## 0.4 percent of GDP in 2030, consistent with France’s previous medium-term  objective (MTO)

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### Context and recent developments
- GDP rebounded by 6.8 percent in 2021 and by the end of 2021:Q3 output had recovered to pre-crisis levels.
- Recovery was broad-based: consumption, investment, employment, and labor force participation rebounded more quickly than in most other European countries; only manufacturing production remained below pre-crisis levels.
- Energy crisis effects:
  - Dampening recovery by reducing consumer purchasing power, denting confidence, and exacerbating supply-side difficulties.
  - France’s share of natural gas in energy supply: about 16 percent (vs. 24 percent for the EU).
  - Imports from Russia accounted for less than 10 percent of natural gas supply; most gas comes from Norway and from LNG imports.
  - Gas storage levels increased to normal seasonal levels (95 percent capacity in early December), providing a buffer covering about 30 percent of annual consumption.
  - Average burden of the energy price shock for French households: about 3 percent of total household consumption in 2022 (3.3 percent for the first quintile) and about 4 percent in 2023.
- Inflation and wages:
  - Twelve-month inflation (HICP) reached 7.1 percent in November 2022; inflation expected to average 6 percent in 2022.
  - Insee estimates policy measures reduced inflation by 3.1 percent (1.9 percent direct diffusion into non-energy goods/services and 1.2 percent indirect).
  - Wage increases: 3 percent; year-ahead wage expectations: 4 percent; overall inflation expectations in Q3 2022: 5 percent.
- Labor and credit:
  - Headline unemployment declined from 8.2 percent in 2019:Q4 to 7.3 percent in 2022:Q3; apprenticeships entries increased by 42 and 41 percent in 2020 and 2021.
  - Corporate credit growth picked up in the first half of 2022 (cash loans); household credit growth remained stable but mortgage lending slowed.
- External and fiscal:
  - Current Account: surplus of 0.4 percent of GDP in 2021 (from a deficit of 1.8 percent in 2020); CA deficit expected about 1.5 percent of GDP in 2022.
  - Fiscal deficit narrowed by 2.5 ppts to 6.4 percent of GDP in 2021; purchasing power measures in 2021 totaled 1 percent of GDP.
  - Energy-related measures in 2021-22 initially ½ percent of GDP (2021-22) expanded to 2.1 percent of GDP by 2022 after March, August, and November measures.
  - Debt service costs related to inflation-indexed debt increased by ½ percent of GDP on top of a small increase due to higher yields.
  - Deficit expected to meet the 2022 budget target of 5 percent of GDP thanks to sizeable revenue overperformance and windfalls under the CSPE.

### Outlook and risks
- Growth and inflation:
  - Staff projects GDP growth at 0.7 percent in 2023, with quarterly growth near zero in 2022:Q4 and 2023:Q1, and a slow rebound later in 2023.
  - Average inflation expected to remain around 5 percent in 2023 as energy prices stabilize and supply bottlenecks ease.
  - Over the medium term, growth expected to converge towards potential rate of 1.3 percent, with scarring leaving output some 2 percentage points below the level implied by the pre-pandemic trend.
  - Inflation will gradually decline to around 2 percent over the medium term as price caps are lifted gradually.
- Risks (tilted to the downside):
  - Main downside risks: a prolonged war and an escalation of sanctions; gas and electricity prices could further spike; inflationary pressures and higher wage demands could increase the risk of a wage-price spiral; faster-than-expected monetary policy adjustments; deeper slowdown in the US or China.
  - Upside: swift adjustment to accelerate the green transition could ease energy shock risks and boost investment.

