## 1. Re-Opening and Re-Locking in France

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### Context: pre-pandemic economic landscape
- Broad cyclical position and structural features:
  - Largely closed output gap and slowing growth momentum in 2019.
  - Public debt about 98 percent of GDP.
  - High private and public debt, sluggish productivity growth, and unequal opportunities (education, training, regional).
- Labor market and external:
  - Employment creation led to a decline in the unemployment rate prior to the pandemic.
  - Inflation was somewhat below the ECB’s target.
  - Current account registered a small deficit, remaining stable at around 0.7 percent of GDP between 2017–2019.
- Reform environment:
  - Early reforms on labor participation and flexibility (labor code, labor tax reductions, apprenticeship and training reforms) but momentum stalled amid social opposition and COVID-19.
  - Presidential elections scheduled for April 2022.

### Pandemic impact: infection dynamics, containment, and reopening strategy
- Key dates and measures:
  - First confirmed COVID-19 case: January 24, 2020.
  - First Lockdown: March 17–May 10 (national, schools closed, ban on non-essential outings).
  - Reopening began May 11; by end-June, 67 percent of containment restrictions were eased (peers: 51 percent).
  - Second national lockdown: October 30 (schools remained open; non-essential stores, bars, restaurants closed).
  - Exit from second lockdown: progressive from end-November; night curfews replaced lockdowns; bars and restaurants set to open in January.
- Testing and NPIs:
  - Testing rose from 200 tests per 100,000 at the start to 1,400 by end-August.
  - Mask adoption: 70 percent reporting wearing masks in public.
  - Social distancing adoption: around 65 percent, relatively stable since reopening.
- Reopening characterization:
  - France: late reopener but rapid reopening — 67 percent restrictions eased by mid-July vs peers 51 percent — contributing to faster economic recovery but likely increasing reinfection risk.

### Real economy and labor market impact
- Aggregate and sectoral impacts:
  - Economic activity contracted by about 19 percent (y-on-y) in the first half of 2020.
  - Contributions to the H1 decline:
    - Private consumption: -8.8 percent
    - Public consumption: -3 percent
    - Investment: -4.5 percent
    - Net exports: -2.6 percent
  - Accommodation, restaurant, and transport-related sectors (together >10 percent of GVA) had the most severe declines; agri-food, IT, banking and real estate services marginally affected.
- Recovery dynamics:
  - Activity rebounded by almost 19 percent in Q3 2020, driven by domestic demand and consumption.
  - Q4 2020 estimated contraction: roughly another 5½ percent.
  - Aggregate activity estimated 13 percent below normal in November vs 30 percent below normal in April.
  - Several services sectors (transport, restaurants, entertainment) operated 28 to 60 percent below their end-2019 levels.
- Hours, employment, and unemployment:
  - Hours worked dropped by 15 percent in 2020H1 while employment fell by only 2½ percent in 2020H1.
  - Unemployment:
    - Fell to 7.1 percent in 2020:Q2.
    - Jumped to 9 percent after partial recovery in activity and labor force participation in Q3.

### Financial sector and markets
- Market turmoil and policy support:
  - Equities lost more than a third of their value at the onset; CAC40 remained around 7 percent below the pre-crisis value by mid-December.
  - Bond yields spiked; wholesale funding markets experienced acute short-term stress.
  - ECB interventions (Pandemic Purchase Emergency Program and commercial paper market actions) helped ease funding stress.
- Banking sector:
  - Banks increased provisions, hurting profitability in H1 2020.
  - Cost of risk for the six main French banks grew by 150 percent (y-o-y) in H1 2020.
  - Bank credit to non-financial corporations surged; additional credit mainly financed working capital and cash buffers.

### Prices and inflation
- Headline inflation:
  - Slowed from 1.6 percent (y-o-y) in February to 0 percent in September and remained close to zero thereafter.
  - Drivers: fall in oil prices and decelerating core inflation; temporary spikes in unprocessed food and semi-durables subsided.
  - Near-term outlook: euro appreciation and remaining slack expected to exert downward pressure on inflation.

### Policy response: fiscal, guarantees, and liquidity measures
- Overall fiscal package:
  - Emergency fiscal package close to 22 percent of GDP in 2020, introduced over multiple budget amendments (March–July and a fourth amendment in November).
  - Total above the line measures: 3.8 (2020), 1.6 (2021), 1.3 (2022), 0.7 (2023), 0.6 (2024), 0.5 (2025) (Percent of GDP).
- Composition (selected magnitudes):
  - Measures with effect on the fiscal deficit (above-the-line): 3.8 percent of GDP (2020) — preserving employment and incomes via expanded STW, grants via Fonds de solidarité, sectoral support, exoneration of social security contributions.
  - Direct support for selected firms (below-the-line): 0.9 percent of GDP (envelope for equity, quasi-equity, or debt securities) — increased gross public debt by 0.4 percent of GDP in 2020 and the rest in 2021.
  - Public guarantees and other contingent measures: 14.5 percent of GDP — PGE accounted for 90 percent of this envelope; as of end-November, about 42 percent of PGE availability had been used.
  - Other liquidity measures: 2.4 percent of GDP (deferrals, accelerated refunds) — additional liquidity relief, not necessarily affecting the fiscal deficit.
- Size summary (Text Table highlights):
  - Other measures with no impact on fiscal balance total: 18.2 (Percent of GDP) — Liquidity measures: 2.4; Postponement social/fiscal deadlines: 1.7; Accelerated refund of tax credits: 0.8; Public guarantees (envelope approved): 14.9 (PGE: 13.3; Reinsurance schemes: 0.7; Other guarantees: 0.6); Direct equity support (envelope approved): 0.9.

### Banking sector support and monetary policy
- Prudential and monetary measures:
  - Counter-cyclical bank capital buffer reduced to zero.
  - Banks allowed to operate temporarily below Pillar 2 Guidance, capital conservation buffer, and liquidity coverage ratio.
  - Credit mediation to support SME loan renegotiation.
  - Tier 1 capital requirements reduced by about 1.7 percentage points during H1 2020 via these flexibilities.
  - ECB provided expanded asset purchase programs, additional liquidity, and eased collateral requirements.

### Short-time Work (STW) scheme — design, expansion, and take-up
- Design and emergency expansions:
  - Workers under STW earn 84 percent of their net wages for reduced hours (compared to about 65 percent replacement for regular unemployment benefits), with a floor at the minimum wage, for up to 6 months (renewable to one year).
  - Emergency March changes: eligibility to all contract types, simplified application, state reimbursement increased to 100 percent of labor cost for furloughed hours up to a cap of about €30.3 per hour (equivalent to €4,608 at a monthly basis).
- Take-up and usage:
  - Workers authorized for STW: 11.2 million in March and 12.7 million in May (about 50 percent of total employees).
  - Ex post effective use averaged 7½ million workers over March-May (and 3½ million in full-time equivalent terms).
  - By September, registered STW workers declined by almost half vs March-May average; claims were down by 85 percent but broadly constant in November.
- Adjustments as economy emerged:
  - Replacement rate for firms reduced to 85 percent in June (full compensation extended for heavily affected sectors until January 2021); scheduled to decline to 60 percent from early-2021 onward.
  - Long-duration scheme (activité partielle de longue durée): firms signing a collective agreement can register workers for 40 percent of normal hours up to 24 months over a three-year window and get reimbursed 85 percent of the cost.
  - French long-duration STW described as exceptionally generous versus other European countries.

### Household and firm income support, liquidity, and moratoria
- Income preservation and savings:
  - Output declined by 19 percent (y-o-y) in 2020:Q2 while aggregate household disposable income dropped by only two percent (y-o-y).
  - Preservation of income led to a surge in aggregate household savings (about 78 percent y-o-y).
- Firm liquidity:
  - ECB’s TLTRO III enabled banks to largely fund state-guaranteed loans for cash buffers and working capital.
  - Banks agreed moratoria covering around €20 billion in loans initially; moratoria expanded subsequently.
  - Emergency measures in second lockdown expected to have preserved aggregate household and firm income in 2020:Q4.

### Recovery plan and fiscal measures (Plan de Relance; 2021 budget law)
- Size and composition:
  - Recovery plan includes additional spending measures of 2.4 percent of GDP and permanent tax cuts worth 0.4 percent of GDP per year.
  - Additional spending focused on green and digital transformation; employment support; incentives to relocate production to France.
  - Part financed by EU Recovery Fund grants: 1.6 percent of GDP expected from grants.
  - About 46 percent of total additional spending (1.1 percent of GDP) expected to be executed in 2021.
  - Recovery plan includes public guarantees (0.3 percent of GDP) to leverage private-sector quasi-equity financing for SMEs and mid-size firms.
  - 2021 budget includes healthcare civil servant wage increases from Ségur de la santé negotiations (~0.3 percent of GDP).

### Fiscal outlook, deficits, and public debt projections
- Staff baseline and projections:
  - Output declined by around 9 percent in 2020.
  - Staff forecasts growth of almost 5½ percent in 2021 (baseline assumes absence of a third wave strong enough to trigger another lockdown and widespread vaccine availability toward end-2021).
  - Output projected to grow above potential but remain below pre-crisis trend; real output expected about 4 percent lower than pre-COVID-19 trend by 2025.
- Fiscal balances and debt:
  - Deficit projected to reach about 11 percent of GDP in 2020, declining to 7.2 percent of GDP in 2021.
  - Staff projects overall and primary fiscal deficit to remain high at around 4½ and 3½ of GDP, respectively, over the medium term.
  - Public debt: about 116 percent of GDP in 2020, projected to edge higher to close to 122 percent of GDP over the medium term.
  - Downside scenario: debt could reach close to 140 percent of GDP; upside scenario: decline slightly to 114 percent of GDP but still above pre-crisis levels.

### Outlook, scenarios, and risks
- Illustrative scenarios:
  - Downside: worse health dynamics delaying recovery by one year if social distancing and further lockdowns needed in 2021.
  - Upside: faster and widespread vaccine availability leading to population immunity by mid-2021 could bring quicker rebound in late-2021 and 2022.
- Key risks (unusually high):
  - Virus risks: extended or renewed containment could delay recovery and affect fiscal sustainability; earlier-than-expected vaccine availability could accelerate recovery.
  - Financial risks: repricing of risk, increased volatility, tightened financial conditions, pressures on bank balance sheets, reduced credit supply, corporate liquidity risks, insolvency, social discontent, and trade disruptions (e.g., no-deal Brexit).

### Corporate solvency, household vulnerabilities, and restructuring
- Guarantees and corporate debt:
  - Some 5.4 percent of GDP in guarantees granted by end-November, equivalent to 10 percent of total outstanding loans to non-financial corporates.
  - Gross corporate debt grew by an additional 10 percentage points of GDP in 2020:Q2.
  - Many firms used loans to build cash buffers; net debt remained fairly stable so far.
- Solvency and equity gap:
  - Staff estimates an equity gap of approximately 1.3 percent of GDP (amount needed to resolve financial difficulties of firms solvent before the crisis); equity needs likely to increase with further infections or protracted recovery.
- Household mortgage risk:
  - Losing a job (and receiving unemployment insurance) associated with an 8 percent probability of mortgage default (within 5 years).
  - Adverse scenario (without moratoria and with unemployment increasing by about 2 percentage points): mortgage default risk could increase by 20 basis points.
  - Low- and middle-income households face a five-fold higher default risk upon job losses compared to high income households.
- Policy recommendations on corporate finance and insolvency:
  - Scale up equity-like financing targeted at crisis-affected viable enterprises (prêt participatif and other quasi-equity).
  - Augment envelope for equity-support if take-up weak; use state equity/debt for large strategic companies only within budgeted envelope.
  - Temporarily increase administrative capacity of out-of-court restructuring (mandat ad hoc and conciliation); adopt corporate triaging; swiftly implement EU Restructuring Directive (Directive 2019/1023).
  - Frequently monitor intragroup transactions within conglomerates.

### Banking, insurance, and macroprudential stance
- Banking metrics and stress tests:
  - CET1 at 14.6 percent on average at end-2019; NPL ratios at 2.5 percent on average; liquidity coverage ratio about 140 percent on average.
  - Baseline assessment: buffers adequate to withstand baseline shock.
  - Adverse stress-test: CET1 could be depleted by 5.3 percentage points under lower growth and higher defaults, taking into account policy measures.
- Insurance sector:
  - SCR coverage ratio at 265 percent at end-2019, declining slightly during crisis.
  - Low policy rates and higher impairments likely to dampen insurers’ net profits.
- Macroprudential guidance:
  - Macroprudential stance "broadly appropriate"; temporary, time-bound regulatory flexibility is appropriate to relieve solvent borrowers but permanent relaxation should be avoided.
  - Maintain limits on borrower-based measures and large exposure limit; consider sectoral systemic risk buffer once recovery takes hold.
  - Supervisory guidance to limit dividend payouts while support measures in place.

