverage: - The large banks’ CT1 ratio has increased in recent years, averaging 14.7 percent at end-2018. - The leverage ratio is in line with peers. - Asset quality: - NPLs fell below 3 percent. - Liquidity: - The liquidity-coverage ratio is well above 100 percent and has been rising recently. - The net-stable-funding ratio (NSFR) hovers around 100 percent, having increased in 2018. - Profitability: - Successive increases in fees and commission income and earnings from bancassurance products have supported overall profitability, which is in line with global peers. - Net-interest margins have been compressed and are below peers, given low interest rates, regulated savings, and competition among banks and from fintech. - Insurers: - Insurers’ solvency ratios have been stable, and implementation of Solvency II is ongoing. ### Macrofinancial vulnerabilities and macroprudential responses - Credit gap and corporate debt: - Staff estimates the credit gap to have reached 2.7 percent of GDP last year (slightly below the 3.2 percent level attained in 2017). - Corporate debt has been rising sharply since the global financial crisis—to around 140 percent of GDP at end-2017 on an unconsolidated basis. - Consolidated corporate debt is lower, at 90 percent of GDP. - Many firms have also built up cash buffers. - Household sector and housing: - Household debt has increased but is mitigated by an increase in household assets. - Residential house prices, while having risen, remain broadly in line with fundamentals at the national level. - Policy actions taken: - The authorities lowered the large exposure limit of banks to large indebted corporates. - A countercyclical capital buffer (CCyB) of 0.25 percent was introduced and raised to 0.5 percent this year. - Banks have until April 2020 to comply with the latest increase in the CCyB. ### Stress-test findings and resilience - Overall resilience: - Stress-test analysis for France’s 2019 FSAP indicates banks, corporates, and insurers are broadly resilient to simulated shocks, although some pockets of vulnerability remain. - Overall, banks appear to have sufficient capital and liquidity buffers (notwithstanding high volatility in dollar liquidity ratios) to withstand an adverse shock. - Specific stress vulnerabilities: - An increase in wholesale funding costs could challenge profitability and solvency. - Large outflows of wholesale funding could strain liquidity positions. - Corporate debt-at-risk would increase under stress, but overall risks from corporate exposures appear manageable. - Insurers are broadly resilient to market shocks, but risks stem from concentrated exposures, mostly to parent banks; they are also vulnerable to a combination of a rise in interest rates and a mass-lapse event. - Stress scenario assumptions: - The shock assumes that GDP would be 7.1 percent below baseline, asset prices would be lower by 25 percentage points, and risk premia for the sovereign and corporates would rise by 100 and 150 basis points. ### Policy recommendations and supervisory priorities - Bolster monitoring and oversight of financial conglomerates: - Improve cooperation among supervisory agencies to develop common reporting templates, provide supervisory guidance, increase oversight of liquidity including stress testing, and set requirements at the conglomerate level. - Intensify monitoring of insurers’ exposures toward parent banks (which can reach more than 50 percent of insurers’ capital); consider concentration limits on these exposures. - Build resilience against cyclical risk, including corporate indebtedness: - Stay vigilant, continue to monitor financial conditions, and be ready to use additional micro- and macro-prudential policies proactively if risks intensify. - Consider introduction of a systemic risk buffer and Pillar II capital measures calibrated to corporate exposure or further adjust the CCyB. - Further reduce the fiscal tax bias favoring debt rather than equity financing to help curb corporate leverage. - Consider development of additional measures to address non-bank financing pressures. - Ensure adequate liquidity buffers: - Although aggregate liquidity indicators have improved, banks sometimes rely on collateral swaps, and the NSFR in US dollars is still well below 100 percent. - To minimize residual risks related to potential disruptions in wholesale funding, supervisory authorities are encouraged to consider imposing liquidity buffers to cover at least 50 percent of wholesale funding outflows up to a five-day horizon for all currencies, linked with monitoring of banks’ use of collateral swaps, to improve liquidity ratios. - Enhance crisis management, safety nets, resolution arrangements, and financial integrity: - Integrate crisis-preparedness tools by pooling safety-net resources and broadening recovery and resolution-planning exercises to cases where failure within a conglomerate impedes internal support. - Enhance the insurer-resolution framework by providing ACPR powers to mandate the bail-in of liabilities and privately-financed resolution funding. - Continue to enhance AML/CFT supervision of smaller high-risk rated banks and develop consistent approaches to risk-based compliance monitoring procedures. ### Selected key statistics and timelines (exact figures from source) - Large banks’ CT1 ratio: 14.7 percent at end-2018. - NPLs: below 3 percent. - Liquidity-coverage ratio: well above 100 percent. - NSFR: around 100 percent (increased in 2018); NSFR in US dollars is still well below 100 percent. - Credit gap: 2.7 percent of GDP last year; 3.2 percent level attained in 2017. - Corporate debt (unconsolidated): around 140 percent of GDP at end-2017. - Corporate debt (consolidated): 90 percent of GDP. - CCyB: introduced at 0.25 percent, raised to 0.5 percent this year; compliance deadline for banks: April 2020. - Stress scenario assumptions: GDP 7.1 percent below baseline; asset prices lower by 25 percentage points; sovereign and corporate risk premia rise by 100 and 150 basis points. - Recommended liquidity buffer: cover at least 50 percent of wholesale funding outflows up to a five-day horizon for all currencies. *Source: 1fraea2019002 - 31. Banks have improved capital positions (excerpt).* ### Box 1. Policy Responses to the Gilets Jaunes Protests (concluded) ### Box 1. Policy Responses to the Gilets Jaunes Protests (concluded) ### Immediate policy stance and commitments - Measures would be financed through a rationalization of subsidies and tax expenditures (niches fiscales) and incentivizing longer work but has not yet identified specific measures. - Announced policy actions and commitments: - Closure of the administrative elite school (ENA). - Committed not to close any hospitals or schools until 2022. - Indicated that the statutory pensionable age and the 35-hour week will remain unchanged. - Noted that the target for reducing public employment by 120,000 by 2022 may no longer be feasible. - Maintained the reform replacing the wealth tax with a real estate tax but committed to reassess it in early-2020. ### Planned Fiscal Structural Reforms - Objective: legislate reforms in 2019 to improve government spending efficiency, quality and fairness of social protection, boost long-term output growth by increasing labor-force participation, addressing misallocation of labor, and reducing structural unemployment. - Civil service reform (expected to be legislated by mid-2019): - Encourage the use of contractual employment, including at managerial level. - Introduce new types of temporary contracts. - Simplify social dialogue. - Allow for voluntary dismissals, as in the private sector. - Simplify procedures to change jobs within the public administration and increase the portability of acquired rights and benefits. - Impose a minimum 35 hour week for all civil servants. - Introduce a merit-based pay system while harmonizing remunerations and promotions criteria across the administration. - Pension system reform (expected to kick-in gradually, starting from 2025; law expected to be finalized and legislated in 2019 or early 2020): - Unify the 42 existing pension systems under one scheme for all private and public workers, with benefits based on points. - Calculate pension rights over the whole career, instead of a number of best years, for all groups of workers. - Introduce a single definition for labor revenues to be used as basis for calculating pension contributions, including bonuses for the public sector. - Provide incentives to retire later, such as by accelerating the planned gradual increase in the effective retirement age. - Unemployment benefit system reform (expected to be implemented in the summer of 2019 with measures taking effect from November 2019 to mid-2020; no further legislation required): - Compute unemployment benefits on the basis of average monthly salaries, rather than average earnings over worked days, while ensuring that benefits are between 65 percent and 96 percent of net monthly salaries. - Introduce a 30 percent reduction in benefits after six months for high-salary earners (above €4,500), while maintaining the initial maximum benefit cap of €7,700 and introducing a floor of €2,261. - Extend the minimum contribution length to six months over the past 24 months (from four months over the past 