### Fiscal policy — findings and recommended path to the MTO
- Objective: reach 0.4 percent of GDP in 2030, consistent with France’s previous medium-term objective (MTO).
- Required effort:
  - Sustained annual effort averaging 0.7 percent over 2024-30, for a cumulative effort of about 5 percent of GDP relative to staff’s baseline.
- Impact: this path would bring public debt on a firmly downward path from 2024.
- Measures and costs to date:
  - Purchasing power measures and COVID support replaced earlier emergency measures, contributing to elevated deficits.
  - Energy-related measures in 2021-22: ½ percent of GDP (2021-22); total energy/purchasing power support in 2022 after March/August/November: 2.1 percent of GDP.
  - Windfall revenues and claw-back provisions under the CSPE partially offset support costs.
- Near-term recommendation for 2023:
  - Begin reducing the deficit by taking advantage of the phase-out of pandemic support.
  - Recommend a fiscal tightening of ¼ ppt of GDP relative to 2022 or 0.7 ppt relative to staff’s baseline—equivalent to savings from expiring temporary Covid-19 support.
  - Possible levers: better targeting energy support; fully funding it from savings from higher energy prices (under CSPE); postponing production tax cuts (CVAE) until compensatory measures are in place; temporarily indexing higher pensions and income tax brackets below inflation.
  - If downside risks materialize: allow automatic stabilizers to work; discretionary support should be well-targeted and offset by compensatory measures.
- Medium-term plan and staff critique:
  - Authorities’ plan: bring deficit below Maastricht ceiling of 3 percent of GDP by 2027 and put debt on a downward path from 2026, relying on pension and labor market reforms, rationalizing tax expenditures, improving social security administration efficiency and reducing fraud, and tightening health and local government spending control.
  - Staff note fiscal watchdogs criticize optimistic macro assumptions that inflate deficit reduction and undermine credibility.
  - Staff recommended path: sustained adjustment to bring the deficit down to 0.4 percent of GDP by 2030 (one year later than staff advised last year), implying cumulative effort of about 5 ppts of GDP over 7-8 years, average annual effort 0.7 percent; consolidation gradual, focus on current spending while protecting investment.

### Fiscal scenarios and quantified measures (selected)
- Options and Quantified Measures to Achieve Adjustment in 2023 (Percent of GDP):
  - Total potential cost savings: 0.7-0.9
  - Energy measures: 0.6-0.6
  - Accelerated phase-out energy price controls: 1.6-0.8
  - Savings from higher energy prices: -1.1 0.0
  - Targeted cash transfers: 0.2
  - Other: 0.1-0.2
  - Offset/postpone production tax cut (CVAE): 0.1-0.1
  - Incomplete pension indexation: -0.1
- Fiscal projections (baseline vs recommended) — selected series (percent of GDP unless noted):
  - Real GDP growth (percent): Baseline: 1.9 -7.9 6.8 2.6 0.7 1.6 1.8 1.6 1.4; Recommended: 1.9 -7.9 6.8 2.6 0.4 1.3 1.6 1.4 1.1
  - Revenue: Baseline: 52.3 52.5 52.5 53.5 52.8 51.6 51.4 51.2 51.2; Recommended: same series.
  - Expenditure: Baseline: 55.4 61.5 59.1 58.4 58.1 56.4 56.0 55.7 55.7; Recommended: 55.4 61.5 59.1 58.4 57.5 55.6 54.9 54.1 53.6
  - Overall balance: Baseline: -3.1 -9.0 -6.5 -5.0 -5.3 -4.8 -4.7 -4.5 -4.5; Recommended: -3.1 -9.0 -6.5 -5.0 -4.7 -4.0 -3.5 -2.9 -2.4
  - Primary balance: Baseline: -1.7 -7.8 -5.2 -3.2 -3.7 -3.1 -2.9 -2.5 -2.3; Recommended: -1.7 -7.8 -5.2 -3.2 -3.2 -2.3 -1.8 -1.0 -0.3
  - Public debt (Percent of GDP): Baseline: 97.4 114.7 112.6 111.6 112.0 112.2 113.0 114.2 115.7; Recommended: 97.4 114.7 112.6 111.6 111.6 111.1 110.6 110.0 109.3
  - Recommended additional fiscal effort (relative to baseline projections): 0.7 0.4 0.5 0.5 0.6
  - Cumulative recommended additional fiscal effort since 2023: 0.7 1.1 1.6 2.1 2.7

### EDF’s renationalization (Box 1 — key points)
- Operational difficulties for EDF in 2022:
  - Nuclear power generation dropped to 280-300 TWh in 2022; expected to rebound to 300-330 TWh in 2023 (~30 percent below its 2005 peak).
  - Causes: Grand Carénage safety upgrades and tighter post-Fukushima inspection time (from 3 to 6 months); pandemic-created reactor maintenance backlog; corrosion led to temporary shutdown of 12 reactors (production loss of 60 TWh); delays to start operating Flamanville-3 reactor.
  - More than half of French nuclear reactors unavailable since beginning of 2022, turning EDF into a net importer of electricity.
  - Under Arenh regime, EDF sold an extra 20 TWh at €46.2/MWh to competitors.
  - EDF estimated impact on its 2022 EBITDA at €32bn (outages) and €10bn (regulatory measures).
- Government actions and costs:
  - Capital injection in March of €2.6bn.
  - In July, announced acquisition of remaining 16 percent of capital for €12 per share for a total of €9.7bn.
  - Government plans to build at least three pairs of new nuclear reactors at an estimated cost of €52bn, with possibly an additional eight reactors by 2050; first two envisaged to operate by 2035-37.
  - Additional estimated €32bn for lifetime extensions of second-generation reactors under phase two of the Grand Carénage (2022-28).
- Fiscal/corporate implications:
  - Nationalization may facilitate financing conditions for low carbon investments and grid, but phasing out tariff shield and restoring EDF production capacity critical to rehabilitate company’s financials.
  - Nationalization entails a risk to the 2023 budget if considered a capital transfer.
  - EDF expected to continue to be classified as a non-financial public enterprise; nationalization risks exposing the state to further losses.