### Policy challenges, sequencing, and recommendations
- Near-term:
  - Continue strong, flexible policy support scaled to need to protect firms and individuals; strengthen corporate balance sheets and address insolvency risks.
  - Monitor effectiveness, transparency, and accountability of public spending (public access to procurement contracts recommended).
- Medium-term:
  - Use crisis to reorient economy: limit scarring by boosting productivity and employment, and green the recovery.
  - Shift from broad-based emergency measures to progressively targeted support as recovery firms, while providing safety nets.
  - Once recovery firm, implement expenditure-based consolidation to place debt on a downward path; timing state-contingent and should start only when output broadly recovered and downside risks abated.
  - Avoid permanent tax cuts or expenditure hikes unless offset by compensatory measures.
- Structural priorities:
  - Continue unemployment benefit reform and planned pension reform once crisis eases.
  - Streamline distortionary production taxes in a budget neutral way; consider eliminating C3S and adjust CVAE cut accordingly.
  - Boost productivity via digital transformation, liberalizing product and service markets, simplifying tax system, and supporting green investment.

### Key statistics and projections (selected exact values)
- Real GDP (change in percent): 2017: 2.3; 2018: 1.8; 2019: 1.5; 2020: -9.2; 2021: 5.4; 2022: 3.7; 2023: 2.2; 2024: 1.8; 2025: 1.4
- Private consumption (change in percent): 2017: 1.5; 2018: 0.9; 2019: 1.5; 2020: -8.7; 2021: 4.8; 2022: 5.5; 2023: 2.2; 2024: 1.5; 2025: 1.3
- Unemployment rate (percent): 2017: 9.4; 2018: 9.0; 2019: 8.5; 2020: 8.7; 2021: 10.4; 2022: 9.8; 2023: 9.3; 2024: 8.9; 2025: 8.6
- General government gross debt (percent of GDP): 2017: 98.3; 2018: 98.1; 2019: 98.1; 2020: 116.1; 2021: 117.9; 2022: 118.6; 2023: 119.8; 2024: 120.7; 2025: 121.8
- General government balance (percent of GDP): 2017: -2.9; 2018: -2.3; 2019: -3.0; 2020: -11.0; 2021: -7.2; 2022: -5.4; 2023: -4.7; 2024: -4.4; 2025: -4.4
- CPI (year average): 2017: 1.2; 2018: 2.1; 2019: 1.3; 2020: 0.5; 2021: 0.7; 2022: 1.0; 2023: 1.2; 2024: 1.5; 2025: 1.6
- Current account (percent of GDP): 2017: -0.8; 2018: -0.6; 2019: -0.7; 2020: -2.1; 2021: -1.5; 2022: -1.4; 2023: -1.2; 2024: -0.9; 2025: -0.9

*IMF staff summary based on "1. Re-Opening and Re-Locking in France" (content unit 1fraea2021001).*

### 1. Re-Opening and Re-Locking in France _________________________________________________________ 6

### 1. Re-Opening and Re-Locking in France

### Context: pre-pandemic economic landscape
- The French economy entered the crisis in a broadly balanced cyclical position, with a largely closed output gap and slowing growth momentum in 2019.
- Labor market:
  - Employment creation led to a decline in the unemployment rate prior to the pandemic.
- Prices and external position:
  - Inflation was somewhat below the ECB’s target.
  - Current account registered a small deficit, remaining stable at around 0.7 percent of GDP between 2017–2019.
- Structural challenges:
  - Public debt about 98 percent of GDP.
  - High private and public debt, sluggish productivity growth, and unequal opportunities (education, training, regional) weighed on the pre-crisis outlook.
- Reform environment:
  - Early reforms aimed at labor participation and flexibility (labor code, labor tax reductions, apprenticeship and training reforms).
  - Reform momentum stalled amid social opposition (e.g., “yellow vest” protests) and COVID-19; presidential elections scheduled for April 2022.

### Pandemic impact: infection dynamics, containment, and reopening strategy
- First confirmed COVID-19 case: January 24, 2020.
- Lockdown and containment chronology:
  - First Lockdown: national measures including school closures and ban on non-essential outings; lasted over two months (March 17–May 10).
  - Exit from first lockdown: reopening began May 11; by end-June, 67 percent of containment restrictions were eased (peers: 51 percent).
  - Night curfews and second (partial) lockdown: resurgence prompted regional night curfews and a second national lockdown on October 30; schools remained open; non-essential stores, bars, and restaurants closed.
  - Exit from second lockdown: progressive lifting from end-November; night curfews replaced lockdowns; bars and restaurants set to open in January.
- Testing and non-pharmaceutical interventions:
  - Testing rate rose from 200 tests per 100,000 at the start of the pandemic to 1,400 by end-August.
  - Mask adoption: 70 percent of survey respondents reporting wearing masks in public.
  - Social distancing adoption: around 65 percent, relatively stable since reopening.
- Reopening characterization (Box 1):
  - France: late reopener but rapid reopening (67 percent restrictions eased by mid-July vs peers 51 percent), contributing to faster economic recovery but likely increasing reinfection risk.

### Real economy and labor market impact
- Depth and sectoral heterogeneity of recession:
  - Economic activity contracted by about 19 percent (y-on-y) in the first half of 2020.
  - Contributions to the H1 decline:
    - Private consumption: -8.8 percent
    - Public consumption: -3 percent
    - Investment: -4.5 percent
    - Net exports: -2.6 percent
  - Sectoral hits: accommodation, restaurant, and transport-related sectors accounted together for more than 10 percent of GVA and registered the most severe declines; agri-food, IT, banking and real estate services were only marginally affected.
- Recovery dynamics:
  - Activity rebounded by almost 19 percent in Q3 2020, driven by domestic demand and consumption.
  - By September the recovery had lost steam amid second-wave concerns.
  - Q4 2020 estimated contraction: roughly another 5½ percent.
  - Activity intensity comparisons:
    - Aggregate activity estimated 13 percent below normal in November vs 30 percent below normal in April (first lockdown).
    - Several services sectors (transport, restaurants, entertainment) operated 28 to 60 percent below their end-2019 levels.
- Hours and employment:
  - Hours worked dropped by 15 percent in 2020H1 while employment fell by only 2½ percent in 2020H1.
  - Unemployment:
    - Fell to 7.1 percent in 2020:Q2 (initially muted due to drop in labor force and STW scheme).
    - Jumped to 9 percent after partial recovery in activity and labor force participation in Q3.

### Financial sector and markets
- Market turmoil and recovery:
  - Equities lost more than a third of their value at the onset of the pandemic; CAC40 remained around 7 percent below the pre-crisis value by mid-December, lagging European peers.
  - Bond yields spiked and wholesale funding markets experienced acute short-term stress (drop in issuance, shorter maturities).
  - ECB interventions (Pandemic Purchase Emergency Program and commercial paper market actions) helped ease funding stress.
- Banking sector performance:
  - Banks increased provisions, deteriorating profitability in H1 2020.
  - Cost of risk for the six main French banks grew by 150 percent (y-o-y) in H1 2020, negatively impacting return on equity.
  - Bank credit to non-financial corporations surged, reaching growth rates seen prior to the global financial crisis.
    - Additional bank credit was primarily used to finance working capital and build cash buffers; some was used for investment, though credit growth for investment declined in recent months.

### Prices and inflation
- Headline inflation trend:
  - Headline inflation slowed from 1.6 percent (y-o-y) in February to 0 percent in September and remained close to zero thereafter.
  - Drivers: fall in oil prices and decelerating core inflation; temporary spikes in unprocessed food and semi-durables during early lockdown subsided.
  - Near-term outlook: euro appreciation and remaining slack expected to exert downward pressure on inflation.

### Policy response: fiscal, guarantees, and liquidity measures
- Overall fiscal package:
  - Emergency fiscal package close to 22 percent of GDP in 2020, introduced over multiple budget amendments (March–July and a fourth amendment in November).
- Components and magnitudes:
  - Measures with effect on the fiscal deficit: 3.8 percent of GDP
    - Focused on preserving employment and incomes (expanded Short-time Work (STW) scheme), grants to small and micro enterprises and self-employed via a solidarity fund (Fonds de solidarité), and support to heavily affected sectors (tourism, automobile) via subsidies and exoneration of social security contributions.
    - These measures are temporary with no effect on the deficit beyond 2020.
  - Direct support for selected firms: 0.9 percent of GDP
    - Envelope for equity, quasi-equity, or debt securities mainly aimed at large and strategic corporates.
    - Did not affect the fiscal deficit but increased gross public debt (0.4 percent of GDP in 2020 and the rest in 2021).
  - Public guarantees and other contingent measures: 14.5 percent of GDP
    - Program of public guarantees for bank loans (Prêt garanti par l’État, PGE) accounted for 90 percent of this envelope.
    - As of end-November, about 42 percent of PGE availability had been used (France among the highest take-up rates of loan guarantees among peers).
    - Guarantees not called do not affect the fiscal deficit or public debt.
  - Other liquidity measures: 2.4 percent of GDP
    - Deferrals for taxes and social contributions and accelerated refunds of tax credits provided additional liquidity relief; these measures do not necessarily affect the fiscal deficit.

_Italic: IMF staff summary based on "1. Re-Opening and Re-Locking in France" (content unit 1fraea2021001)._

### 13.      The banking sector was supported by a range of prudential and monetary measures. In

### 13.      The banking sector was supported by a range of prudential and monetary measures. In

### Banking sector support and monetary policy
- Supervisory authorities reduced the counter-cyclical bank capital buffer to zero.
- Banks were allowed to operate temporarily below the Pillar 2 Guidance, the capital conservation buffer, and the liquidity coverage ratio.
- Credit mediation was offered to support renegotiation of SME bank loans.
- These measures allowed to reduce Tier 1 capital requirements by about 1.7 percentage points during the first half of the year.
- Some flexibility was provided in the classification requirements and expectations on loss provisioning for non-performing loans.
- The ECB provided monetary policy support through expanded asset purchase programs, additional liquidity, and eased collateral requirements.

### Short-time Work (STW) scheme — design, expansion, and take-up
- The STW scheme (activité partielle) provides that workers under STW earn 84 percent of their net wages for reduced hours (compared to a replacement rate of about 65 percent for regular unemployment benefits), with a floor at the minimum wage, for a period of up to 6 months (renewable to one year).
- Before COVID-19, firms were reimbursed a fixed amount per hour (about 90 percent of the minimum wage) under the regular STW scheme.
- Key emergency expansions in March:
  - Eligibility extended to all contract types, with no condition on seniority.
  - Application process significantly simplified; firms can apply pre-emptively and claim reimbursement for hours effectively cut, with a lag of up to one year.
  - Reimbursement from the state increased to 100 percent of the labor cost of furloughed hours (up to a cap of about €30.3 per hour, equivalent to €4,608 at a monthly basis).
- Take-up and effective use:
  - Number of workers authorized for STW rose to 11.2 million workers in March and 12.7 million in May (or about 50 percent of total employees).
  - Ex post effective use averaged 7½ million workers over March-May (and 3½ million in full-time equivalent terms).
  - In comparison, STW claims peaked at around 0.3 million workers in 2009:Q2.
  - By September, the number of workers registered at STW had declined by almost half compared to the average over March-May level (and claims were down by 85 percent), but remained broadly constant in November reflecting the effects of the second lockdown.
- Adjustments as the economy emerged:
  - Replacement rate for firms reduced to 85 percent in June—except for firms in heavily affected sectors (catering, hotels, tourism, events, sports, and culture) or affected by mandatory closures, for which the full compensation was extended until January 2021—and will decline further, to 60 percent, from early-2021 onward.
  - Firms that sign a collective agreement can access a long-duration scheme (activité partielle de longue durée): register workers for 40 percent of their normal hours for a period of up to 24 months over a three-year window (effectively extending the scheme until 2023) and get reimbursed 85 percent of the cost.
  - The French long-duration STW program is described as exceptionally generous in comparison to STW schemes in other European countries.