28 months). - Raise from one to six months the minimum working period needed to recharge unemployment insurance rights during the benefit period. - Introduce a bonus-malus scheme for firms with 11 workers or more in selected sectors (accommodation and restauration; food; transport and storage; water and sanitation; rubber and plastic; wood, paper, and printing; and certain specialized activities) by which employers would contribute more to the system for using short-term contracts excessively, coupled with a lumpsum tax of €10 for the use of very short term contracts. - Expand rights for independent workers and those quitting jobs and reinforce support for job seekers. - Healthcare system reform (now in parliament; expected to be legislated in mid-2019): - Aim: improve the quality of health services by “placing the patient at the heart of the system.” - Key measures: - Introduce a flat price system for hospital stays for certain diseases. - Create 1,000 new territorial health centers by 2022, and 4,000 new positions of doctor assistants. - Reform the administrative authorizations for health services and reinforce the role of doctors in hospital management. - Reform undergraduate and graduate medical studies. - Expected financing: cover reform costs by the increase of the ceiling on health spending from 2.3 to 2.5 percent in 2019. - Future planned measures (in subsequent years): - Introduce further reforms to unify social minimum benefits into a single universal activity benefit. - Reform old-age care for dependent elderly citizens. - Further decentralize powers from the central to local governments. *International Monetary Fund — FRANCE (excerpt).* ### Box 3. Recent Efforts in Tackling Corruption and Supply-Side Bribery ### Box 3. Recent Efforts in Tackling Corruption and Supply-Side Bribery ### OECD Working Group on Bribery assessment and concerns (2012) - The Working Group on Bribery raised concerns about anti-corruption enforcement efforts in France. - It concluded that foreign bribery enforcement in France was "not commensurate with the size and significance of France’s economy." - Only five convictions for foreign bribery had been secured since France’s ratification of the OECD Anti-Bribery Convention, "of which only one (not yet final) was for a legal person." - French authorities were perceived as exhibiting a "lackluster" response in pursuing cases against companies sanctioned by other Parties to the Convention. - The Working Group recommended that France intensify efforts to combat the bribery of foreign public officials, including by: - enhancing the independence of the prosecutors, - dedicating sufficient resources to the investigation and prosecution of foreign bribery, and - protecting whistleblowers. - The next assessment of France by the Working Group on Bribery will take place in 2020. ### Legal and institutional reforms (since Phase 3 review in 2012) - In December 2016, France passed the Law on Transparency, the Fight Against Corruption, and the Modernization of the Economy (Loi Sapin 2), which: - expanded France’s jurisdiction with respect to corruption offences by eliminating the dual criminality requirement for prosecution of foreign bribery offences, - imposed mandatory compliance requirements for French companies of a certain size and above the statutory threshold, - introduced a deferred prosecution resolution mechanism (Convention Judiciaire d’Intérêt Public – CJIP), - created the French Anti-Corruption Agency (AFA) to support the prevention, detection, investigation and prosecution of corruption. ### Enforcement developments and trends (2013–2018) - Measures to bolster enforcement against French companies bribing public officials abroad include: - establishment of a new National Financial Prosecutor, - cessation of individual instructions from the Minister of Justice to prosecutors, - protection for all whistleblowers from retaliation, - an increase in criminal sanctions for the foreign bribery offence, - an end to the monopoly of the Public Prosecutor's Office on foreign bribery prosecutions. - As of December 2017, "15 natural persons and 2 legal persons had been convicted of foreign bribery and sanctioned since the entry into force of the Convention in 2000." - In 2018, French prosecution authorities entered into the first ever CJIP in close cooperation and coordination with the United States. *International Monetary Fund — Box 3. Recent Efforts in Tackling Corruption and Supply-Side Bribery* ### Annex I. Authorities’ Response to Past IMF Policy ### Annex I. Authorities’ Response to Past IMF Policy Recommendations ### Fiscal Policy - IMF 2018 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: - Legislated with the 2019 budget nominal spending growth ceilings for local authorities, public wages, social benefits, and health spending. - Important tax cuts were also legislated, which almost offset the impact of legislated spending measures. - Working on reforms of the civil service, pension system, unemployment benefits, and healthcare, but have yet to identify fiscal savings from some of these reforms. ### Structural Reforms - IMF 2018 recommendations: - Better link education systems to labor market needs, re-examine the level and accumulation rate of unemployment benefits, expand firm-level flexibility in setting base wages, and re-evaluate the minimum wage mechanism. - Simplify business regulations, address disincentives to company growth, and further reduce barriers to competition in regulated professions. - Authorities’ response: - Substantial progress in reforming the organization, governance, and funding of apprenticeship and training systems in late 2018. - Reform of the unemployment benefit system is underway, aiming to reduce the system’s generosity, improve work incentives, and disincentivize precarious work arrangements. - The Loi Pacte, enacted in early 2019, simplifies further administrative burdens for firms, particularly for smaller ones. ### Financial Sector - IMF 2018 recommendation: Closely monitor financial risks, in particular the rise in corporate debt. - Authorities’ response: - Continued monitoring of financial risks. - Decided in 2019 to further increase the countercyclical capital buffer. *Italic: Source — Annex I. Authorities’ Response to Past IMF Policy Recommendations* ### Annex II. External Sector Assessment ### Overall Assessment and Foreign Asset/Liability Position - Overall assessment: The external position in 2018 was broadly consistent with medium-term fundamentals and desirable policy settings. - Background and key figures (2018): - NIIP: -11.4 (% GDP) - Gross Assets: 289.9 (% GDP) - Debt Assets: 164.2 (% GDP) - Gross Liabilities: 301.2 (% GDP) - Debt Liab.: 199.3 (% GDP) - Net international investment position (NIIP) averaged around -16 percent of GDP since 2015. - NIIP improved from -20 percent of GDP in 2017 to -11 percent of GDP in 2018. - Net FDI position: positive and over 20 percent of GDP. - Gross asset position: 290 percent of GDP in 2018. - Banks’ non-FDI related assets: about one-third of gross assets. - Other non-bank financial institutions: close to another one-third. - Gross liabilities: 301 percent of GDP in 2018. - External debt estimated at 199 percent of GDP. - Public-sector accounts for 54 percent of GDP. - Banks for 104 percent of GDP. - Target 2 balances averaged around -€36 billion (-1.5 percent of GDP) in 2018. - Bank debt maturing in 2019: estimated at €75 billion (3.2 percent of GDP). - Financial derivatives: 30 percent of GDP. - Assessment: NIIP negative but size and projected stable trajectory do not raise sustainability concerns; vulnerabilities from large public external debt and banks’ gross financing needs. ### Potential Policy Responses - Steadfast implementation of recently legislated structural reforms (e.g. labor market reforms). - Further efforts to reduce corporate administrative burdens, promote innovation, and strengthen competition in service sectors to improve competitiveness, investment and long-run growth. - Steady medium-run fiscal consolidation to help keep the external position in line with medium-term fundamentals. ### Current Account - Background and figures: - Actual CA: -0.6 (% GDP) in 2018 (narrowed from -0.7 in 2017). - Cycl. Adj. CA: -0.5 (% GDP) - EBA CA Norm: 0.5 (% GDP) - EBA CA Gap: -1.0 (% GDP) - Staff Adj.: 0.0 - Staff CA Gap: -1.0 (% GDP) - Assessment: - 2018 cyclically-adjusted CA deficit estimated at 0.5 percent of GDP, compared to an EBA-estimated norm of a surplus of 0.5 percent. - Staff assesses the CA gap in 2018 was between -1.5 to -0.5 percent of GDP. ### Real Exchange Rate (REER) - Background: - ULC-based and CPI-based REER appreciated moderately by 0.4–2.2 percent in 2018 relative to 2017. - Through May 2019, the CPI-based REER depreciated by 1.6 percent. - ULC-based REER appreciated by around 3–9 percent since the late 1990s. - France lost about one-third of its export market share in the 2000s and has not regained it since. - Assessment: - EBA REER-Index model: REER gap of -0.5 percent. - EBA REER-Level model: REER gap of 7.7 percent. - Given an elasticity of 0.27, the EBA CA gap points to an overvaluation of 2–5 percent. - Staff assesses the REER gap to be in the range of 2 to 5 percent. ### Capital and Financial Accounts - Background: CA deficit 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 Level - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. *Italic: Source — Annex II. External Sector Assessment* ### Annex III. Risk Assessment Matrix - Presentation: Risks that could materially alter the baseline path, with staff subjective likelihood and expected impact assessments. - Weaker-than-expected global growth - Likelihood: High - Expected impact: High - Key near-term channels: Delayed investment, reduced private consumption, adverse financial market reactions, potential disorderly Brexit. - Policy response: - Accelerate structural reforms to spur investment, productivity and competitiveness, and strengthen private-sector balance sheets. - Early identification of deep spending reform to put debt on a downward path and increase economic resilience. - Rising protectionism and retreat from multilateralism - Likelihood: High - Expected impact: High - Key channels: Trade disruptions, reduced growth, increased financial market volatility, political backlashes. - Policy response: - Continued support for the multilateral rules-based trading system, trade liberalization and pursuit of high-standard free-trade agreements. - Re-double efforts to secure benefits of economic integration and cooperation across the EU. - Strong collaboration to ensure smooth and predictable transition to a new economic relationship between the U.K. and the EU. - Sharp tightening of global financial conditions - Likelihood: Low - Expected impact: High - Key channels: Tighter U.S. monetary policy driven by strong wage growth and higher-than-expected inflation; rise in euro-area risk premia due to sovereign concerns or idiosyncratic policy missteps. - Policy response: - Build buffers by pressing expeditiously with structural reforms, strengthening balance sheets, and fiscal consolidation. - Weakening of reform implementation in France, including due to increased resistance - Likelihood: High - Expected impact: High - Key channels: Non-implementation could undermine confidence and lead to higher financing costs. - Policy response: - Accelerate structural reforms to spur investment, productivity and competitiveness, and strengthen private-sector balance sheets. - Early identification of deep spending reform to put debt solidly on a downward path and increase economic resilience. *Italic: Source — Annex III. Risk Assessment Matrix* ### Annex IV. Debt Sustainability Analysis (DSA) ### A. Public Debt Sustainability Analysis — Baseline and Background - Baseline projection: - Debt-to-GDP ratio projected to decline modestly to 97 percent of GDP by 2024 from 98 percent in 2018. - Gross financing needs expected to peak at 21 percent of GDP in 2022 and gradually decline to 19 percent in 2024. - Under baseline, gross financing needs of the government would peak at 20.8 percent of GDP in 2022 and decline to 19.3 percent in 2024. - Background: - Debt-to-GDP increased by 30 percent of GDP since 2008 to 98 percent at end-2018. - Public debt revised up by 1.7 percent of GDP in 2017 due to absorption of SNCF debt. - Interest payments: 1.7 percent of GDP in 2018. - Benchmark 10-year yield: declined from 4.2 percent in 2008 to 0.8 percent in 2018. - Spreads over German Bunds around 50 basis points at end-2018. - About 13 percent of French debt is indexed to inflation (end-2018). - This interest payment level is the lowest since 1982 when debt-to-GDP was 25 percent. ### A.2 Baseline Decomposition and Assumptions - Staff projects debt-to-GDP to decline modestly by 1.4 percent of GDP to 97.0 in 2024. - Primary deficit contribution: 6.9 percent of GDP increase in debt over the period. - Interest-growth dynamics contribution: 7.8 percent of GDP reduction in debt over the period. - Macroeconomic assumptions: - Real GDP growth: 1.7 percent in 2018; 2.3 percent in 2017. - Growth expected to decline to 1.3 percent in 2019 and then gradually stabilize at potential of 1.5 percent over the medium term. - Effective interest rate expected to be around 1.7 percent over the medium term. - Fiscal outlook: - Primary structural adjustment averaged 0.1 percent of GDP in 2017–18 and expected to be -0.1 percent of GDP on average over the next 5 years. - Primary deficit around 1.1 percent of GDP; debt-stabilizing level is 1.5 percent of GDP. ### A.3 Realism of Projections - Median forecast errors (2009–17): - Real GDP growth: -0.3 percent (upward bias in staff projections). - Primary balance: -0.5 percent median forecast error. - Inflation: -0.3 percent median forecast bias. - Projected cyclically-adjusted primary balance adjustments below thresholds that would cast doubt on feasibility: - Largest projected adjustment over any three years: 0.7 percent of GDP (threshold: 3 percent of GDP). - Maximum average level of cyclically-adjusted primary deficit for any consecutive 3-year period: -1.0 percent of GDP (threshold: 3.5 percent of GDP). ### A.4 Alternative Scenarios - Constant primary balance scenario (equal to 2019 value): public debt around 100 percent of GDP by 2024. - Historical scenario (2009–2018 averages): gross public debt approaching 108 percent of GDP by 2024; gross financing reaching 24 percent of GDP. ### A.5 Shocks and Stress Tests - Growth shock: - Real output growth lowered by one standard deviation over 2020–21 = 1.5 percentage points relative to baseline. - Assumed lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth). - Interest rate assumed to increase 25 basis points for every 1 percent of GDP worsening of primary balance. - Public debt peaks at 105 percent of GDP in 2021 and declines to 104 percent by 2024. - Primary balance shock: - Dual shock of lower revenues and rise in interest rate leading to deterioration of -0.6 percent of GDP in the primary balance in 2020–21. - Debt-to-GDP peaks at 100 percent in 2021 and declines to 98 percent by 2024. - Interest rate shock: - Assumes increase of 341 basis points in the cost of debt throughout the projection period. - In 2024, impact on gross financing needs: 2.3 percent of GDP; on debt-to-GDP ratio: 3.4 percent of GDP. - Note: Interest rate increase computed by difference between average real interest rate level over the projection period and maximum real historical level. - Average maturity of debt as of end-2018: 7 years and 336 days. - Real exchange rate shock: - Assumes a 13 percent devaluation of the real exchange rate in 2020; impact on debt through inflation channel leaves debt-to-GDP very close to baseline. - Combined macro-fiscal shock: - Aggregates shocks to real growth, interest rate, exchange rate, and primary balance. - Debt reaches 105 percent of GDP in 2021 and increases to 107 percent in 2024. - Gross financing needs would peak at 25 percent of GDP in 2021. ### A.6 Heat Map - Risks from debt level and gross financing needs deemed high, given France is above thresholds: - Debt threshold: 85 percent of GDP. - Gross financing needs threshold: 20 percent of GDP. - Share of public debt held by non-residents: 54 percent as of end-2018 (down from peak of 71 percent early 2010). - High share of public and private (mainly banks) debt held by non-residents results in high external financing requirements. ### B. External Debt Sustainability Analysis - Baseline projection: - External debt projected to decline from 217 percent of GDP in 2018 to 206 percent of GDP in 2024. - Contributing factors: non-interest current account surpluses and favorable growth interest rate differentials. - Background and key figures: - External debt increased from 209 percent of GDP in 2014 to 217 percent of GDP in 2018. - Globally active banks account for about half of external debt: 104 percent of GDP. - Government accounts for another quarter: 54 percent of GDP. - Intercompany loans: about 10 percent of GDP in external debt. - France holds substantial foreign assets: around 290 percent of GDP in 2018. - Assessment: France has a high level of external debt, with mitigating factors including low current cost of debt, high foreign assets, limited share of debt in foreign currency, and a positive non-interest current account. *Italic: Source — Annex IV. Debt Sustainability Analysis* ### 8. Assessment. France’s external debt, while high, is sustainable over the medium term. Under ### 8. Assessment. France’s external debt, while high, is sustainable over the medium term. ### External debt outlook and baseline projections - External debt is projected to decline from 217 percent of GDP in 2018 to 206 percent of GDP in 2024 under the baseline scenario. - Projected non-interest current account surpluses of close to 3 percent of GDP in the medium term and favorable growth interest rate differentials support the decline. - Baseline includes projected non-interest current account surpluses and continued low effective interest rates (see Public DSA figures for effective interest rates and debt dynamics). ### Mitigating factors supporting sustainability - Current low cost of debt. - High amount of foreign assets. - Limited share of debt in foreign currency. - Positive non-interest current account. ### Vulnerabilities and stress-test results - The path of external debt is robust to standard stress test scenarios. - Only the historical scenario (macroeconomic variables set equal to their historical averages) would