### Financial sector — findings and recommendations
- Systemic risks increased since the onset of the war, despite high profitability.
- Banking sector metrics and vulnerabilities:
  - Five major French banks doubled annual net profit in 2021, to about 25 percent above pre-crisis levels.
  - CET1 ratio increased by 4 percentage points to 15.5 percent at end-2021; LCR about 150 percent.
  - NPL ratio fell to 3.4 percent, but NPL volumes increased by 60 percent in pandemic-affected sectors (hospitality and recreation).
  - About 75 percent of combined loan exposure is to energy and inflation-affected sectors—expected higher credit risk.
  - Direct exposures to Russia and Ukraine are low (about €30 billion).
- Policy recommendations:
  - Banking supervision should remain vigilant against negative effects of increased credit risk from vulnerable corporates.
  - Staff support authorities’ decision to further tighten the counter-cyclical buffer (CCyB) to a rate above pre-pandemic levels given buildup of financial stability risks and still low cost of capital for banks.
  - Staff-recommended CCyB target range: between 1 to 1.25 percent; pre-crisis level returned in March 2022: 0.5 percent; HCSF decision: raise CCyB by a further 0.5 points (implied to 1.0 percent).
  - Authorities could explore deployment of a sectoral systemic risk buffer directed at corporate exposures.
- Financial conditions and market indicators:
  - Corporate bond spreads have risen; French equities lost about 12 percent since their peak in early 2022.
  - Market financing rates have risen more swiftly than policy rates.
  - Financial Conditions Index shows tightening driven by price of risk, funding constraints, and external conditions.
- Liquidity and corporate support:
  - Guaranteed loans envelope: €150bn; grants to energy-intensive firms: €3bn envelope (uptake low so far).
  - Staff encourage consideration of more targeted liquidity support for critically integrated wholesale energy producers to help cover large margin requirements.

### Structural policy — findings and recommendations
- Labor market:
  - Recommendations: ensure smooth transition of apprentices into permanent work; address skills shortages and inferior educational outcomes; continue structural reforms in pensions, unemployment, and product and services markets.
  - Pension reform (proposed parameters):
    - Raise minimum retirement age at a rate of 3 months per year and contribution period for a full pension, with provisions for special circumstances.
    - Introduce automatic adjustment by indexing retirement age to life expectancy.
    - Unify fragmented system of 42 schemes for new participants.
  - Fiscal/macro benefit estimates:
    - Bringing increase in effective retirement age to 64 by 2030 could yield about ½ percent of GDP in savings over the medium-term (IMF staff estimate).
    - OECD (2021) estimate: increasing it to 64 by 2025 would yield 0.9 percent of 2019 GDP in savings and increase GDP per capita by 0.5 percent.
- Unemployment benefit reform:
  - 2019 reform tightened eligibility and introduced modulation; recent law extends application until end-2023 and allows countercyclicality.
  - Planned implementation: effective from February; varying benefit duration with labor market conditions, with a 25 percent reduction in maximum duration when unemployment rate is below 9 percent and quarterly rate of increase below 0.8 ppts; safeguards: floor of 6 months and extension if labor market deteriorates.
  - Staff encourage further revisiting eligibility and generosity to generate additional savings.
- Education and spending efficiency:
  - Public education spending: 5.2 percent of GDP in 2019.
  - Non-teaching staff compensation share: 22 percent in non-tertiary and 38 percent in tertiary education (vs. 12 and 28 percent in peers).
  - Expenditure per student: 5 percent higher than peers for secondary; over 30 percent higher for upper secondary; 20 percent lower for primary; 8 percent lower in tertiary.
  - PISA performance: only 30 percent of population have completed a post-secondary education cycle (versus 35 and 33 percent in the UK and Germany).
  - Recommendations: rebalance spending from upper secondary to primary; rationalize non-teaching staff spending; improve teacher training; align compensation with performance; incentivize teachers in disadvantaged areas; increase school administration autonomy.
- Product and service market efficiency:
  - France lags peers on regulatory barriers; easing restrictions in regulated professional services, retail services, and network sectors would raise potential growth.
- Green transition and investment needs:
  - IMF staff support accelerating green transition through energy conservation and faster switch to renewables.
  - Illustrative net increase in non-fossil fuel energy investment for France: approximately €200-250 billion over 8 years (including new nuclear reactors and life-cycle extensions and scaling renewables).
  - Additional investments in transportation and residential infrastructure: approximately €200-250 billion over same period.
  - Overall economy-wide estimates: net climate investment needs around €70-90 billion per year (around 2.5 percent of GDP).
  - Carbon price projection in the price surge scenario: nominal ETS price rises from €87 per ton/CO2 in 2022 to €112 by 2030.
  - Illustrative emissions impact: combination of higher projected carbon prices and energy prices would reduce emissions by about a third in ETS sectors and about one fourth in ESR sectors relative to pre-crisis baseline.