### Household and firm income support, liquidity, and moratoria
- The STW scheme, the solidarity fund, and extension of expiring regular unemployment benefits largely preserved income of workers and self-employed in the emergency phase.
- While output declined by 19 percent (y-o-y) in 2020:Q2, aggregate household disposable income dropped by only two percent (y-o-y) during that period.
- Preservation of income led to a surge in aggregate household savings (about 78 percent y-o-y).
- Liquidity support to firms:
  - ECB’s TLTRO III enabled banks to largely fund the state-guaranteed loans used by firms to build cash buffers and finance working-capital.
  - Banks agreed to establish moratoria covering around €20 billion in loans, taking advantage of flexibility in accounting and prudential treatment of claims restructured under debt moratoria.
- The expansion of emergency measures in response to the second lockdown is expected to have also preserved aggregate household and firm income in 2020:Q4.

### Recovery plan and fiscal measures (Plan de Relance; 2021 budget law)
- The recovery plan embedded in the 2021 budget law includes:
  - Additional spending measures of 2.4 percent of GDP.
  - Permanent tax cuts worth 0.4 percent of GDP per year.
- Allocation and financing:
  - Additional spending largely focused on the green and digital transformation; employment support; and incentives to relocate production to France.
  - Part of the additional spending (1.6 percent of GDP) is expected to be financed by grants from the EU Recovery Fund.
  - About 46 percent of the total additional spending (1.1 percent of GDP) is expected to be executed in 2021.
  - The recovery plan includes public guarantees (0.3 percent of GDP) to leverage private-sector funds providing quasi-equity financing for SMEs and mid-size firms through participatory loans (see ¶32).
  - The 2021 budget also includes the increase in healthcare civil servant wages decided in the context of Ségur de la santé negotiations (about 0.3 percent of GDP).
- Context and composition:
  - The additional spending measures are largely focused on the green and digital transformation of the economy; employment support; and incentives to relocate production to France.
  - The recovery plan also includes permanent cuts to distortionary production taxes (0.4 percent of GDP) per year.

### Fiscal package size and other measures (Text Table summary highlights)
- Total above the line measures: 3.8 (2020), 1.6 (2021), 1.3 (2022), 0.7 (2023), 0.6 (2024), 0.5 (2025) (Percent of GDP).
- Amending Budget Laws (March-November 2020): 3.8 (2020).
- Key spending measures in 2020:
  - Short-time work scheme - expanded coverage: 1.5 (2020).
  - Direct transfers (Solidarity Fund): 0.9 (2020).
  - Health spending (incl. expansion of health insurance): 0.5 (2020).
- Recovery Plan (Plan de Relance) contributions: 1.6 (2021), 1.3 (2022), 0.7 (2023), 0.6 (2024), 0.5 (2025).
- Recovery Plan revenue measures:
  - Cut in production taxes: 0.4 (2021), 0.4 (2022), 0.4 (2023), 0.4 (2024), 0.4 (2025).
- Other measures with no impact on fiscal balance total: 18.2 (Percent of GDP).
  - Liquidity measures: 2.4
  - Postponement of social and fiscal deadlines: 1.7
  - Accelerated refund of tax credits: 0.8
  - Public guarantees (envelope approved): 14.9
    - Bank loans (Prêt garanti par l’État): 13.3
    - Reinsurance schemes: 0.7
    - Other guarantees: 0.6
  - Direct equity support (envelope approved): 0.9

### Outlook and risks
- Staff estimates and baseline projection:
  - Output declined by around 9 percent in 2020.
  - Staff forecasts growth of almost 5½ percent in 2021, predicated on the absence of a third wave strong enough to trigger another lockdown.
  - Baseline assumes widespread availability of an effective vaccine or treatment towards end-2021.
- Drivers of 2020 output decline:
  - Two lockdowns triggered a domestic demand decline of around 7½ percent of GDP.
  - France’s export composition and destination imply a stronger negative contribution from net exports compared to some European peers.
- Medium-term projection:
  - Output projected to grow above potential but remain below the pre-crisis trend.
  - Real output is expected to remain about 4 percent lower than its pre-COVID-19 trend by 2025 due to lasting damage from the crisis.
- External sector:
  - Current account deficit estimated to increase to more than 2 percent of GDP in 2020 from 0.7 percent of GDP in 2019.
  - ULC-based real effective exchange rate appreciated by about 7½ percent.
  - France’s external position in 2020 preliminarily assessed to be weaker than implied by medium-term fundamentals and desirable policies.
- Illustrative scenarios:
  - Downside scenario: worse health dynamics delaying recovery by one year if social distancing and further lockdown measures are needed again in 2021.
  - Upside scenario: faster and widespread availability of an effective vaccine leading to population immunity by mid-2021 could bring a quicker rebound in late-2021 and 2022.
- Risks (unusually high):
  - Virus risks: extended or renewed containment could delay recovery and affect fiscal sustainability; earlier-than-expected vaccine availability could accelerate recovery.
  - Other risks: repricing of risk by credit markets, increased volatility in equity and bond flows, renewed tightening of financial conditions, pressures on bank balance sheets with lower capital buffers, reduced credit supply, liquidity risk in the corporate sector, worsening corporate insolvency, increased social discontent, and disruptions from a no-deal Brexit or other trade disruptions.

### Authorities’ views
- Authorities expected a slightly stronger contraction in 2020 and faster recovery in 2021 compared with staff:
  - Authorities expect output to drop by almost 11 percent in 2020.
  - Authorities revised growth in 2021 after the mission to 6 percent, from 8 percent in the draft 2021 budget law (note: revision occurred in the fourth budget amendment law).
- Authorities anticipate a stronger contribution from private investment and net exports to growth in 2021.
- Authorities agree downside virus risks are large but emphasize upside risks on health developments or consumption (drawing on accumulated savings) could significantly accelerate recovery.
- Authorities view current account weakness as partly due to an export structure disadvantaged by the asymmetric nature of the shock and expect competitiveness gains from lower production taxes to help gradual improvement.

### Policy challenges and recommendations
- Continued strong and flexible policy support is appropriate amid the second wave of infections and high uncertainty.
- Near-term policy:
  - Support to affected firms and individuals should continue to be scaled up as needed to protect the economy.
  - Strengthening corporate balance sheets and addressing risks from insolvency will be critical to the recovery.
- Longer-term policy orientation:
  - Use the crisis as an opportunity to reorient the French economy, limit scarring effects by boosting productivity and employment, and green the recovery.
- Fiscal stance:
  - Continued strong fiscal support is warranted in the near term but should become increasingly targeted as the recovery firms while ensuring budget neutrality over the medium term.
  - Despite high debt, France has some fiscal space due to the ECB’s accommodative monetary stance and support from the Next Generation EU Recovery Fund.
  - If downside risks materialize, the policy response should be scaled up further through temporary measures to prevent a vicious cycle of falling demand and balance sheet impairment, and to avoid further increases in poverty and inequality.
  - It will be critical to monitor the effectiveness, transparency, and accountability of public spending, including by providing public access to procurement contracts related to crisis programs.

*Source: IMF staff report (excerpt).*

### 25.      As the recovery firms, a progressive targeting of support measures would help

### 1fraea2021001 - 25.      As the recovery firms, a progressive targeting of support measures would help

### Targeting of support measures and labor policies
- Additional spending planned for 2021 and beyond is focused on boosting investment on the ecological and digital transformation of the economy and on upgrading skills, while preserving jobs by subsidizing the cost of reduced hours.
- As the recovery gains traction, broad-based emergency measures should give way to targeted support for the more dynamic parts of the economy, while providing a safety net for those affected by the transition.
- For unemployed and precarious workers: continue compensating income shortfalls of workers affected by the pandemic, including those with limited access to standard benefits at the onset of the crisis.
- Risk: maintaining current STW replacement rates for all sectors up to 2023, as currently planned, may be insufficiently targeted and disincentivize the reallocation of workers across firms (Box 2 and Annex VIII).

### Production taxes and tax reform design
- France levies close to 6 percent of firms’ value added in production taxes (compared to, e.g., 1.2 percent in Germany) and these taxes represent about 3 percent of GDP.
- The recovery plan includes a permanent reduction in three production taxes at a cost of about 0.4 percent of GDP per year.
- Policy recommendations:
  - Reform should aim at simplifying France’s complex system in a budget neutral way.
  - Consider eliminating the C3S turnover tax and adjusting the cut in the CVAE accordingly (Annex VII) to target a similar envelope.
  - Because tax cuts are permanent, include offsetting measures (scheduled to enter into effect only when the recovery is firm) to avoid aggravating future fiscal consolidation needs.
  - Possible offsets include further streamlining tax expenditures, especially those with detrimental environmental effects.

### Fiscal outlook, deficits, and public debt projections
- Deficit projections:
  - The deficit is projected to reach about 11 percent of GDP in 2020, and to decline to 7.2 percent of GDP in 2021 (text table).
  - Staff projects the overall and primary fiscal deficit to remain high at around 4½ and 3½ of GDP, respectively, over the medium term.
- Public debt projections:
  - After reaching about 116 percent of GDP in 2020, public debt is projected to edge higher to close to 122 percent of GDP over the medium term.
  - Downside scenario: debt could reach close to 140 percent of GDP.
  - Upside scenario: debt could decline slightly to 114 percent of GDP but would still remain above pre-crisis levels.
- Authorities’ draft 2021 budget pluriannual forecasts envisage the deficit to decline to about 3 percent of GDP by 2025, underpinned by a yet unspecified adjustment of about ½ percent of GDP starting in 2022.
- Footnote on downside scenario: assumes 2.4 percent of GDP in public guarantees being called, bank recapitalization needs of 0.6 percent of GDP, and additional stimulus measures of 1.8 percent of GDP.

### Medium-term consolidation strategy and policy priorities
- Recommendation: once the recovery is on firm ground, implement an expenditure-based consolidation effort to place debt on a downward path.
- Timing and pace: state contingent; start only when output has broadly recovered to its pre-crisis level and downside risks to growth have abated.
- Suggested measures:
  - Continue implementation of the unemployment benefit reform once the crisis eases.
  - Pursue the planned pension reform after consultation with social partners to account for crisis background.
  - Focus on structural spending reforms to sustainably reduce recurrent spending in a growth-friendly manner.
  - Reassessment of priorities in light of pandemic consequences may be warranted.
- Objective: ensure debt remains sustainable, create space to reduce distortionary taxes further, and provide for critical investment to reorient the economy post-crisis.

### Authorities’ views
- Authorities agree strong, flexible, and temporary additional fiscal support is warranted in the near term, and there is need for a medium-term expenditure-based consolidation plan to be implemented only once the recovery is on firm ground.
- Authorities prioritize emergency support for affected firms and individuals, and agree policy support can become more targeted as recovery strengthens.
- Authorities are less concerned than staff about potential costs of untargeted programs in terms of resource misallocation.
- Authorities view that the growth dividend from the recovery plan will lessen consolidation needs.
- Authorities reiterated commitment to implement the unemployment benefit reform and pursue pension reform after consultations.
- Authorities emphasized safeguarding public funds and noted public availability of public procurement contract information, including beneficial owners of companies that contract with the State.

### Corporate sector solvency risks and state-guaranteed loans
- Emergency policies, such as government guaranteed bank loans, have helped firms remain current and shielded banks’ loan books.
- Guarantees and take-up:
  - Some 5.4 percent of GDP in guarantees were granted by end-November, equivalent to 10 percent of total outstanding loans to non-financial corporates.
- Impact on corporate debt:
  - Gross corporate debt grew by an additional 10 percentage points of GDP in 2020:Q2.
  - Many firms used loans to build cash buffers; net debt remained fairly stable so far.
- Solvency risks:
  - Losses from depressed business activity likely large for some sectors; delinquencies expected to increase as fiscal deferrals, moratoria, and temporary insolvency flexibility fade.
  - Staff estimates an increase of firm insolvencies in France concentrated around service-sector and small-sized firms, leading to an equity gap of approximately 1.3 percent of GDP (amount needed to resolve financial difficulties of firms that were solvent before the crisis).
  - Equity needs likely to increase with second wave infections, associated lockdowns, and under an adverse protracted recovery.

### Household balance sheets and mortgage risk
- Job loss and mortgage default link:
  - Staff stress test estimates: losing a job (and receiving unemployment insurance) is associated, on average, with an 8 percent probability of default on mortgages (within 5 years).
- Adverse scenario risk:
  - In an adverse scenario (without moratoria and with unemployment increasing by about 2 percentage points) the overall mortgage default risk could increase by 20 basis points.
- Distributional vulnerabilities:
  - Low- and middle-income households face a five-fold higher default risk, upon job losses, compared to high income households.
- Temporary mitigation: moratoria policies have temporarily mitigated mortgage default risk.