lead to an increase in external debt: from 217 percent of GDP in 2018 to 266 percent of GDP in 2024. - External debt is more vulnerable to: - A real depreciation and growth shock. - External debt is less affected by: - An interest shock (effect would be small). - A non-interest current account shock (effect would be small). - Bound tests and scenario outcomes (selected averages shown in figures): - Baseline average external debt: 206 (percent of GDP) in projection horizon. - Historical scenario average external debt: 266 (percent of GDP) in projection horizon. - Interest-rate shock baseline box values and scenario comparisons are displayed in Figure 6. ### Public DSA — baseline fiscal-debt dynamics (selected figures) - Nominal gross public debt (percent of GDP, selected years): - 2017: 88.6 - 2018: 98.4 - 2019: 98.4 - 2020: 99.0 - 2021: 98.6 - 2022: 98.3 - 2023: 97.9 - 2024: 97.4 and 97.0 (figures show slight year-by-year variation in table). - Public gross financing needs (percent of GDP, selected years): 20.9 (2017), 17.3 (2018), 16.6 (2019), 16.9 (2020), 19.5 (2021), 20.7 (2022), 20.8 (2023), 20.4 (2024), 19.3 (projection end noted). - Real GDP growth (in percent, selected years): 0.6 (2017), 2.3 (2018), 1.7 (2019), 1.3 (2020), 1.4 (2021), 1.5 (2022–2024 steady at 1.5). - Inflation (GDP deflator, in percent, selected years): 1.0 (2017), 0.5 (2018), 0.8 (2019), 1.3 (2020), 1.4 (2021), 1.6–1.8 (2022–2024). - Nominal GDP growth (in percent): 1.6 (2017), 2.7 (2018), 2.5 (2019), 2.6 (2020), 2.9 (2021), 2.9 (2022), 3.2 (2023), 3.3 (2024). - Effective interest rate (in percent): 3.0 (2017), 1.8 (2018), 1.8 (2019), 1.6–1.8 (2020–2024 range shown). - Change in gross public sector debt (cumulative, percent of GDP): 3.7 (2017), 0.5 (2018), 0.0 (2019), 0.7 (2020), -0.4 (2021), -0.3 (2022), -0.4 (2023), -0.5 (2024), cumulative -0.4 and -1.4 shown across projection horizon. ### Public DSA — identified debt-creating flows and automatic dynamics (selected figures) - Identified debt-creating flows (contribution, percent of GDP): 3.6 (2017), 0.3 (2018), 0.2 (2019), 0.7 (2020), -0.3 (2021), -0.2 (2022), -0.3 (2023), -0.4 (2024), cumulative -0.9. - Primary deficit (percent of GDP): 2.5 (2017), 1.1 (2018), 0.9 (2019), 1.8 (2020), 0.9 (2021), 1.0 (2022), 1.1 (2023), 1.1 (2024), cumulative 6.9. - Primary (noninterest) revenue (percent of GDP): 51.6 (2017), 53.5 (2018), 53.4 (2019), 52.3 (2020), 52.0 (2021), 51.7 (2022), 51.4 (2023), 51.3 (2024), cumulative 10.0. - Primary (noninterest) expenditure (percent of GDP): 54.1 (2017), 54.6 (2018), 54.3 (2019), 54.1 (2020), 52.8 (2021), 52.6 (2022), 52.5 (2023), 52.4 (2024), cumulative 16.9. - Automatic debt dynamics contribution (percent of GDP): 1.0 (2017), -0.9 (2018), -0.7 (2019), -1.0 (2020), -1.2 (2021), -1.2 (2022), -1.4 (2023), -1.5 (2024), cumulative -7.8. - Of which real interest rate contribution (percent): 1.6 (2017), 1.3 (2018), 0.9 (2019), 0.3 (2020), 0.2 (2021), 0.2 (2022), 0.0 (2023), -0.1 (2024), cumulative 0.5. - Of which real GDP growth contribution (percent): -0.6 (2017), -2.2 (2018), -1.7 (2019), -1.3 (2020), -1.4 (2021), -1.4 (2022), -1.4 (2023), -1.4 (2024), cumulative -8.3. ### External debt sustainability framework (Table 1, selected figures) - Baseline: External debt (percent of GDP): - 2014: 209.1 - 2015: 209.2 - 2016: 213.0 - 2017: 210.5 - 2018: 216.9 - 2019: 219.2 - 2020: 217.5 - 2021: 215.3 - 2022: 212.4 - 2023: 209.2 - 2024: 205.9 - Change in external debt (percent of GDP): 15.3 (2014), 0.1 (2015), 3.8 (2016), -2.5 (2017), 6.4 (2018), 2.3 (2019), -1.8 (2020), -2.2 (2021), -2.9 (2022), -3.2 (2023), -3.3 (2024). - Identified external debt-creating flows (percent of GDP, sum of current account excluding interest, net non-debt inflows, automatic dynamics): -3.8 (2014), 7.2 (2015), -3.8 (2016), -7.5 (2017), -9.0 (2018), -3.7 (2019), -4.0 (2020), -4.3 (2021), -4.7 (2022), -4.8 (2023), -4.9 (2024). - Current account deficit, excluding interest payments (percent of GDP): -2.2 (2014), -2.7 (2015), -2.3 (2016), -2.0 (2017), -2.5 (2018), -2.5 (2019), -2.4 (2020), -2.7 (2021), -2.8 (2022), -2.8 (2023), -2.7 (2024). - Net non-debt creating capital inflows (negative, percent of GDP): -1.8 (2014), 0.1 (2015), -1.1 (2016), -1.4 (2017), -1.9 (2018), -1.4 (2019), -1.5 (2020), -1.7 (2021), -1.8 (2022), -2.0 (2023), -2.2 (2024). - Automatic debt dynamics (percent of GDP): 0.2 (2014), 9.8 (2015), -0.4 (2016), -4.1 (2017), -4.7 (2018), 0.1 (2019), -0.1 (2020), 0.0 (2021), -0.1 (2022), 0.0 (2023), 0.1 (2024). - External debt-to-exports ratio (in percent): 688.3 (2014), 655.9 (2015), 674.7 (2016), 656.6 (2017), 653.3 (2018), 631.3 (2019), 626.1 (2020), 616.0 (2021), 604.8 (2022), 593.4 (2023), 580.1 (2024). - Gross external financing need (in billions of US dollars): 19 (2014), 19.2 (2015), 20.5 (2016), 8.7 (2017), 21.2 (2018), 60.7 (2019), 23.7 (2020), 77.0 (2021), 26.7 (2022), 27.3 (2023), 39.8 (2024) — (table presents a multi-year series with yearly values shown). - Scenario with key variables at their historical averages projects external debt rising to 266.3 (percent of GDP). ### Stress tests (Public DSA figures and scenarios) - Alternative scenarios shown: Baseline, Historical, Constant Primary Balance. - Historical scenario path for real GDP growth and primary balance (selected numbers): - Historical Real GDP growth: 1.3, 0.9, 0.9, 0.9, 0.9, 0.9 (years 2019–2024 displayed). - Historical Primary Balance: -1.8, -2.4, -2.4, -2.4, -2.4, -2.4 (2019–2024). - Stress tests simulated: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock. - Example stress-test outcomes (gross nominal public debt, percent of GDP): under various shocks debt rises relative to baseline; combined shock shows larger increase (figures and charts detail year-by-year trajectories). ### Additional macro-fiscal and market indicators (selected) - Long-term bond spread over German bonds (20-Mar-19 through 18-Jun-19 average): 37 bp (noted in heat map context). - Public debt held by non-residents (percent of total): 54% (figure noted in heat map context). - Bond spread and external financing requirement benchmarks used in heat map analysis: 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for the public debt held by non-residents. ### Annex V — Taking Stock of Inequality in France (key findings) - France’s disposable income inequality is slightly below the euro area average; Gini coefficient of disposable income is around 0.3. - Poverty rate (share below half median disposable income): 8 percent in France; 10 percent in Germany; 14 percent in Italy. - Poverty rate by age cohorts: youth (age 18–25) poverty rate is 14 percent; elderly (age 51–65) poverty rate is 7 percent. - Wealth concentration measures (mean-to-median wealth ratio and share of richest 1 percent) are about the OECD average and lower than in Denmark, Germany, and the Netherlands. - Time trends: - Gini coefficient declined between 1984 and 2004, then increased since then, particularly during the crisis, and remains above pre-crisis levels. - Pre-tax income share of the top 1 percent increased from 8 to 11 percent between 1980 and 2014. - Share of people at risk of poverty or social exclusion increased slightly during the crisis but has been declining since 2013; France’s aggregate poverty rates broadly stable since the mid-80s. - Youth poverty increased from 9 to 14 percent over the longer period; elderly poverty declined from 11.3 to 6.9 percent. *Source: IMF staff (selected figures and tables from the provided content).* ### 3. France’s good aggregate disposable ### 1fraea2019002 - 3. France’s good aggregate disposable ### Redistribution and aggregate outcomes - Fiscal policies (transfers and taxes) reduce market income inequality in France by 44 percent, against an OECD average of 36 percent. - Market income inequality reduction in France is driven mainly by transfers rather than taxes: 37 versus 7 percent, respectively. - Recent literature suggests fiscal measures introduced over the last decade have contributed to a decline in inequality: the bottom 65 percent households have gained in terms of disposable income, while the richest 35 lost. - Cross-country comparison suggests the reduction in market income inequality in France comes at a relatively large fiscal cost. ### Inequality of opportunity and vulnerable groups - Income mobility: it takes 6 generations for someone born in a family at the bottom 10 percent income to reach the mean income in France (comparable to Germany at 6 generations; the United States at 5 generations). - On another measure of intergenerational income persistence (Corak, 2016) France ranks toward the middle of the distribution, worse than Germany or Denmark. - Educational performance dependence on socioeconomic background: - A student from the top wealth quintile is 5.6 times more likely to have a high score in the PISA Science test than a student from the bottom wealth quintile. - A well-off student is 3.6 times more likely to complete tertiary education than a poor student. - Vulnerable groups: conditional on individual characteristics, the youth, the low-skilled, and non-EU born migrants face a significantly higher probability of being unemployed than the rest of the population; differences in unemployment rates between vulnerable groups and the rest tend to be