### Key statistics and figures cited
- GDP rebound in 2021: 6.8 percent.
- Staff growth projection for 2022: 2.6 percent.
- Staff growth projection for 2023: 0.7 percent.
- Potential growth medium term: 1.3 percent.
- Output scarring: some 2 percentage points below pre-pandemic trend.
- HICP inflation expected average 2022: 6 percent; twelve-month rate in November 2022: 7.1 percent.
- Insee estimated inflation reduction from measures: 3.1 percent (1.9 percent direct diffusion to non-energy goods/services; 1.2 percent indirect).
- Wage increases: 3 percent; year-ahead wage expectations: 4 percent; overall inflation expectations in Q3 2022: 5 percent.
- Share of natural gas in French energy supply: about 16 percent (vs. 24 percent for the EU).
- Gas storage: 95 percent capacity in early December; buffer covering about 30 percent of annual consumption.
- Household burden of energy shock: about 3 percent of total household consumption in 2022 (3.3 percent for first quintile) and about 4 percent in 2023.
- Current Account balance 2021: surplus of 0.4 percent of GDP (2020: deficit of 1.8 percent).
- CA deficit expected 2022: about 1.5 percent of GDP.
- Fiscal deficit 2021: 6.4 percent of GDP (narrowed by 2.5 ppts).
- Purchasing power measures 2021: 1 percent of GDP.
- Energy measures 2021-22: ½ percent of GDP.
- Total energy/purchasing power support in 2022 after March/August/November: 2.1 percent of GDP.
- Debt service costs related to inflation-indexed debt increased by ½ percent of GDP.
- Savings ratio expected 2022-23: about 15.8 percent (2019 level: 15 percent).
- Required fiscal consolidation to reach MTO: annual effort averaging 0.7 percent over 2024-30; cumulative effort about 5 percent of GDP relative to staff’s baseline.
- Target in 2030: 0.4 percent of GDP.