### Strengthening corporate balance sheets and equity financing
- Policy recommendation: refocus measures away from government loan guarantees by scaling up equity-like financing targeted at crisis-affected viable enterprises to spur investment and business dynamism, and reduce excessive leverage risk.
- Recovery plan features selective measures on quasi-equity financing for SMEs and mid-caps:
  - Main instrument: prêt participatif (Annex V) — incentivizes private sector mobilization of quasi-equity (subordinated loan) financing via public guarantees.
  - Concerns: complex design and pricing may preclude adequate take-up or prevent funds from reaching firms with equity needs.
- Contingent actions:
  - Augment envelope for equity-support initiatives and adapt instruments if take-up is weaker than planned or equity needs persist.
  - Use state equity and debt instruments for large strategic companies on a limited basis, within the budgeted envelope, and only to avoid protracted widespread damage to the recovery.
  - Consider measures to weaken tax incentives that favor debt over equity, in line with the 2019 FSAP recommendation.
- Operational recommendation: frequently and closely monitor intragroup transactions within conglomerates to limit amplification of corporate risks.

### Debt restructuring, insolvency mechanisms, and corporate triaging
- France has the highest rate of annual insolvencies worldwide, accounting for almost one third of total insolvencies in western Europe.
- A projected increase in insolvencies from the pandemic of about 50 percent could overwhelm court capacity and risk indiscriminate firm liquidation.
- Recommendations:
  - Temporarily increase administrative capacity of out-of-court restructuring mechanisms (mandat ad hoc and conciliation) to prevent overwhelming the system and enable viable firms to restore financial health.
  - Adopt corporate triaging to distinguish businesses that can and cannot be restructured based on transparent criteria and led by private-sector specialists, allowing expeditious winding down of non-viable firms.
  - Swift implementation of the EU Restructuring Directive (Directive 2019/1023) to increase effectiveness of corporate restructuring procedures.
- Objective: facilitate capital reallocation towards viable firms and avoid long-run scarring from debt overhang.

### Banking sector resilience and stress-test outcomes
- Pre-crisis banking metrics:
  - CET1 at 14.6 percent on average at end-2019.
  - NPL ratios at 2.5 percent on average.
  - Liquidity coverage ratio about 140 percent on average.
  - Sovereign exposure of banking sector was below the EU average as of end-2019.
- Baseline assessment: buffers adequate to withstand baseline shock incorporating increased corporate insolvencies.
- Adverse scenario stress-test:
  - Assumes lower growth (- 4.0 pp below the baseline in 2021) and increased corporate and mortgage defaults.
  - French banks could see a depletion of CET1 ratio by 5.3 percentage points, taking into account existing policy measures.
- Other risks: exposure to market risk, wholesale funding risk, interconnectedness risk, risks around a no-deal Brexit, and exposures to previously more stable sectors undergoing permanent transformation (e.g., retail and commercial real estate).

### Insurance sector outlook and prudential guidance
- Insurers' capitalization and profitability:
  - Solvency capital requirement (SCR) coverage ratio at 265 percent at end-2019, declining slightly during the crisis.
  - Low policy rates and higher impairments/provisions likely to dampen insurers’ net profits going forward.
- Actions recommended for prudential authorities:
  - Continue to collect data and provide special guidance to contain insurers’ risk exposure, aimed at preserving their solvency.
  - Monitor insurance commitments given the uncertain and changing context.

*Source: IMF staff analysis and projections as presented in the provided chapter excerpt.*

### 36.      The macroprudential stance is broadly appropriate and minimum regulatory and

### 1fraea2021001 - 36.      The macroprudential stance is broadly appropriate and minimum regulatory and

### Macroprudential stance, regulatory flexibility, and supervision
- The macroprudential stance is "broadly appropriate" and minimum regulatory and supervisory standards should be maintained, given the uncertain financial outlook.
- Temporary reductions in capital and liquidity requirements and allowing for regulatory flexibility targeted at providing relief to solvent borrowers are appropriate, especially if stress returns in financial markets.
- Any regulatory flexibility should be temporary and time bound; a permanent and significant relaxation of micro-prudential requirements or rules that assess banks’ asset quality should be avoided as it may compromise long-term financial stability.
- Close monitoring of bank capital is warranted going forward, especially if the shock persists.
- Continue to enhance financial integrity in the post-crisis environment by maintaining efforts to upgrade the AML/CFT supervision of small banks rated as high-risk (see IMF Country Report No. 19/241 and Annex II).
- Maintaining limits on other macroprudential measures (borrower-based measures and the large exposure limit) is adequate given the need to mitigate risks from corporate and household indebtedness.
- Supervisory guidance to limit dividend payouts while certain support measures are in place is prudent and should continue until the shock is weathered.
- Once recovery takes hold, consider a sectoral systemic risk buffer calibrated to corporate exposures, to be activated appropriately should systemic risks from corporate leverage intensify (in line with the 2019 FSAP recommendation).
- Develop concentration thresholds for direct exposures within conglomerates and common exposures among entities to mitigate amplification risks from interconnectedness.

### Considerations for supporting firm financing through equity (Box 3)
- Rationale:
  - Temporarily supporting firm financing through well-targeted equity-like instruments could help mitigate debt overhang.
  - Broad-based liquidity credit support to companies may not be sustainable and would eventually need to be phased out.
  - Given the uncertain outlook, private capital may not be readily available in sufficient quantities.
- Key design aspects for an equity-like financing program:
  - (i) selectivity, ensuring problems related to adverse selection are mitigated;
  - (ii) pricing of the financing instrument, so that take-up is adequate;
  - (iii) time-bound duration, involving a clear exit strategy for the government.
- Selectivity: consider supporting crisis-affected firms having an equity need that were viable before the crisis (e.g., by gauging balance-sheet metrics) and are dynamic (e.g., by assessing firms’ submission of recovery feasibility plans).
- France’s participatory loans (PL):
  - PL are subordinated loan instruments that may include an interest rate indexed to the company’s turnover or profit, but indexing has been historically rare and does not confer equity status legally or for accounting purposes.
  - Relatively long amortization periods ease debt-servicing constraints, but potentially high cost of access can deter borrowers.
  - The government’s prêt participatif program (about €20 bn, consistent with the governments’ equity-gap estimate) provides public guarantees to incentivize private quasi-equity financing and mitigates adverse selection by relying on banks to select viable companies.
  - Risks and limitations: pricing and complexity may result in low take-up; targeting via banks’ discretion may direct funds toward firms with limited solvency risk, leaving equity-gap needs of viable firms partially unfulfilled; banks’ risk exposure could increase if they cannot sell a large portion of PLs granted.
  - For PLs granted directly by the state (Annex V, FDES), determining viability and recovery prospects of recipient enterprises remains key; tools to estimate SMEs’ ability to repay should be considered to safeguard public finances.
- Other adaptation options:
  - Index existing credit schemes to fiscal claims and provide capital and investment subsidies.
  - Loan convertibility options linked to higher future taxes could act like an equity injection.
  - Tranching hybrid credit support (junior claims), varying borrowing amounts (e.g., progressively on pre-crisis tax returns), and dynamically adjusting programs as crisis conditions change can enhance selectivity and reduce risks.
  - Augment fiscal carrybacks or carryforwards to allow companies to utilize losses for tax savings.
  - Provide tax subsidies for corporate capital (e.g., investor tax credits), or use the guaranteed loan envelope for exclusively financing long-term investment to incentivize private equity and investment.

### Authorities’ views (selected)
- Authorities agreed on the need to strengthen corporate balance sheets and remain vigilant on the buildup of risks in the financial sector.
- They highlighted the widespread take-up of the loan guarantee scheme that enabled firms to build cash-buffers.
- Authorities view their equity support scheme, including participatory loans, as adequate to fill equity financing gaps in a market-friendly manner.
- They reported intragroup transactions are sufficiently well monitored and that reporting will be enhanced soon.
- They are committed to timely implementation of the EU restructuring directive and preparedness for a spike in insolvency cases.
- Noted measures have been taken to weaken the tax-equity bias.
- Authorities share staff’s assessment that buffers in the banking sector are appropriate but require continued monitoring.
- Expressed concern about banking and insurance sector profitability in the low-interest environment and vigilance on potential build-up of risks in commercial real-estate.
- Open to evaluating the appropriateness of a sectoral systemic risk buffer once the crisis abates and regulatory framework is in place.

### Employment, labor policies, and recovery priorities
- Outlook and labor market impact:
  - The unemployment rate is projected to increase to about 10½ percent and decline only gradually over the medium term.
  - Unemployment fell to 7.8 percent in 2020:Q1, then increased to 9 percent in 2020:Q3.
  - Employment is estimated to have fallen by just 1.3 percent in 2020.
  - Youth employment and people on temporary contracts were disproportionately affected.
  - Job creation is likely to remain weak amid continued depressed activity, especially in labor-intensive service sectors, pushing up the unemployment rate well into 2021.
- Policy recommendations:
  - Boost employment, particularly among vulnerable groups, by facilitating new work relationships in dynamic sectors.
  - Preserve income of affected workers during the emergency phase and boost resources for training of existing and prospective workers (as envisaged in the recovery plan).
  - Reorient support to facilitate new work relationships in dynamic sectors as recovery gains strength.
  - The requirement to sign collective agreements to be eligible for the long-duration STW scheme can help align wage demands and training with job preservation objectives.
  - Gradually tighten duration, generosity, and eligibility parameters of the STW scheme to avoid incentivizing firms to operate below capacity and to facilitate worker reallocation.
  - Hiring subsidies focused on youth are appropriate but may need recalibration to avoid displacing other workers in a market with limited job creation.
  - Continue reforms to reduce structural unemployment and increase labor force participation, including making collective bargaining and training reforms fully effective.

### Green investment, productivity, and structural reforms
- Job-rich green investment (Plan de Relance) should help limit scarring and green the recovery; plan includes public transport and building sector investment (thermal retrofitting with long amortization times).
- Phase out identified tax expenditures supporting fossil fuels, redirecting resources to narrow green investment gaps.
- Implement additional green policies consistent with Paris Climate Agreement commitments and European initiatives, including adequate carbon pricing across sectors, accompanied by mitigation measures for low-income households.
- Leverage French firms’ presence in automobiles, power generation, and aeronautics into green energy generation/storage and zero-emission transportation with appropriate pricing and incentives.
- Boosting productivity is critical: labor productivity growth has declined over the past two decades largely due to falling multi-factor productivity growth.
- Government proposals to boost digital transformation in the Plan de Relance will help, but additional efforts are needed.
- Further simplify and modernize the tax system, including streamlining distortionary production taxes.
- Liberalize product and service markets (regulated professions, retail trade, sale of medicines) to boost productivity.
- Ensure support for reshoring is strictly limited to addressing national security concerns.

### Staff appraisal and fiscal guidance
- The IMF staff appraisal notes:
  - France suffered one of the sharpest economic contractions among EU countries; authorities responded with strong, flexible support measures targeting households and firms.
  - The response included a large emergency support package, significant uptake of government guaranteed bank loans, and the short-time work scheme.
  - The recovery plan focuses on upgrading skills and boosting investment for ecological and digital transformation.
- Economic outlook and risks:
  - Outlook is highly uncertain and dominated by virus dynamics.
  - External position weaker than implied by medium-term fundamentals partly due to one-off COVID-19 factors.
  - Downside risk: prolongation of the health crisis into 2021 could delay and weaken rebound.
  - Upside risk: faster availability of an effective vaccine with widespread immunization could significantly speed recovery.
- Policy guidance:
  - Continued strong policy support is warranted given unprecedented crisis and uncertainty, but support should be continuously reassessed and adapted.
  - Near-term: calibrate support to affected firms and individuals as the pandemic evolves, focusing support on those most affected to preserve fiscal sustainability.
  - Once health emergency is over and recovery gains traction, shift from broad-based emergency support to targeted support for dynamic parts of the economy while buffering those most affected by the transition.
  - Monitor implementation and effectiveness of measures and adjust to maximize impact.
- Fiscal consolidation:
  - Once recovery is on firm ground, an expenditure-based consolidation effort will be needed to place high debt on a downward path.
  - Timing and pace should depend on economic situation, starting only when output has broadly recovered to pre-crisis level and downside risks abated.
  - Begin planning now to provide a credible medium-term fiscal path focused on structural fiscal reforms to streamline and boost efficiency of recurrent expenditure.
  - Avoid permanent tax cuts or expenditure hikes unless accompanied by specific compensatory measures.
- Financial sector vigilance:
  - Strengthen corporate balance sheets and remain vigilant on buildup of financial sector risks.
  - Sharp increase in corporate borrowing may lead to debt overhang and hamper private recovery.
  - Once acute phase eases, pivot away from government loan guarantees and scale up equity-like financing targeted at crisis-affected viable enterprises to spur investment and productivity.
  - Market-led quasi-equity financing initiative is welcome but may need augmentation or adaptation if take-up is weak and equity needs increase.
  - Reinforce insolvency frameworks to facilitate efficient restructuring of viable firms and boost business dynamism.
  - Despite comfortable buffers, close monitoring of bank capital is required as asset quality deterioration from corporate defaults could risk limited bank profitability.
  - Macroprudential stance is appropriate and should continue to be calibrated as systemic risks evolve; regulatory flexibility targeted at relief for solvent borrowers has been appropriate but should be temporary and time bound.