higher in France than in other crisis-resilient euro area countries. - University premium: France’s university premium (the percentage difference between the employment rate of those with a tertiary education and those with a secondary education) is 25 percent, among the highest in the EU, compared to 7–12 percent in Sweden, Germany, and the Netherlands. ### Gender equality - World Bank WBL index: France (together with only 5 other countries) has the best possible score on gender equality before the law. - Female share in boards of listed companies: 43 percent in France, against an OECD average of 22 percent. - Gender wage gap: 10 percent in France, against an OECD average of 14 percent. - Early childhood education enrolment: 60 percent in France, relative to the OECD average of about 30 percent. - Labor market participation: France has relatively high female relative to male labor market participation. - Manager gap: the ratio of the share of female managers to the share of male managers is one of the lowest among OECD countries. ### Recent reforms and policy implications - Fiscal measures introduced in the 2018–19 budgets are supportive of the middle classes and active population. - More recently announced measures (e.g., the income tax reduction for the middle class, support to single mothers) should also contribute to a reduction in inequality. - Labor market and education reforms: - Training and apprenticeship reforms and reduction in class sizes in primary schools in disadvantaged areas should reduce inequality of opportunities. - Introduction of an index measuring gender pay inequalities together with financial penalties should reduce the gender wage gap and gender inequality further. - Government’s new Poverty Plan aims at increasing early childhood education in disadvantaged areas, introducing mandatory training until age 18, and supporting labor market integration. - New policy efforts will need to continue to take into account inequality considerations. ### Spending benchmarks and fiscal context - Public spending increased by about 10 percent of GDP since the early 1980s to reach 56 percent of GDP at end-2018. - France’s spending is 10 percent higher than the EU average. - In 2018, spending relative to GDP was reduced slightly to 56 percent from 56.4 percent in 2017, by limiting the growth of the wage bill and social spending, while legislating substantial and frontloaded tax cuts. - Public debt has now reached close to 100 percent of GDP. - France’s public spending is 8.3 percent of GDP higher than that of peers; 7 percent of this gap is explained by social protection, health, education, and economic support (social protection accounts for 50 percent of the gap). - France also spends 12 percent more than peers on health and almost 7.5 percent more on education (mostly on secondary education). - Support to the economy through subsidies (including tax expenditures) and investment in infrastructure explain another 20 percent of the spending gap. *Source: IMF staff analysis in 1fraea2019002 - 3. France’s good aggregate disposable* ### 4. Social protection spending accounts for the lion’s share in total government ### 4. Social protection spending accounts for the lion’s share in total government ### Overview: scale, redistribution, and poverty - Social protection spending accounts for 44 percent of total government expenditure. - Social protection spending stands at 24 percent of GDP, higher by 4.2 percent of GDP than peers. - The impact of social benefits (along with that of taxes) on inequality in France is among the highest in Europe: 45 percent decrease in income GINI in 2016 from 0.52 to 0.29. - Poverty in France is close to 8 percent, described as low by European standards. - Pensions alone account for one third of the spending difference with peers. ### Pensions: magnitude, outcomes, and equity implications - Pension spending was 15 percent of GDP in 2017, among the highest in the EU. - System features noted: relatively generous system with high replacement rates and a low effective retirement age; fragmentation across 42 different regimes with differing rules. - Positive outcomes associated with high pension spending: - Old-age poverty is lower than the overall country level and peers by about 5 percentage points. - Retirees’ living standards are 6 percent higher than the population average. - Life expectancy at retirement is higher than in peers. - Equity and efficiency concerns: - Generous pension system protects older generations at the expense of younger ones, who experience higher rates of poverty and lower standards of living. - Fragmentation results in lack of transparency and intra-generational inequities. - Reference: See also the 2018 report of the Conseil d’Orientation des Retraites (COR). ### Family and child benefits: spending design and distributional gaps - France spends nearly 1 percent of GDP more than countries with similar demographics on family and child benefits. - Positive associations: - Relatively better outcomes than peers regarding fertility and female labor participation. - Positive rates of enrollment of young children in childcare or pre-primary education. - Distributional shortfalls: - French children of less educated parents face a 15 percent higher risk of poverty than in peer countries. - Family and child benefits in France are largely not means-tested (similar to Sweden and Finland). - Policy action noted by authorities: the new “Plan Pauvreté” aims to provide more targeted child benefits to those in need (e.g. nurseries and free breakfast at school in poor neighborhoods). ### Unemployment benefits: generosity, protection, and labor-market incentives - Spending on unemployment benefits is 1.9 percent of GDP, twice the European average and higher than peers (except Italy). - Replacement rate: 64 percent, more than 10 points higher than the average level of peers, and more than 20 points higher than in Germany. - Poverty protection: - At-risk-of-poverty rate for unemployed: 59 percent in France compared to 84 percent in Germany and 73 percent in the UK. - Median income of unemployed relative to employed is high in France relative to peers. - Labor-market implications: - Generosity associated with relatively high unemployment level, higher share of youth unemployment and structural unemployment. - Some evidence suggests that at least 20 percent of unemployment benefit recipients receive more than their last salary (Pôle Emploi analysis referenced). - Ongoing reforms: authorities’ planned unemployment reform aims to tighten compensation and benefit cumulation rules and introduce degressivity for high benefits. ### Housing: high spending with mixed outcomes for vulnerable groups - France spends 1.3 percent of GDP on housing development and housing benefits (similar to the UK), versus 0.4 percent in Germany and 0.2 percent in Italy. - Mixed outcomes for poor households: - Overburden rate of poor households is among the lowest in France: 16 percent compared to 37 percent in the UK. - Number of rooms per person in poor households is lower in France than in the UK and in Germany. - Houses of those at the lowest end of the income distribution in France are three times more overcrowded than in the UK. - Note: The number of rooms per person is a limited proxy for accommodation quality; cross-country data on size per person are not available. ### Health: higher spending in some categories and associated outcomes - Aggregate health spending in France is 8 percent of GDP, about 1 percent of GDP higher than peers. - Composition differences: - Spending on outpatient services and medical products, appliances and equipment is substantially larger than in peers. - Spending on public health services and research and development is well below peers. - Outcomes: - Life expectancy is among the highest among peers. - Health-adjusted life expectancy is close to the peer average. - Cancer death rates and infant mortality are somewhat higher than peers. - Potential efficiency gains highlighted: support preventive healthcare, foster use of generic drugs, and improve procurement and management of health service purchases. - Upcoming reform: a health reform aiming to decentralize healthcare and improve hospital management; caution advised to minimize medium-term costs. ### Education: spending profile and performance - France spends more than peers on secondary education, less than peers on pre-primary, primary, and post-secondary education. - Bulk of secondary education spending is on teachers’ compensation, representing 80 percent of the total spending on secondary education. - France has fewer students per teacher at upper-secondary level. - Outcomes: France’s overall PISA score is lower than several peers; France is below some peers in Math, Science and Reading. - Reforms underway: 2017–18 reforms include reducing class sizes at the primary level in disadvantaged areas, and a reform of the Baccalauréat and higher education. - Further suggested measures: align teacher-student ratios in secondary education with level of peers, increase teaching hours in secondary public schools, and reform teachers’ training to increase versatility. ### Direct support to the economy, subsidies, and tax expenditures - France spends slightly more than 5 percent