*FRANCE — INTERNATIONAL MONETARY FUND*

### 48.      Policies should also aim at boosting employment, particularly among vulnerable

### 1fraea2021001 - 48.      Policies should also aim at boosting employment, particularly among vulnerable

### Employment and labor market: findings and vulnerabilities
- Lower job creation as a result of uncertainty and continued depressed activity, especially in the labor-intensive service sector, is likely to push the unemployment rate up further.
- The crisis has a proportionally stronger effect on lower-skilled workers and the young, which could negatively affect their integration into the labor market and amplify preexisting vulnerabilities.
- Evidence from charts and figures:
  - Employment growth declined sharply in 2020:Q2, with a disproportionate strong effect on the younger age cohort.
  - Employment relationships with open-ended contracts declined only marginally; fixed-term contracts collapsed.
  - The labor force fell as search activity came to a halt in the lockdown and subsequent summer period, but rebounded in 2020:Q3.
  - The unemployment rate in France only started to increase in 2020:Q3.
  - The number of job vacancies remains at a long-term low also after the first lock-down.
  - Inflation shows continued trend weakening, which up to July was mostly driven by lower energy prices.

### Policy recommendations: labor market and skills
- Reorient support to incentivize work and facilitate new work relationships in dynamic sectors once the recovery takes hold:
  - Tighten the eligibility and generosity of the short-time work scheme.
  - Facilitate retraining of existing workers.
- Continue the government structural reform process to reduce structural unemployment and increase labor force participation over the medium term.

### Green investment, productivity, and structural policy
- The economic disruption of the COVID-19 pandemic, and the associated massive fiscal response, represent an opportunity to reorient the French economy.
- Job-rich green investment policies, such as those in the Plan de Relance, are well placed to help limit scarring effects from the crisis while greening the recovery.
- As recovery strengthens, France should implement further green policies consistent with Paris Climate Agreement commitments and European initiatives, including by strengthening carbon pricing.
- The need to boost productivity—which predates the current downturn—will become increasingly important in the recovery phase as scarring effects are likely to weigh on growth potential.
- Additional policy steps to boost productivity:
  - Further simplification and modernization of the tax system.
  - Further steps to liberalize product and service markets.

### Fiscal policy: stance, risks, and recommended sequencing
- The pandemic response entailed a massive fiscal response; low financing costs have provided fiscal space to support affected individuals and firms.
- France entered the crisis with a high level of public debt after decades with sizable deficits; efforts to redress public finances tended to fall short of plans.
- Fiscal restraint will be needed to put debt on a downward path over the medium term.
- Sequencing recommendation:
  - France’s fiscal effort should only start once the recovery is secured and should be focused on reversing the trend in spending growth that led France to exhibit the largest spending-to-GDP ratio among peers.

### Procedural recommendation
- It is recommended that the next Article IV consultation take place on a standard 12-month cycle.

### Key statistics and projections (selected, exact values)
- Real GDP (change in percent): 2017: 2.3; 2018: 1.8; 2019: 1.5; 2020: -9.2; 2021: 5.4; 2022: 3.7; 2023: 2.2; 2024: 1.8; 2025: 1.4
- Private consumption (change in percent): 2017: 1.5; 2018: 0.9; 2019: 1.5; 2020: -8.7; 2021: 4.8; 2022: 5.5; 2023: 2.2; 2024: 1.5; 2025: 1.3
- Unemployment rate (percent): 2017: 9.4; 2018: 9.0; 2019: 8.5; 2020: 8.7; 2021: 10.4; 2022: 9.8; 2023: 9.3; 2024: 8.9; 2025: 8.6
- General government gross debt (percent of GDP): 2017: 98.3; 2018: 98.1; 2019: 98.1; 2020: 116.1; 2021: 117.9; 2022: 118.6; 2023: 119.8; 2024: 120.7; 2025: 121.8
- General government balance (percent of GDP): 2017: -2.9; 2018: -2.3; 2019: -3.0; 2020: -11.0; 2021: -7.2; 2022: -5.4; 2023: -4.7; 2024: -4.4; 2025: -4.4
- CPI (year average): 2017: 1.2; 2018: 2.1; 2019: 1.3; 2020: 0.5; 2021: 0.7; 2022: 1.0; 2023: 1.2; 2024: 1.5; 2025: 1.6
- Current account (percent of GDP): 2017: -0.8; 2018: -0.6; 2019: -0.7; 2020: -2.1; 2021: -1.5; 2022: -1.4; 2023: -1.2; 2024: -0.9; 2025: -0.9

*Source: IMF staff report (France), extracted content.*

### Annex I. Authorities’ Response to Past IMF Policy

### Annex I. Authorities’ Response to Past IMF Policy Recommendations

### Fiscal Policy
- IMF 2019 recommendation: Undertake a structural fiscal consolidation to reverse the rising trend of public debt. Pursue planned fiscal structural reforms (civil service, pension system) to support consolidation, improve spending efficiency and equity, and boost long-term growth. Complement with further spending efforts (including on tax expenditures, health, education, better targeting social benefits, and eliminating overlaps between central and local government functions).
- Authorities’ response:
  - The civil service reform was approved and implemented.
  - The pension system reform faced obstacles for approval and a redesign of the reform’s proposals has been postponed until the crisis dissipates.
  - Some streamlining of tax expenditures was introduced in the 2020 budget (elimination of reduced tariffs for off-road diesel) but was postponed in a subsequent amendment in the context of the Covid-19 crisis.

### Structural Reforms
- IMF 2019 recommendations:
  - Fully implement unemployment benefit reform to reduce structural unemployment while helping to generate some fiscal savings.
  - Continue implementation of apprenticeship and professional training reforms and adjust if outcomes fall short of objectives.
  - Further liberalization of product and service markets.
- Authorities’ response:
  - The unemployment benefits reform was approved but its implementation has been delayed because of the Covid-19 crisis.
  - The government implemented measures to liberalize personal transport (driving schools and auto parts) and online sales of medicines.

### Financial Sector (IMF 2019 recommendations and authorities’ response)
- Recommendations:
  - Bolster monitoring and oversight of financial conglomerates. Build resilience against cyclical risk, including related to corporate indebtedness.
  - Engage with ECB and other EU agencies on use of Pillar II measures to address bank specific residual risk from concentration of exposures to large indebted corporates.
- Authorities’ response:
  - Continued monitoring of financial risks and appropriately reduced the countercyclical capital buffer to 0 percent in response to the Covid-19 crisis.
  - The limit on banks’ exposure to the most heavily indebted companies was maintained, despite the crisis, for prudential reasons and to mitigate the increased risk associated with financially stressed non-financial companies.

### Annex II. 2019 Key FSAP Recommendations — Implementation Status (high-level syntheses)
- Implementation status coding: D—Done / LD—Largely Done / PD—Partly Done / NA—No Action; Timing: I= immediate (within one year), NT= near term (1–3 years), MT= medium term (3–5 years).
- Selected items and outcomes:
  - Engage with ECB and other EU agencies on Pillar II measures to address bank-specific concentration risk.
    - Agency: ACPR; Timing: I; Status: PD.
    - Note: ECB implemented a pragmatic SREP process for 2020, maintaining P2 requirements unchanged in most cases.
  - Develop analytical framework for borrower-based measures for corporates; consider sectoral Systemic Risk Buffer (SRB).
    - Agency: HCSF; Timing: NT; Status: LD.
    - Note: HCSF published a 2020 annual report reviewing the 2018 measure limiting banks’ exposures to large indebted corporates and participated in EBA consultation.
  - Evaluate options to incentivize corporates to finance through equity rather than debt.
    - Agency: MoF; Timing: NT; Status: NA.
  - Develop options to manage disruptions in wholesale funding markets and consider liquidity buffers to cover at least 50 percent of wholesale funding outflows over/up to five days horizon for all major currencies.
    - Agencies: ACPR, ECB; Timing: NT; Status: NA.
    - Note: ECB and ACPR stated liquidity buffers have been built to be used; banks prefer to maintain a significant liquidity buffer, above the 100% usual threshold. NSFR entry into force in June 2021 will add liquidity constraints.
  - Engage with ESRB and others on liquidity and leverage tools for insurers and investment funds.
    - Agencies: BdF, HCSF, ACPR, AMF; Timing: NT; Status: PD.
    - Note: National work undertaken; France pushes topic at ESRB level; Banque de France and ACPR actively take part in ESRB insurance work.
  - Report intragroup exposures and transactions within conglomerates on a flow and stock basis at regular frequency; develop guidance on exposures.
    - Agencies: ACPR, AMF; Timing: NT; Status: PD.
    - Note: Reporting CONGLOMER in place; to be enhanced with Common reporting templates by JC of ESAs.
  - Develop liquidity risk management requirements and stress testing at conglomerate level.
    - Agencies: ACPR, AMF; Timing: NT; Status: PD.
    - Note: No liquidity risk management requirement at this stage; research projects launched on conglomerate-level stress testing.
  - Strengthen conglomerate oversight and finalize common reporting templates and supervisory guidance.
    - Agencies: ACPR, AMF; Timing: NT; Status: PD.
    - Note: ACPR engaged in JC of ESAs and with ECB; full set of reporting expected by end 2021.
  - ACPR and AMF autonomy to determine resource levels based on forward-looking supervisory needs.
    - Agencies: ACPR, AMF, MoF; Timing: I; Status: NA (constitutional constraint).
    - Note: NSAs free to allocate resources but cannot determine global resource level; parliamentary decision required.
  - Government recuse itself from supervisory decision-making committees at ACPR and AMF to avoid perception of conflict of interest.
    - Agency: MoF; Timing: I; Status: NA (provides legal underpinning to sharing confidential information).
    - Note: MoF presence as observer on non-voting basis supports information sharing and does not prevent independent decisions.
  - Reduce spread between market interest rates and return on regulated savings products; implement CDC governance reform under Loi PACTE and review regulated savings framework.
    - Agency: MoF; Timing: NT; Status: NA.
  - Enhance AML/CFT supervision of smaller banks rated as high-risk; provide guidance on detection of terrorist financing.
    - Agencies: ACPR, Tracfin; Timing: I; Status: LD.
    - Note: ACPR devised an AML-CFT supervisory approach in late 2019 linking supervisory intensity to individual risk assessment. Implementation of 2020 supervisory plan delayed by pandemic; onsite visits resumed in May.
  - Work toward enhanced resolution framework for insurers including bail-in powers and funding.
    - Agency: ACPR; Timing: MT; Status: NA (EU single market issue).
    - Note: Authorities expect resolution regime to be strengthened following ongoing revision of Solvency II Directive and consider an EU Directive essential.
  - Change FGDR Supervisory Board membership eligibility from bank executives in activity to independent members.
    - Agency: FGDR; Timing: MT; Status: NA.
  - Develop modalities for providing ELA in currencies other than euros and establish general rules to assist banks identifying assets for ELA collateral.
    - Agencies: BdF, ACPR; Timing: MT; Status: PD.
    - Note: ELA framework decided by ECB Governing Council; ECB maintained TAF facility in some currencies. Banque de France revised internal procedures and has an internal framework for assets that can be pledged.

### Annex III. External Sector Assessment — Key Findings and Indicators
- Overall assessment:
  - Preliminary shift from “moderately weaker” in 2019 to “weaker” in 2020, subject to high uncertainty given lack of full-year 2020 data and the COVID-19 crisis.
  - A complete analysis will be provided in the 2021 External Sector Report.
- Potential policy responses:
  - Near term: focus on saving lives and supporting those most affected by the crisis.
  - Medium term: improve competitiveness through structural reforms and rebuild fiscal space once recovery is secured to help bring the current account (CA) more in line with fundamentals.
- Foreign Asset and Liability Position and Trajectory:
  - NIIP stood at –26 percent of GDP at 2020:Q2, below the 2014–19 range (between –16 and –23 percent of GDP).
  - NIIP fell by about 3½ percent of GDP since end-2019, largely driven by increases in banks’ and public sector gross debt (22 and 9½ percent of GDP, respectively).
  - Gross assets stood at 360 percent of GDP in 2020:Q2; banks’ non-FDI-related assets account for about 44 percent.
  - Gross liabilities reached 387 percent of GDP in 2020:Q2; external debt is about 250 percent of GDP (53 percent accounted for by banks and 26 percent by the public sector).
  - About ¾ of France’s external debt liabilities are denominated in domestic currency.
  - The average TARGET2 balance in 2019 was only about €100 million.
  - Assessment: NIIP negative but not raising sustainability concerns; vulnerabilities from large public external debt (58 percent of GDP) and banks’ gross financing needs. Stock of banks’ short-term debt securities was €83 billion at end-2019 (3.5 percent of GDP); financial derivatives stood at about 35 percent of GDP.
- Current Account:
  - Background: CA deficit projected to widen to 2.1 percent of GDP (compared with 0.7 percent in 2019).
  - Factors: one-off import of health sector equipment ~0.2 percent of GDP; business and tourism travel service balance decline ~0.2 percent of GDP; aeronautics net exports contracted by about ½ percent of GDP; lower investment income reduced income account contribution by about 0.4 percent of GDP.
  - Medium-term projection: CA deficit narrows to about ¾ percent of GDP as temporary factors dissipate and reforms improve competitiveness.
  - Assessment: 2020 cyclically adjusted CA deficit estimated at -2.8 percent of GDP; EBA-estimated norm of a surplus of 0.5 percent. IMF staff assesses the CA gap in 2020 was between –3.9 and –2.7 percent of GDP (compared to -1.6 to -0.6 percent of GDP in 2019). Model residual accounts for bulk of estimated gap (-3.1 percent of GDP).
  - 2020 (% GDP) indicators: Actual CA: –2.1; Cycl. Adj. CA: –2.8; EBA CA Norm: 0.5; EBA CA Gap: –3.3; Staff Adj.: 0.0; Staff CA Gap: –3.3.
- Real Exchange Rate:
  - Background: ULC-based REER and CPI-based REER depreciated by 3.3 and 1.7 percent, respectively, in 2019; both appreciated strongly in 2020. Through October, ULC-based REER appreciated by 6.4 percent with respect to the 2019 average; CPI-based REER appreciated by 2.1 percent.
  - Longer-term: both REER measures depreciated by about 10 percent between 2008 and 2019; France has not regained the loss of about one-third of its export market share registered in the early 2000s.
  - Assessment: EBA REER-index model points to REER gap of –2.8 percent; EBA REER-level model points to REER gap of 1.8 percent. CA gap points to an overvaluation of 9.9 to 14.4 percent. Staff assesses REER gap range of 9.9 to 14.4 percent, with a mid-point of 12.2 percent (subject to high uncertainty).
- Capital and Financial Accounts:
  - Background: 2020 CA deficit financed mostly by net portfolio debt inflows (~2.6 percent of GDP). Outward direct investment flows increased from 2.1 to 2.4 percent of GDP between 2019 and 2020; inward flows about 1.8 percent of GDP. Financial derivative flows grew since 2008 but fell slightly in 2020 with asset- and liability-side flows decreasing 4.3 percent of GDP each from about 5.5 percent in 2019. Capital account is open.
  - Assessment: France remains exposed to financial market risks owing to large refinancing needs of the sovereign and banking sectors.
- FX Intervention and Reserves:
  - 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.
- Note on methodology: REER gap range (9.9 to 14.4 percent) is obtained from CA gap range (–3.9 to –2.7 percent of GDP) and estimated semi-elasticity of the CA balance to the REER of 0.27.

### Annex IV. Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Policy Responses
- Unexpected shift in the Covid-19 pandemic
  - Likelihood: High (downside); Low (upside).
  - Expected impact: High (downside); High (upside) for faster recovery scenario.
  - Policy responses:
    - Ramp-up the testing capacity to facilitate early detection of cases. Ensure hospitals are adequately resourced.
    - Provide fiscal support in a targeted manner for viable firms to avoid losses from liquidity risks and ensure the normalization of labor market activity.
- Sharp tightening of financial conditions
  - Likelihood: Medium.
  - Expected impact: High.
  - Policy responses:
    - Monitor and support dislocations in all credit segments of the economy.
    - Recalibrate macroprudential policy as necessary to ensure the smooth flow of credit.
    - Prioritize government spending to limit the increase in government liabilities.
- Widespread social discontent and political instability
  - Likelihood: High.
  - Expected impact: Medium.
  - Policy responses:
    - Extend temporary support for most vulnerable groups.
    - Accelerate policies to facilitate reallocation of factors of production.
    - Accelerate job-rich investment projects financed by the EU Recovery Fund.
- Accelerating de-globalization
  - Likelihood: High.
  - Expected impact: Medium.
  - Policy responses:
    - Continue support for the multilateral rules-based trading system, and advocate trade liberalization.
    - Ensure cooperation within EU and avoid retaliatory policies.

*Source: Annex I–IV, 1fraea2021001 - Annex I. Authorities’ Response to Past IMF Policy Recommendations (IMF staff report).*

### Annex IV. Risk

### Annex IV. Risk

### Emergency Measures: Overview and Objectives
- Public guarantees
  - Public guarantees for bank liquidity loans (Prêt garanti par l’État, or PGE) were provided for firms in all sectors and regardless of size until December 31, 2020.
  - The state guarantees between 70 to 90 percent of the loan amount (depending on firm size).
  - The loan is capped at 25 percent of 2019 turnover (or three months of 2019 sales or two years of payroll in some cases).
  - PGE loans can be reimbursed over up to 5 years with no capital or interest payments due in the first year.
  - Large companies need to commit (i) not to pay dividends in 2020 (ii) not to buy back shares during 2020.
  - An envelope of €300 billion was approved for this scheme.
  - The deadline was extended to June 30, 2021, in the context of the second lockdown, and the maximum duration was extended to 6 years, with a grace period of up to 2 years.
  - An envelope of €15 billion was also approved for guaranteeing loan insurance schemes, some especially for exporters.
  - Objective: Channel liquidity to firms and avoid any disruptions to credit supply.
- Short-time work (STW) scheme
  - Coverage and generosity significantly expanded in March, at the onset of the crisis.
  - Generosity tightened in June, except for firms in vulnerable activities, and scheduled to be tightened further by early -2021.
  - Since July firms can also apply for an alternative long-duration STW scheme, complemented with dedicated training, with high replacement rates for up to three years, conditional on signing collective agreements.
  - Objective: Preserve employer-employee relationships, limit increases in unemployment and inefficient churning in the labor market and mitigate liquidity and solvency problems for firms.
- Grants for very small enterprises (VSE), micro-entrepreneurs, self-employed, and highly affected firms (Fonds de solidarité)
  - VSE, self-employed, micro-entrepreneurs and liberal professions (at most 10 employees and turnover of less than €1 million), who suffered a loss of turnover during March and April 2020 were eligible to receive compensating transfers of up to €1500, extendable by up to €10,000 based on cash-flow considerations and sector vulnerability.
  - Program reintroduced in 2020:Q4, with eligibility expanded to include firms with up to 50 employees (and regardless of size for highly affected firms), covering monthly turnover losses with grants of up to €1500 or €10,000, depending on turnover loss thresholds, the sector of activity, and whether firms were affected by curfew or lockdown closures.
  - Objective: Mitigate liquidity and solvency problems for very small firms, self-employed, and highly affected firms.
- Other liquidity measures
  - All firms could request to postpone social security contribution payments to the second half of 2020. Deferral of direct taxes (tax on profits, territorial economic contribution, for example) could also be requested in some cases.
  - Firms could ask for an advance of tax credits that would have been otherwise paid later.
  - Postponement of the payment of rents, water, gas and electricity bills for smaller companies in difficulty.
  - Waiver of late penalties for all state and local government public contracts.
  - Objective: Mitigate liquidity problems for firms.
- Direct support for companies
  - An envelope of €20 billion was approved to provide direct support to selected French large and strategic companies (e.g. Air France, Renault) through equity, quasi-equity, and debt securities.
  - An envelope of €1 billion was allocated through FDES to grant direct support to firms that were declined PGE loans and whose economic fundamentals remain viable.
  - After meeting additional eligibility criteria (e.g., firm size, justification of recovery prospects etc.), firms can receive participatory loans directly from the state.
  - Objective: Mitigate liquidity and solvency problems for firms.
- Macroprudential, capital flow and other financial measures
  - The counter-cyclical bank capital buffer was reduced to 0 percent (an increase from 0.25 percent to 0.5 percent was to become effective by April).
  - The SSM provided regulatory flexibility aimed at relaxing banks; capital and liquidity buffers.
  - Liquidity to the financial system was channeled through the ECB’s TLTRO operations.
  - A temporary ban on short-selling stocks was in place until May 18.
  - A public system for credit mediation was set up that helps any business that encountered difficulties with financial institutions (banks, lessors, factoring companies, credit insurers, etc.); business mediation in cases of conflict was also enabled through state ombudsmen.
  - Temporary amendments to insolvency law: suspension of the duty of directors to file for insolvency of the company; restricting access to the insolvency process; extension of filing deadlines.
  - The foreign direct investment screening procedure was updated to (i) include biotechnologies in the list of critical technologies and, (ii) temporarily lowering of the voting rights threshold from 25 to 10 percent (until Dec. 31, 2020).
  - Objective: Ensure smooth functioning of the banking and wholesale funding system, so that adequate credit supply is channeled into the economy. Avoid disruption to equity and bond markets. Mitigate credit resolution issues for firms.
- Health-related measures
  - Additional funding for hospitals to cover purchases of face masks, ventilators, etc.
  - Wage bonus for employees in the health sector.
  - Expanded health insurance coverage to take care of family members.
  - Objective: Strengthen the response of the health sector and protect affected households.
- Sectoral support plans
  - Targeted measures to most affected sectors (including automobile, construction, local crafts, technology, and tourism).
  - Measures include subsidies for purchase of electric/hybrid cars; subsidies for R&D and investment on green technology, including the production of electric car batteries; and investment fund to support R&D on greening of aviation industry.
  - Objective: Ensure support for vulnerable sectors, most hard-hit by the crisis, is not abruptly withdrawn and support their recovery.

### Recovery Measures: Objectives and Instruments
- Green Transition
  - Subsidies and public investment for thermal retrofitting of public and private buildings.
  - Direct support for projects aimed at the decarbonation of industry.
  - Additional infrastructure to develop everyday green mobility (cycling and public transportation).
  - Direct support to develop railway transportation, including freight.
  - Direct support for projects to develop green hydrogen.
  - Objective: Support the recovery of firms and jobs through a green transformation of the economy.
- Competitiveness
  - Permanent reduction in selected corporate production taxes (representing about €10 billion per year).
  - Measures to incentivize the relocation of industrial production in France.
  - Support for digital transformation of SMEs, VSEs, and mid-size companies.
  - Equity/quasi-equity public guarantees for (i) a special financial investment portfolio that selects relevant funds directed towards long-term financing for SMEs and mid-cap companies, (ii) investor’s refinancing of banks’ participatory loans to SMEs (prêt participatif).
  - Temporary tax incentives for the revaluation of enterprise assets and facilitation of leaseback operations to strengthen equity.
  - Objective: Enhance the competitiveness of French firms and reducing production related inefficiencies. Support firm balance sheets by strengthening equity.
- Skills, social and territorial cohesion
  - Additional investment in healthcare infrastructure.
  - Expanded training of young people in strategic sectors.
  - Hiring subsidies targeted at young and disabled people.
  - Additional funding for life-long training (digitalization, modernization).
  - Expanded funding for long-duration STW and dedicated training.
  - Support local authorities’ public investments (including on green transition) and dedicated measures to support the most vulnerable individuals and households.
  - Objective: Support the recovery of jobs by incentivizing hiring and enabling efficient reallocation of resources.