of GDP to support its economy directly; nearly two-thirds of this amount is dedicated to general affairs and transportation. - Relative to peers, this spending is 1.5 percent of GDP higher in France than elsewhere, largely on subsidies and other tax expenditures. - Institutional finding: A 2018 Report of the Cour de Comptes identified 474 tax expenditure programs, a vast majority "small programs, whose efficiency, pertinence, or impact could not be established," and a quarter had not been updated in decades. - Policy step: The authorities have legislated the replacement of the CICE tax credit with a reduction in social contributions, improving transparency and generating some fiscal gains. - Further recommendation: rationalize and simplify tax expenditures and complement with product market reforms to support competitiveness. ### Summary policy recommendations and reform priorities - Pensions: - Simplify the system and address generosity to improve intra- and inter-generational equity. - Improve work incentives while ensuring low pensions are protected. - Government’s planned pension reform could unify regimes under one umbrella, better link contributions to benefits through a point system, and accelerate the planned increase in the effective retirement age. - Social benefits: - Pursue ambitious implementation of the planned unemployment reform (tighten compensation and cumulation rules; introduce degressivity for high benefits). - Continue adjustments to housing benefits and the planned simplification/unification of some social minima under a unique universal activity benefit. - Aim to further improve targeting of social benefits to those most in need while generating efficiency savings. - Health: - Obtain efficiency savings without compromising outcomes via preventive healthcare, use of generics, and improved procurement and management of health purchases. - Ensure the health decentralization reform minimizes medium-term costs. - Education: - Build on 2017–18 reforms; consider aligning teacher-student ratios in secondary education with peers, increasing teaching hours in secondary public schools, and reforming teachers’ training. - Subsidies and tax expenditures: - Continue the shift from CICE to social contribution cuts and pursue further rationalization and simplification of tax expenditures. *International Monetary Fund* ### References ### References ### Cited works - Conseil d’Orientation des Retraites (2018), “Évolutions et perspectives des retraites en France.” Rapport Annuel du COR (Conseil d’Orientation des Retraites, Juin 2018). - Cour des Comptes (2015), “Les Aides Personnelles au Logement.” Communication à la Commission des Finances du Sénat (Juillet 2015). - Cour des Comptes and Chambres Régionales & Térritoriales des Comptes (2017), “Les Achats Hospitaliers.” Communication à la commission des affaires sociales et à la mission d’évaluation et de contrôle des lois de financement de la sécurité sociale de l’Assemblée Nationale (Juin 2017). - Gouardo, C. and Lenghart, F. (2019), “Où Réduire les Dépenses Publiques ?” La Note d’Analyse. (France Stratégie, Janvier 2019). - Hallaert, J-J. and Queyranne, M. (2016), “From Containment to Rationalization: Increasing Public Expenditure Efficiency in France.” IMF Working Paper 16/7 (Washington, January 2016). - Mareuge, C. and Merckling, C. (2014), “Pourquoi les dépenses publiques sont-elles plus élevées dans certains pays ?” La Note d’Analyse. (France Stratégie, Juillet 2014). ### Fund relations — key facts and figures (As of May 31, 2019) - Membership Status: Joined December 27, 1945; Article VIII. - General Resources Account: - Quota: 20,155.10 SDR Million (100.00 percent of Quota) - Fund Holding of Currency (Exchange Rate): 17,110.03 SDR Million (84.89 percent of Quota) - Reserve Tranche Position: 3,045.11 SDR Million (15.11 percent of Quota) - New Arrangements to Borrow: 719.74 SDR Million - SDR Department: - Net Cumulative Allocation: 10,134.20 SDR Million (100.00 percent of Allocation) - Holdings: 8,181.29 SDR Million (80.73 percent of Allocation) - Outstanding Purchases and Loans: None - Latest Financial Arrangements (dates and amounts): - Stand-By: Sep 19, 1969 – Sep 18, 1970; Amount Approved: 985.00 SDR Million; Amount Drawn: 985.00 SDR Million - Stand-By: Jan 31, 1958 – Jan 30, 1959; Amount Approved: 131.25 SDR Million; Amount Drawn: 131.25 SDR Million - Stand-By: Oct 17, 1956 – Oct 16, 1957; Amount Approved: 262.50 SDR Million; Amount Drawn: 262.5 SDR Million - Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Charges/Interest: - 2019: 10.98 - 2020: 21.85 - 2021: 21.83 - 2022: 21.84 - 2023: 21.84 - Total: - 2019: 10.98 - 2020: 21.85 - 2021: 21.83 - 2022: 21.84 - 2023: 21.84 - Implementation of HIPC Initiative: Not applicable - Implementation of MDRI: Not applicable - Implementation of PCDR: Not applicable ### Exchange arrangements and restrictions - Currency: euro, floats freely and independently. - Exchange system: free of restrictions on payments and transfers for current international transactions except restrictions imposed solely for the preservation of international peace and security (notified pursuant to Executive Board Decision No. 144-(52/51)). - Lists of countries and situations subject to maintained restrictions include (as presented): Democratic Republic of Congo, the former government of Iraq, the Democratic People's Republic of Korea, Guinea (republic of), Guinea Bissao, the former Government of Liberia, the former Government of Libya, the former Government of Tunisia, Transnistria, Eritrea, the former Government of Egypt, Somalia, Sudan and South Sudan, Syria, certain individuals associated with the murder of former Lebanese Prime Minister Rafiq Hariri, Central African Republic, Ukraine, Russia, Yemen, Zimbabwe. - Islamic Republic of Iran: some restrictions still exist in accordance with UN Security Council Resolution 2224 (double use goods, ballistic and nuclear related goods); majority of past EU bilateral restrictions were dropped in early 2016 pursuant to the Vienna Agreement. - Measures to freeze accounts of listed persons and entities linked to terrorists pursuant to EU regulations (n°881/2002, n°2580/2001 and n°753/2011) and UN Security Council resolutions (resolutions 1267 and 1373 and subsequent resolutions). ### Article IV Consultation and FSAP/ROSC history - Last Article IV consultation concluded on July 25, 2018; France is on the standard 12-month consultation cycle. - ROSC and related updates and reports cited with dates: - Fiscal Transparency—ROSC Module I: October 17, 2000; Updates IMF Country Report No. 01/196 (11/05/01) and No. 04/345 (11/03/04). - Transparency in Monetary and Financial Policies—ROSC Module II: October 2000 corrected 2/15/01; Updates IMF Country Report No. 01/197 (11/05/01) and No. 02/248 (11/13/02). - Data Module ROSC: IMF Country Report No. 03/339 (10/29/03); Update No. 05/398 (11/07/05). - FSAP and FSSA reports and related IMF Country Reports spanning 2004–2013 (multiple report numbers and dates listed in source). ### Summaries and findings from ROSC / FSAP / FSSA - Fiscal Transparency summary: - France achieved a high level of fiscal transparency and introduced improvements in coverage and presentation of fiscal information. - Final accounts publication developed to include more complete information on government assets and liabilities and contingent liabilities. - Accounting standards shifted toward accruals principles in a number of areas; recommendations included identifying quasi-fiscal activities, consolidating fiscal activity outside appropriation processes, and improving reconciliation of policies with outcomes at the general government level. - Loi organique aux lois de finance (LOLF) became fully effective on January 1, 2006; the first multi-annual fiscal framework law adopted January 2009 covering 2009–12; State Audit Office assigned certification of public accounts; accruals accounting implementation confirmed; parliamentary oversight powers strengthened. - Transparency in Monetary and Financial Policies summary: - Financial agencies accord high priority to transparency; objectives, legal/institutional frameworks, and policymaking processes disclosed. - Framework for supervision and regulation applicable to mutual insurance firms was initially less well defined; subsequent legislative changes created CCAMIP in August 2003 and later unified supervision under ACP/ACPR in 2010 with extended powers. - Data Module summary: - France is in observance of the Fund’s SDDS Plus. - INSEE and Banque de France mandates are clearly defined for production of six macroeconomic datasets; methodologies follow international/European standards; data are timely and accessible. - Suggestions for improvements included clarifying INSEE responsibility for government finance statistics, improving data sharing, reviewing balance-of-payments classification and valuation, aligning timing of revisions in quarterly and annual national accounts, and facilitating identification of INSEE data production units. - France participates in the G-20 Data Gaps Initiative; Recommendation on Sectoral Accounts target requirements met through transmission of additional data to the OECD. - Financial system assessments: - 2004 report: France’s financial sector strong and well supervised; no systemic-risk weaknesses identified; strong conformity to supervisory and regulatory standards; banking sector modernized and well capitalized; insurance sector vulnerabilities contained; securities markets large and sophisticated. - 2012 FSAP Update: confirmed resilience to severe market pressures; identified challenges — banks’ size, complexity, and dependence on wholesale funding; larger banks restructuring toward more stable funding and reduced cross-border presence but remain vulnerable to sustained funding disruptions and reduced profitability. - Areas for improvement identified: greater de jure independence of supervisory authorities; disclosure of capital treatment and intra-group financial interactions; economic risk-focused insurance supervision; enhanced supervision of investment service providers and financial advisors; disclosure-related shortcomings noted with desirability for institution-by-institution comparable data and detailed official analyses. ### Statistical issues — data adequacy and practices - General: Economic database comprehensive and high quality; data provision to the Fund adequate for surveillance; France subscribes to SDDS Plus and transmits data using SDMX. - National Accounts: France adopted ESA 2010 in May 2014; transition from ESA95 entailed revisions and new data sources; historical series from 1949 available. - Government Finance Statistics: Since September 2014, GFS data compiled and reported based on ESA 2010; revised time series for general government deficit and debt levels from 1995 onwards reported; source data collected by Ministry of Economy and Finance and INSEE principally responsible for compilation and dissemination consistent with ESA. - Monetary and Financial Statistics: Monetary data for IFS based on ECB framework; statistics prepared monthly and timely; quarterly IFS Supplement disseminated. - Financial Sector Surveillance: France provides core and some encouraged FSIs on a timely basis. - External Sector: Since June 2014, monthly balance-of-payments statistics use BPM6 guidelines; back casting published end June 2014; consistent quarterly BOP and IIP in BPM6 format covering 1999:Q1 to date published. ### Table of Common Indicators Required for Surveillance (As of June 2019) - Exchange Rates: Date of Latest Observation 06/19; Date Received 06/19; Frequency of Data Daily; Frequency of Reporting Daily; Frequency of Publication Daily. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 05/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - International Investment Position: Date of Latest Observation Q4:2018; Date Received Q1:2019; Frequency Quarterly; Reporting Quarterly; Publication Quarterly. - Reserve/Base Money: Date of Latest Observation 05/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - Broad Money: Date of Latest Observation 05/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - Central Bank Balance Sheet: Date of Latest Observation 05/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - Consolidated Balance Sheet of the Banking System: Date of Latest Observation 05/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - Interest Rates: Date of Latest Observation 06/19; Date Received 06/19; Frequency Daily; Reporting Daily; Publication Daily. - Consumer Price Index: Date of Latest Observation 05/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - Revenue, Expenditure, Balance and Composition of Financing — General Government: Date of Latest Observation 2018; Date Received 05/19; Frequency Annual; Reporting Annual; Publication Annual. - Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of Latest Observation 04/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - Stock of Central Government Debt: Date of Latest Observation 05/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - External Current Account Balance: Date of Latest Observation 04/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - Exports and Imports of Goods and Services: Date of Latest Observation 04/19; Date Received 06/19; Frequency Monthly; Reporting Monthly; Publication Monthly. - GDP/GNP: Date of Latest Observation Q1:2019; Date Received Q2:2019; Frequency Quarterly; Reporting Quarterly; Publication Quarterly. - Gross External Debt: Date of Latest Observation Q4:2018; Date Received Q1:2019; Frequency Quarterly; Reporting Quarterly; Publication Quarterly. Notes included in table: - Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - Interest rates include both market-based and officially-determined rates, including discount rates, money market rates, rates on treasury bills, notes and bonds. - Composition of financing covers foreign, domestic bank, and domestic nonbank financing. - General government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - Central government information provided on a budget-accounting basis (not on a national accounts basis). ### Statement by France’s Executive Director (July 22, 2019) — Main points - Acknowledgement of resilient and broad-based growth since last review; continued unemployment decrease despite trade tensions and slowdown among European partners. - Public deficit and public expenditures declined further, allowing public debt to stabilize. - Structural reforms implemented: labor market, taxation, vocational training reforms; additional immediate measures to reinforce work incentives for middle class and ease fiscal burden on poorest households. - Authorities committed to continued reform effort to modernize economy, accelerate energy transition, and enhance equality of opportunities. - Grand Débat National confirmed need to accelerate transformation of France’s economic and social model; authorities committed to comprehensive structural reform agenda, with three major pillars to be modernized: civil service reform, unemployment insurance reform, systemic pension reform. - Authorities committed to further reduce fiscal deficit by gradually reducing public expenditure and to put public debt on continuous downward path. - External risks: trade tensions and external environment are downside risks; authorities committed to multilateral cooperation on trade, international taxation, climate change, and enhanced European integration. - Outlook: - 2019 GDP growth projected at the same level as the Euro Area: +1.3 percent. - Expectations of sustained robust growth aided by increased household purchasing power, dynamic corporate investment, and competitiveness gains. - France’s international attractiveness improving; inward FDI at historically high levels; France ranked second among European economies in the EY Europe attractiveness survey of June 2019 (as cited). - Job creation dynamic in Q1 2019; unemployment decreasing for the 4th consecutive year; increase in share of new hiring under open-ended contracts; long-term unemployment rate decreased. - Current account near balance: -0,6 percent; external position broadly in line with fundamentals. - Staff and authorities broadly agree growth will remain resilient next year with unemployment continuing to decline; staff forecast domestic demand contribution +1,3 percent for France growth. ### Reform strategy — measures described - Unemployment insurance reform (public in June 2019): - Strengthen access of unemployed to training. - Increase requirements to access unemployment benefits to incentivize work. - Review rules on cumulating unemployment benefits with wages from part-time activity to remove disincentives to return to full-time jobs. - Lower ceiling of unemployment benefits for high wage earners. - Introduce bonus-malus mechanism to disincentivize abusive recourse to short-term contracts in certain sectors. - Pension reform: - Current system: pay-as-you-go, complex with 42 different pension regimes. - Past parametric reforms have created conditions for financial sustainability; uncertainty remains due to demographic and long-term growth forecast difficulty. - Reform under preparation would create a universal pension system with same level of contribution and same rights; mechanism calibrated to ensure intergenerational equity and quasi-automatic financial stability. - Note on population projections and long-term scenarios: depending on scenario, pension spending share of GDP would change from 13.8 percent in 2017 to between 11.6 percent to 13.3 percent of GDP by 2070; in a very low growth productivity scenario pension spending could increase moderately to reach 14.4 percent of GDP. - Civil service reform: - Modernize civil service to be more agile, open, and attractive. - Facilitate recourse to temporary contracts depending on administrations’ needs. - Simplify decision-making for posting civil servants to increase mobility between administrations. - Healthcare reform: - Reform presented by staff in Box 2 to be adopted by end of the Summer (as stated). - Competition measures: - Announced measures to enhance competition, facilitate entry into several markets, combat rent-seeking in car spare parts market, driving license schools, and condominium associations (“syndic”). - Authorities note caution in using PMR index to derive potential growth gains. ### Social outcomes and equity considerations - France has one of the lowest poverty rates in the OECD and disposable income inequality broadly stable over time. - Results