### Annex VI. Debt Sustainability Analysis (DSA) — Key Findings and Baseline Projections
- Overall assessment
  - The economic contraction due to the COVID-19 pandemic and the fiscal response that followed led to a sizable increase in public debt that is expected to persist, with a consequent increase in France’s public debt sustainability risk.
  - Under the baseline scenario, the debt-to-GDP ratio is projected to increase by 18 percentage points, to about 116 percent of GDP in 2020, to continue increasing throughout the projection horizon, and to reach about 122 percent of GDP by 2025.
  - The materialization of contingent liabilities or a combined shock to public finances and growth could add 6 to 9 percent of GDP to public debt over the medium term.
- Background
  - After increasing by 33 percent of GDP between 2007 and 2016 on the back of persistently high fiscal deficits, the debt-to-GDP ratio stabilized at around 98 percent of GDP over 2017–19.
  - The rising debt has had a limited impact on the debt service due to the sharp decline in interest rates.
  - The benchmark yield (10 years) declined from 4.2 percent in 2008 to 0.1 percent in 2019 and, as a result, interest payments declined steadily from close to 3 percent of GDP to 1.5 percent of GDP over the same period.
  - Before the pandemic, the debt level was projected to remain broadly stable at close to 100 percent of GDP throughout the forecast horizon.
- Baseline assumptions
  - The baseline fiscal scenario is based on the initial 2020 budget law, the four subsequent amending laws, and the Recovery Plan included in the 2021 budget.
  - No offsetting measures or consolidation effort is assumed in the baseline.
  - After contracting by 9.2 percent in 2020, the economy is projected to recover over 2021– 25.
  - Growth is projected at 5.4 percent in 2021, 3.7   percent in 2022, and remain above potential by 2025 when the output gap is expected to be broadly closed.
  - The level of nominal output would still be about 4 percent below the level projected before the onset of the pandemic.
- Baseline projections — fiscal deficit and primary balance
  - Staff projects the primary fiscal deficit to deteriorate to 9.8 percent of GDP, from 1.6 percent in 2019 (or 0.7 percent of GDP when the effect of the CICE conversion is excluded), as a result of the policies implemented in response to the crisis, the role of automatic stabilizers and the contraction in output.
  - The primary deficit is projected to decline to 6 percent of GDP in 2021—on the back of the sharp rebound in activity together with a partial withdrawal of the emergency package—and continue declining to reach 3.4 percent of GDP in 2025—compared to a projection of around 1¾ percent of GDP before the pandemic and a debt-stabilizing level of

*Source: Annex IV and Annex VI (selected excerpts) from the IMF staff report content unit 1fraea2021001 - Annex IV. Risk.*

### 2.2 percent of GDP. The effective interest rate is expected to remain contained at arou

### 1fraea2021001 - 2.2 percent of GDP. The effective interest rate is expected to remain contained at arou

### Fiscal outlook and debt dynamics
- Debt level projected to increase by 18 percent of GDP in 2020 to about 116 percent of GDP, with 9 percentage points accounted by interest-growth dynamics.
- Debt projected to increase further to about 122 percent of GDP over the medium term as the primary deficit contribution over 2021–25 (21 percent of GDP) would be only partly offset by favorable interest-growth dynamics (-17 percent of GDP).
- Under the baseline, the gross financing needs of the government would peak at around 28 percent of GDP in 2022 before declining to 26 percent of GDP in 2025.
- Effective interest rate is expected to remain contained at around 1 percent over 2021-25 on the back of exceptionally accommodative monetary policy.
- Primary deficit and composition (selected projection figures):
  - Primary deficit cumulative contribution over projections: 31.0 (cumulative in Figure VI.3 table).
  - Primary (noninterest) revenue and grants: 52.0, 53.3, 52.5, 52.5, 52.6, 52.1, 51.5, 51.4, 51.3, 11.5 (as listed).
  - Primary (noninterest) expenditure: 54.6, 54.0, 54.1, 62.4, 58.7, 56.7, 55.3, 54.9, 54.7, 42.5 (as listed).

### Mitigating factors and market indicators
- Mitigating factors: ECB’s accommodative monetary stance is expected to keep France’s financing costs low for a long period; financing from the EU Recovery Fund is another important mitigating factor.
- Share of public debt held by non-residents: 54 percent (substantially lower than the peak of 71 percent reached early 2010).
- Average maturity of debt as of end-2019: 8 years.
- As of end-October 2020, about 5.4 percent of GDP in loan guarantees had been claimed; authorities approved an envelope of public guarantees of about 14.9 percent of GDP in response to the crisis (largely for bank loans).

### Realism of projections and fiscal adjustment assessment
- Median forecast error for real GDP growth during 2011–19 was -0.3 percent, suggesting an upward bias in staff projections during that period.
- Median forecast error for the primary balance was -0.2 percent.
- Median forecast bias for inflation was -0.3 percent.
- Projected adjustment and CAPB:
  - Largest projected adjustment over any three years during the projection is 2.5 percent of GDP (below the 3 percent of GDP threshold based on high-debt country experience).
  - Maximum average level of the cyclically-adjusted primary deficit for any consecutive 3-year period during the projection horizon reaches -3 percent of GDP (well below the threshold of 3.5 percent of GDP).
- France’s percentile ranks in forecast track record figures (2011–2019):
  - Real GDP growth forecast error: -0.30 (has a percentile rank of 51%).
  - Primary balance forecast error: -0.19 (has a percentile rank of 46%).
  - Inflation (deflator) forecast error: -0.31 (has a percentile rank of 46%).

### Shocks and stress-test scenarios (selected outcomes)
- Combined most pertinent adverse scenario (negative growth shock + negative public finances): public debt reaches 131 percent of GDP in 2025 (compared to 122 percent under the baseline).
- Contingent liabilities materialization scenario: debt close to 128 percent of GDP by 2025.
- Growth shocks:
  - Assumption: real output growth rates in 2020–21 lower than baseline by one standard deviation (0.7 percentage points).
  - Assumed decline in inflation of 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 would increase to about 125 percent of GDP by 2025 under this scenario.
  - Gross financing needs would peak at about 30 percent of GDP in 2022 before declining to 27 percent of GDP in 2025.
- Primary balance shock:
  - Deterioration of -2.1 percent of GDP in the primary balance in 2021.
  - Public debt reaches about 125 percent of GDP in 2025.
- Interest rate shock:
  - Assumes an increase of 348 basis points in the cost of debt throughout the projection period.
  - Debt ratio by 2025 reaches about 125½ percent of GDP.
  - Gross financing needs would peak in 2023 at 29½ percent of GDP.
- Real exchange rate shock:
  - Assumes a 13 percent devaluation of the real exchange rate in 2020.
  - Debt and gross financing needs very similar to the baseline.
- Combined macro-fiscal shock:
  - Debt close to 124 percent of GDP in 2022 and 131 percent by 2025.
  - Gross financing needs would peak at more than 30 percent of GDP in 2023.
- Contingent liability shock:
  - Assumes 1 percent of GDP in bank recapitalization needs and 3 percent of GDP in COVID guarantees being called (total magnitude about 4 percent of GDP).
  - Real GDP growth in 2021-22 assumed 0.7 percent lower than baseline.
  - Debt reaches 124½ percent of GDP by 2022 and 128 percent of GDP by 2025.

### Heat map risk assessment (selected indicators)
- Debt level and gross financing needs risks: deemed high because France is above pre-COVID thresholds of 85 and 20 percent of GDP under the baseline and all stress scenarios.
- Public and private debt held by non-residents contributes to high external financing requirements.
- External financing requirement definition used: sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

### External Debt Sustainability Analysis (DSA) — assessment and key projections
- External debt projected to increase from 210 percent of GDP in 2019 to 234 percent of GDP in 2021 then decline gradually thereafter toward pre-COVID ratio.
- Under the baseline, external debt projected to decline from 234 percent of GDP in 2020 to 215 percent of GDP in 2025.
- Mitigating factors for external debt: current low cost of debt, high amount of foreign assets (around 290 percent of GDP in 2018), limited share of debt in foreign currency, and a positive non-interest current account.
- Under the historical scenario (macroeconomic variables = current negative growth averages), external debt would increase from 233 percent of GDP in 2020 to about 277 percent of GDP in 2025.
- Real depreciation scenario: one-time 30 percent depreciation in 2021 would cause external debt to peak at 258 percent of GDP and reach 252 percent of GDP by 2025.
- Composition and contributors to external debt changes (selected figures from Table VI.1):
  - Baseline external debt (selected years): 2019 = 233.5, 2020 = 224.5, 2021 = 220.0, 2022 = 218.3, 2023 = 216.3, 2024 = 214.9, 2025 = (table continues).
  - Identified external debt-creating flows (4+8+9) for 2020: 23.0.
  - Automatic debt dynamics contribution for 2020: 23.3.
  - Contribution from nominal interest rate (selected): 2019 = 3.1, 2020 = 2.7, 2021 = 2.4, 2022 = 1.8, 2023 = 1.7, 2024 = 1.8, 2025 = 1.9.
  - Contribution from real GDP growth for 2020: 20.6; for subsequent years: -11.3, -8.0, -4.7, -3.8, -3.0 (as listed).
- Gross external financing need (in billions of US dollars, selected): 2019 = 257.6, 2020 = 378.9, 2021 = 2703.2, (table includes a series of figures across years).
- External debt-to-exports ratio and other metrics reported in Table VI.1 remain elevated (exact values listed in table).

*Source: IMF staff (1fraea2021001).*

### Annex VII. France’s COVID-19 Fiscal Package

### Annex VII. France’s COVID-19 Fiscal Package

### Overview and size of the fiscal response
- France contracted by 18.9 percent year on year by 2020:Q2.
- Emergency fiscal package announced and legislated amounted to 21.7 percent of GDP.
- Recovery fiscal package (Plan de Relance) legislated in the 2021 budget law added about 3.9 percent of GDP for 2021 and beyond.
- Total package reported: about 25.6 percent of GDP.
- Cross-country context: France’s package among the largest in advanced economies, but the response is in line with peers once initial output losses are considered; variation across countries noted (e.g., larger responses in Germany and Japan despite lower initial output losses).

### Timing and legislative process
- First COVID-19 case in France: January 24.
- National lockdown introduced: March 17.
- About 80 percent of the total package announced over March–November was legislated or announced by end-June.
- First budget amendment legislated: March 23, introduced measures of up to 15.5 percent of GDP.
- Second amendment law: April 25.
- Third amendment voted: July 30, bringing fiscal package to 21 percent of GDP.
- Fourth amendment (partial lockdown from October 30): close to 1 percent of GDP additional measures, bringing total emergency package to close to 22 percent of GDP.

### Composition of the fiscal package
- Initial response centered on liquidity and contingent instruments with limited immediate deficit impact.
- Main components and exact figures:
  - Prêt garanti par l’État (PGE, public guarantees for bank loans): 13.3 percent of GDP.
  - Postponement of social security contribution payments and advanced reimbursement of tax credit: 1.5 percent of GDP (initially).
  - Initial above-the-line measures affecting the deficit: 0.5 percent of GDP (mostly funding for the short-time work scheme, STW).
- As crisis unfolded, composition shifted:
  - Above-the-line measures expanded to about 3.8 percent of GDP for 2020 (expansion of STW, exoneration of social contributions, grants to SMEs and self-employed, support to the health sector).
  - Above-the-line measures about 3½ percent of GDP for 2021–22 (recovery plan).
  - Direct assistance to firms via below-the-line measures (equity, quasi-equity, or debt securities) for mostly large and strategic firms.
- Above-the-line measures accounted for only 30 percent of the fiscal package.
- Note: By early November, only about 40 percent of the PGE envelope had been used.

### Effectiveness for labor markets and household income
- Policy emphasis: preserve household labor income largely by protecting jobs via STW.
- Outcomes and exact figures:
  - Employment contracted by only 1.8 percent (y -o-y) in 2020:Q2.
  - Households’ disposable income declined by only 2 percent.
- Efficiency and targeting:
  - France’s envelope for above-the-line measures directed at households and employment support was smaller than some peers (e.g., Italy) that had worse employment and disposable income outcomes.
  - Flexibility of French STW: firms could register workers on a precautionary basis and claim only for hours actually used.
  - STW usage statistics: about 12 million workers (½ of total employees) were registered in the scheme on average over March-June; actual claims reached 6.6 million workers, or 3 million in full-time equivalent terms.
- International comparisons:
  - Similar STW-based outcomes observed in Germany, Portugal, and the U.K.
  - Italy and Spain had larger losses in disposable income, reflecting worse employment outcomes and less generous STW schemes.
  - Canada and the United States relied more on direct transfers rather than job protection schemes.

### Recovery plan (Plan de Relance) priorities and fiscal implications
- Shift in focus from emergency liquidity and job preservation toward boosting growth and long-term transformation.
- Allocation and exact figures:
  - About 60 percent of the above-the-line measures approved for 2020 were directed at supporting household income (especially labor income).
  - Grants for SMEs accounted for 20 percent of the 2020 above-the-line envelope (2/3 of measures directed at firms).
  - Additional spending for 2021 and beyond includes 1.6 percent of GDP directed to public investment in green technology and the health sector.
  - Spending envelope for employment support reduced from 1.5 percent of GDP in 2020 (exclusively funding STW) to 0.6 percent of GDP for 2021–22:
    - Half of the 0.6 percent aimed at job creation (hiring subsides for the youth) and training.
    - The rest represents ongoing STW funding.
  - Fiscal support for firms shifted from grants and exoneration of social security contributions in 2020 to subsidies (targeting green investment and digitalization) and permanent cuts in business taxes (about 0.4 percent of GDP per year).
- Permanency and timing:
  - The authorities’ Plan de Relance announced as a fiscal package for 2021-22; about 18 percent of its spending component is expected to be implemented after 2022.
  - Reported tax cuts in 2021-22 are permanent, leading to a revenue loss of about 0.4 percent of GDP per year.