attributed to redistributive tax and benefit system and attention to social cohesion. - France has one of the lower gender pay gaps in the world and relatively high female participation. - Authorities note some dimensions of inequality and differentiated impacts of reforms insufficiently apprehended (e.g., differentiated impact of carbon taxation on households’ disposable income depending on location). ### Climate and carbon transition - France committed to transition to low-carbon economy: - Nationally Determined Contributions under 2015 Paris agreement and objective of reaching carbon neutrality in 2050 set in 2017 Climate Plan. - Multiyear strategy: Stratégie Nationale Bas Carbon defining sectoral ceiling emissions and measures. - Tools deployed: high carbon tax, participation in European emissions trading scheme, sectoral regulation (housing and transportation). - Following yellow vests protest, government decided to maintain carbon tax at current level. - Grand Débat National highlighted citizens’ concern about climate change and desire for decisive action balanced with compensation measures for fair burden sharing. ### Public finance strategy — containment of spending growth - Strategy aims to reduce public spending growth relative to GDP growth to durably put public debt on downward path. - Preference for durable containment of public spending rise despite inflationary trends related to ageing and health costs. - Updated benchmarking in Annex VI suggests France has relatively high spending in most expenditure areas compared to peers with potential efficiency gains in several categories. - High level of public spending partly reflects choice to socialize large parts of social protection system (health, education, pensions). - Fiscal strategy reported as bearing fruits: fiscal deficit reduced further (text cuts off in provided content). *Source: 1fraea2019002 - References (PDF chapter/section, July 1, 2019).* ### 2.5 percent and the fiscal debt stabilized at 98.4 percent of GDP at end 2018. Those results ### 1fraea2019002 - 2.5 percent and the fiscal debt stabilized at 98.4 percent of GDP at end 2018. Those results ### Fiscal outcomes and medium-term projections - Fiscal deficit and debt: - Fiscal deficit: 2.5 percent (context: fiscal debt stabilized at 98.4 percent of GDP at end 2018). - Fiscal debt: 98.4 percent of GDP at end 2018. - Drivers of outcomes: - Public spending increase slowed to +0.3 percent in volume (without the tax credits) compared to + 1.4 percent in 2017. - 2019–2022 trajectory and one-off factors: - Transformation of CICE into a permanent cut of social contributions will provoke a one-off increase of the public deficit to 3.1 percent of GDP. - Deficit excluding this exceptional factor will be reduced toward 2.3 percent of GDP. - Public deficit projections: 2.1 percent in 2020, 1.7 percent in 2021, 1.3 percent in 2022. - Authorities’ medium-term view: - Authorities’ projections diverge from staff’s projections because staff uses a methodology taking into account only the impact of legislated measures. - Authorities assert that an increase of the public deficit after 2020 in a context of continued growth appears highly unlikely. - According to authorities’ projections, public spending ratio would decline by 2,9 points of GDP over the presidential 5-year term and the tax to GDP ratio would decline by 1,3 point over the same period. - Public debt structure: long average maturities are highlighted as a factor of resilience to a rise in interest rates. ### Public spending segments: objectives and outcomes - Central government: - Contribution to fiscal consolidation described as significant. - In real terms, central government spending increased by +0,5 percent in 2018 and decreased by 1,1 percent in volume. - Local authorities: - Innovative contractual relationship with local authorities performed well. - Local authorities current spending level: +0,3 percent in 2018 (objective was +1,2 percent) versus +2 percent in 2017. - Social spending: - For the second year, financing need of social security administrations were in a positive territory. - Target for health insurance (ONDAM) met for the ninth year in a row. ### Financial sector resilience and regulatory outcomes - Overall assessment: - Authorities share staff’s positive assessment of robustness and resilience of the French financial system. - Significant progress since the 2012 FSAP in many key areas. - Banking sector metrics: - Regulatory Tier 1 capital to risk-weighted assets: 15,4 % in 2018 from 13,2% in 2013. - Liquidity Coverage Ratio and Net Stable Funding Ratio: above 100 percent for both G-SIBs and other banks. - Insurance sector: - Solvency Capital Requirement coverage ratio: 240 percent at the end of 2018, following an increase by 6 percentage points from end-2017. - Financial Conglomerates (FC): - FC business model has enabled product generation and distribution optimization, income flow and resource allocation efficiencies, with internal reorganizations when necessary. - Oversight over investment service providers and asset managers has been heightened; AMF supervision stepped up through onsite inspections and macroprudential tools available (albeit not active) for asset management industry. - Resolution preparedness and framework: - Less significant banking institutions within ACPR scope at advanced stage for recovery and resolution planning cycles. - A comprehensive resolution framework has been set up for insurance institutions. ### Macroprudential policy, supervision, and specific considerations - Institutional strengthening: - France has strengthened institutional arrangements for macroprudential policymaking amid rising nonbank financial intermediation. - Loi PACTE (approved in April 2019) intended to facilitate SMEs’ access to diversified financing including IPO, private equity, crowdfunding and ICO under AMF supervision through creation of a “visa”. - Preemptive management of systemic vulnerabilities: - Authorities note limitations to using Pillar II measures for corporate exposures, citing difficulties in an open economy where companies can raise funds from foreign investors. - Sectoral systemic risk buffer: not currently allowed by CRR/CRD IV; next banking legislation under CRR II and CRD V expected to include it. - Reduction of debt-enhancing tax bias expected via a decrease in corporate income tax in coming years. - Loi PACTE enlarges long-term financing options for very small, small and medium-size companies. - Liquidity management and buffers: - Disruptions in wholesale funding markets could raise costs and risks to profitability and solvency. - Issues on USD funding concern only a couple of banks and are not viewed as a general system-wide issue. - Liquidity is not a major risk for life-insurance activities; liquidity and leverage tools exist in the 2016 Loi Sapin II (including “gates” mechanisms to cap fund repurchases). - Financial conglomerate oversight: - FC model provides diversification benefits but operations should not be viewed only through component entities. - Link noted between group-level risk-based approaches and removing impediments to free circulation of capital and liquidity within the Banking Union. - Integration of a conglomerate dimension in the resolution framework could be examined at the European level and may require BRRD revision. - Governance, financial policies, and integrity: - Institutional setup reinforced post-crisis and effective in diagnostics and remedial actions. - HCSF benefits from contributions of various members and collegial decision-making. - Authorities disagree that funding institutions should be exempted from constitutional and legal framework on budget appropriation. - Regulated savings products are politically sensitive given popularity and role for low and middle-income earners; transition to more market-based products would be politically difficult. - Steps taken to upgrade calculation method for interest rates of regulated products such as Livret A; new rate calculation will come into force next year. - Authorities agree on need to enhance AML-CFT supervision of smaller banks rated as high-risk. - Crisis management and resolution: - Authorities feel enhanced resolution framework for insurers should be addressed at the EU supervisory and enforcement level; France considers itself advanced in this regard. ### Anti-corruption and governance improvements - Anti-corruption measures and review: - France volunteered to have its anti-corruption supply-side provisions reviewed by staff in partnership with the OECD's Working Group on Bribery. - Law on Transparency, the Fight Against Corruption, and the Modernization of the Economy (adopted in December 2016) has complemented tools to prevent, detect and sanction corruption with proportionate, effective and dissuasive sanctions. - Resolutions of cases since adoption of the law have been demonstrated through trials or settlement agreements, while enhancing cooperation with foreign authorities. - Authorities encourage other IMF members to submit themselves to the voluntary review process. *Source: 1fraea2019002 - 2.5 percent and the fiscal debt stabilized at 98.4 percent of GDP at end 2018. Those results* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1fraea2019002.pdf_