### Tax reform assessment and recommendations
- The announced tax cut is focused on production taxes.
- Key concerns:
  - France’s reliance on production taxes is high: production taxes account for 3 percent of GDP (10 percent of total tax revenue), a level comparable only to Greece and Italy.
  - Production taxes distort relative input prices, increase firms’ breakeven points, can act as a tax on exports and subsidy to imported inputs, and can amplify distortions across production stages affecting aggregate productivity.
- Recommendation: tax reform should be complemented with offsetting measures to ensure budget neutrality over the medium term; tackling the pandemic does not warrant permanent expansionary measures.
- Possible offsetting options suggested:
  - Further streamlining of tax expenditures and subsidies (especially those that incentivize the use of fossil fuels).
  - Gradual increase in carbon prices.
  - Activation of such measures should be delayed until the recovery is firm.

### Observations on missed opportunities and specific tax instruments
- The reform reduces the tax rate of the CVAE and two real-estate property taxes (CFE and TFPB), reducing the tax burden for firms by about €10 billion per year.
- Missed opportunity: simplification of an overly complex system while targeting the same amount.
- Specific option noted: complete elimination of the C3S tax (which raised close to €4 billion in 2019) and adjust cuts of other taxes accordingly.
  - Historical context: the C3S was reduced twice (2015 and 2016) and was scheduled to disappear in 2017.
  - Evidence cited: elimination of the C3S associated with a 1 percent increase in affected firms’ exports and significant improvements in firm survival during recessions (Urvoy 2019).
- French spending on subsidies and tax expenditures: France spends about 30 percent more than peers on subsidies tax expenditures; the 2020 budget included €90 billion, or 4 percent of GDP, in tax expenditures.

### Production taxes — detailed figures (miscellaneous taxes on production, billion euros / 2019)
- Contributions on the value added of the corporations (CVAE): 14.2
- Corporate tax on real-estate properties and non-developped land (TFPB): 15.5
- Property contributions of the corporations (CFE): 6.8
- Solidarity social contributions of the corporations (C3S): 3.8
- Other: 31.9
- Total: 72.2

### Annex VIII — Short-Time Work Scheme (STW) in selected countries (key comparative points)
- France STW (Activité partielle) — Covid provisions:
  - Replacement rate for worker: 70% of gross (84% net), with floor at 90% of min wage.
  - Replacement rate for firms (share of cost covered by State): 100% before June and 85% since June; 100% for selected sectors until Jan 2021.
  - Additional features: State covers 100% training cost; additional SSC waived for 27 weeks; no previous contribution required.
  - Max duration: 12 months (Covid).
- Comparative entries (selected exact figures from table):
  - Germany Kurzarbeit — Replacement rate for worker Pre-Covid: 60% of gross (71% net), with floor at 90% of min wage; Covid: increase to 70% (77%) from 4th month; 80% (87%) from 7th month (if 50%+ cut in hours).
  - Spain ERTE — Replacement rate for worker: 80 percent of gross foregone earnings; firms: 85% covered.
  - Italy Cassa Integrazione — Replacement rate for worker Covid: 80 percent of gross foregone earnings; firms: 100% but employers pay 80% of SSC (about 27% of compensation at avg. salary).
  - United Kingdom (Job Retention Scheme) — Replacement rate for worker Covid: 80% of gross salary of furloughed hours (partial hours allowed since July); firm support: 80% covered initially, with caps on worker compensation (£2,500 Mar-Aug; £2,187 Sept; £1,875 Oct).
- Additional STW statistics for France noted above: on average over March-June about 12 million workers registered; actual claims 6.6 million workers; 3 million in full-time equivalent terms.

*Prepared by Bertrand Gruss (EUR). Source: IMF staff analysis in Annex VII and Annex VIII of the France country document.*

### Annex IX.  Financing Support to Strengthen Equity and Incentivize

### Annex IX.  Financing Support to Strengthen Equity and Incentivize Investment in Selected Countries

### Hybrid financing options
- Country experience:
  - Ireland: offers a funding package to eligible businesses (upon submitting a business recovery plan) which is a hybrid of repayable advances and equity instruments (cumulative redeemable preference shares).
  - United States: assistance for SMEs includes a grant element to the provision of guaranteed loans whereby a portion of the loan can be forgiven in an amount equal to eight weeks of the borrowers’ key expenses, including payroll, mortgage interest, rent, and utilities.
- Considerations around selectivity, pricing and (time-bound) duration:
  - These programs have flexible and affordable pricing that can ensure sufficient take-up.
  - Under some schemes, selection could be too broad, and the government could find it difficult to exit equity stakes and/or losses may be large.

### Conversion of loans into equity or quasi-equity
- Country experience:
  - United Kingdom: Future Fund scheme issues convertible loans which automatically convert to equity at a minimum conversion discount of 20 percent to the price of the next qualifying funding round, which is the discount rate. To qualify, the amount of equity capital raised must be at least the size of the convertible loan.
  - United States (Federal Reserve): added more “equity-like” features to the main street lending program when it lengthened maturities and pushed back amortization in changes announced on June 8 (Federal Reserve 2020c).
- Considerations:
  - Private sector participation, through for example matched up funding can ensure efficient selection.
  - The government could find it difficult to exit equity stakes.
  - Parametric relief on loans could entail higher fiscal risk and increase the duration of exposure.

### Tax credit for incurred losses
- Country experience:
  - United States CARES Act: eased the extent and ability to carry back and carry forward net operating losses.
  - China: increased the tax loss carry-forward period (from five to eight years) for severely affected companies.
  - Austria: introduced rules to allow a carryback (expected) of tax losses for 2020 as a response to address the economic implications of the coronavirus (COVID-19) pandemic.
  - Czech Republic: allows taxpayers to deduct tax losses as a carryback for two years or carried forward for five future tax years.
- Considerations:
  - These tax offsets provide receivables against pandemic losses providing liquidity support to firms, and in some instances, solvency support.
  - Depending on the design, this could however be mistargeted to firms with no recovery prospects and extended longer in duration.

### Capital and investment subsidy and/or support
- Country experience:
  - Germany (KfW): syndicated loans offer investment and operating cost financing and assume up to 80 percent of the risk through sub-participation, or as a syndicate partner.
  - Italy: SME support scheme comprises a tax credit for private investors (up to 20 percent of the invested amount) and tax credit for companies with capital increase.
  - Spain: Investment guarantee facility supports the granting of new financing to self-employed workers and companies primarily to undertake new investments.
  - Australia: Backing Business Investment (BBI) program allows businesses with turnover of less than AUD $500 million to deduct 50 percent of the cost of a business’s investment in a new asset.
- Considerations:
  - Investment and capital tax subsidies could be fiscally costly given the uncertain economic environment and possibly low returns to investment.

### Key France fiscal, macroeconomic and policy findings (Supplementary information)
- Health and pandemic response:
  - France began vaccinating on December 28, 2020; by January 7, 2021, about 44,500 people had been vaccinated compared with the government target of 1 million vaccinations by end-January.
  - The second lockdown was eased in mid-December and replaced by a night curfew; daily new infections continued to be above the government’s target of 5,000.
- 2021 budget and fiscal support:
  - Final bill introduced additional support (about 0.7 percent of GDP) to offset the economic impact of containment measures.
  - Additional measures for 2021 will be partly financed by unused appropriations from 2020 (about 0.4 percent of GDP).
  - The final bill extended the scope of the quasi-equity guarantees program (while maintaining its overall envelope) by including subordinated bonds.
- Macroprudential and financial sector measures:
  - HCSF amended mortgage lending recommendations: DSTI benchmark ceiling raised from 33 percent to 35 percent; amortization deferrals of up to 2 years allowed; share of new loans that can diverge from best practices increased from 15 percent to 20 percent and targeted on first-time buyers.
  - HCSF intends to make these recommendations legally binding in summer 2021.
  - Banks expanded loan moratoria from around €20 billion in May to €262.7 billion at end-September, taking advantage of flexibility in accounting and prudential treatment of claims restructured under debt moratoria.
  - Regulation tightening the screening of non-EU investments: threshold lowered from 25 percent to 10 percent during the crisis (end-April 2020) and extended until the end of 2021.
- Recovery plan (Plan France Relance) and fiscal strategy:
  - The €100 billion Recovery Plan will be partly funded by €40 billion of direct subsidies from the European Union.
  - Pillar allocations:
    - €30 billion dedicated to the green transition (energy-retrofitting, sustainable mobility, decarbonation of industry, development of green technologies including hydrogen, biofuels, recycling).
    - €34 billion to reinforce competitiveness and resilience (including cut in distortive production taxes: €10 billion per year on a permanent basis, the first two years being part of the France Relance Plan for a total amount of €20 billion).
    - €36 billion for skills, social and territorial cohesion (including €1.6 billion for training young people in strategic sectors, €1 billion to lifelong training, €1.1 billion to subsidizing new hires under the age of 26, and €7.6 billion dedicated to preserve employment through a long duration short time work scheme).
  - Publicly supported quasi-equity scheme: participatory loans and subordinated bonds to SMEs and mid-size companies, allowing for quasi-equity financing up to €20 billion. Public support will consist of a portfolio guarantee granted to investment funds which invest in quasi-equity instruments; design described as time-bound and market-based to ensure market-led selectivity, adequate pricing, and time-bound support.
  - The Government expects a rebound in activity for 2021 at 6 percent (Government projection).
- 2019–22 selected economic indicators (Table 1):
  - Real GDP growth: 2019 = 1.5, 2020 = -9.0, 2021 = 5.5, 2022 = 4.1
  - Nominal GDP (billions of euros): 2019 = 2,426; 2020 = 2,257; 2021 = 2,389; 2022 = 2,510
  - Unemployment rate: 2019 = 8.5; 2020 = 8.7; 2021 = 10.4; 2022 = 9.8
  - Inflation (year average, %): 2019 = 1.3; 2020 = 0.5; 2021 = 0.7; 2022 = 1.0
  - General government balance (% GDP): 2019 = -3.0; 2020 = -10.6; 2021 = -7.7; 2022 = -5.1
  - Primary balance (% GDP): 2019 = -1.6; 2020 = -9.3; 2021 = -6.5; 2022 = -4.2
  - General government gross debt (% GDP): 2019 = 98.1; 2020 = 115.3; 2021 = 117.6; 2022 = 117.5
  - Current account (% GDP): 2019 = -0.7; 2020 = -2.1; 2021 = -1.6; 2022 = -1.5
- Fiscal outlook and consolidation:
  - The Budget bill relied on a -11 percent recession in 2020 (Government assumption).
  - Government estimates for 2020: public deficit of -11.3 percent and debt of 119.8 percent (text states these estimates).
  - Government intends to reduce the deficit to 8.5 percent in 2021 and stabilize public debt around 122.4 percent.
  - COVID related debt will be ring-fenced, and public resources dedicated to its amortization, with a stated credible trajectory and calendar.
  - A high level committee chaired by Jean Arthuis expected to deliver recommendations at the end February 2021 to help redefine a fiscal trajectory and improve governance of public finances.
- Labor market and social policy:
  - Short-time work scheme: at its peak in April, over 8 million workers were benefitting from this scheme.
  - Take-up of state-guaranteed loans: €300 billion guaranteed loan scheme with a take-up of around €130 billion at end 2020.
  - Solidarity Fund: credited with €20 billion for 2020.
  - Reforms ongoing: unemployment benefits reform implementation adapted to current context; plan to move towards a single universal retirement regime; Plan Pauvreté to protect the most vulnerable.
- Structural reform and investment in innovation:
  - Government plans: Multiannual Program Law on Research to invest €25 billion in public research over the next ten years; fourth Programme d’investissement d’avenir to target advanced technology support.
  - Measures to support competitiveness: permanent reduction in production taxes amounting to €20 billion over the next two years; conversion of CICE tax credit into a permanent reduction in employer social security contributions; €13 billion investment plan for innovation launched in 2017, and Fund for innovation and industry strengthened by €250 million annually.

*Source: Annex IX and Supplementary Information, France Staff Report for the 2020 Article IV Consultation (prepared by European Department), December 17, 2020.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1fraea2021001.pdf_