*International Monetary Fund — France staff report (January 4, 2023).*

### 0.4 percent of GDP in 2030, consistent with France’s previous medium-term  objective

### 0.4 percent of GDP in 2030, consistent with France’s previous medium-term  objective (MTO)

### Context and recent developments
- After a robust recovery from the COVID shock, GDP rebounded by 6.8 percent in 2021 and by the end of 2021:Q3 output had recovered to pre-crisis levels.
- The recovery was broad-based: consumption, investment, employment, and labor force participation rebounded more quickly than in most other European countries; only manufacturing production remained below pre-crisis levels.
- The energy crisis is dampening the recovery by reducing consumer purchasing power, denting confidence, and exacerbating supply-side difficulties.
- Staff expect growth of 2.6 percent for 2022, but high frequency indicators point to stagnating growth in the coming quarters.
- Capacity utilization continues to remain below pre-crisis levels.
- France’s share of natural gas in energy supply is about 16 percent (vs. 24 percent for the EU).
- Imports from Russia accounted for less than 10 percent of natural gas supply; most gas comes from Norway and from LNG imports.
- Gas storage levels increased to normal seasonal levels (95 percent capacity in early December), providing a buffer covering about 30 percent of annual consumption.
- The average burden of the energy price shock for French households was contained at about 3 percent of total household consumption in 2022 (3.3 percent for the first quintile) and about 4 percent in 2023, among the smallest across Europe.
- Twelve-month inflation (HICP) reached 7.1 percent in November 2022; inflation is expected to average 6 percent in 2022.
- Insee estimates that policy measures reduced inflation by 3.1 percent (1.9 percent direct diffusion into non-energy goods/services and 1.2 percent indirect), see Insee Analyses no. 75, September 1, 2022 (methodology referenced in source).
- Wage increases remain below headline inflation: wages at 3 percent and year-ahead wage expectations at 4 percent were below overall inflation expectations in Q3 2022 (5 percent).
- Headline unemployment declined from 8.2 percent in 2019:Q4 to 7.3 percent in 2022:Q3; apprenticeships entries increased by 42 and 41 percent in 2020 and 2021.
- Corporate credit growth picked up in the first half of 2022, driven by cash loans; household credit growth remained stable but mortgage lending slowed in recent months.
- The Current Account moved to a surplus of 0.4 percent of GDP in 2021 (from a deficit of 1.8 percent in 2020); CA deficit expected about 1.5 percent of GDP in 2022.
- Fiscal deficit narrowed by 2.5 ppts to 6.4 percent of GDP in 2021; purchasing power measures in 2021 totaled 1 percent of GDP.
- Measures in response to rising energy prices announced in 2021 included regulated gas and electricity price freezes and cash transfers, totaling ½ percent of GDP over 2021-22.
- Additional energy and purchasing power support in 2022 (March, August, November) brought the total to 2.1 percent of GDP.
- Debt service costs related to inflation-indexed debt increased by ½ percent of GDP on top of a small increase due to higher yields.
- The deficit is expected to meet the 2022 budget target of 5 percent of GDP thanks to sizeable revenue overperformance and windfalls under the CSPE.

### Outlook and risks
- Staff projects GDP growth at 0.7 percent in 2023, with quarterly growth near zero in 2022:Q4 and 2023:Q1, and a slow rebound later in 2023.
- Average inflation is expected to remain around 5 percent in 2023 as energy prices stabilize and supply bottlenecks ease.
- The savings ratio is expected to remain at about 15.8 percent in 2022-23 (slightly above the 2019 level of 15 percent).
- Over the medium term, growth is expected to converge towards the potential rate of 1.3 percent, with scarring leaving output some 2 percentage points below the level implied by the pre-pandemic trend.
- Inflation will gradually decline to around 2 percent over the medium term as price caps are lifted gradually.

### Fiscal policy — findings and recommended path to the MTO
- Objective: reach 0.4 percent of GDP in 2030, consistent with France’s previous medium-term objective (MTO).
- Required effort: a sustained annual effort averaging 0.7 percent over 2024-30, for a cumulative effort of about 5 percent of GDP relative to staff’s baseline.
- Impact: this path would bring public debt on a firmly downward path from 2024.
- Fiscal developments and measures to date:
  - Purchasing power measures and COVID support replaced earlier emergency measures, contributing to elevated deficits.
  - Energy-related measures in 2021-22 amounted to ½ percent of GDP (2021-22) and were expanded to 2.1 percent of GDP by 2022 after March, August, and November measures.
  - Windfall revenues and claw-back provisions under the public service energy obligation mechanism (CSPE) partially offset support costs.

### Financial sector — findings and recommendations
- Systemic risks in the financial sector have increased since the onset of the war, despite high profitability.
- Recommendations:
  - Banking supervision should remain vigilant against possible negative effects of increased credit risk from vulnerable corporates.
  - Staff support the authorities’ decision to further tighten the counter-cyclical buffer to a rate above pre-pandemic levels given the buildup of financial stability risks and still low cost of capital for banks.
- Financial conditions have tightened amid increasing funding costs:
  - Corporate bond spreads have risen; French equities lost about 12 percent since their peak in early 2022.
  - Market financing rates have risen more swiftly than policy rates.
  - Financial Conditions Index shows tightening driven by price of risk, funding constraints, and external conditions.

### Structural policy — findings and recommendations
- Labor market:
  - Labor market policies should ensure smooth transition of apprentices into permanent work while addressing skills shortages and inferior educational outcomes.
  - Continuing structural reforms in pensions, unemployment, and product and services markets will be essential for future fiscal health as well as better competitiveness and growth.
- Green transition:
  - The energy crisis presents an opportunity to accelerate the green transition through energy conservation and a faster switch to renewable energy.
- Other structural observations:
  - Spending efficiency and educational attainment, investment needs for the climate transition, and emissions targets are highlighted as key structural policy areas (referenced in boxes and figures).

### Key statistics and figures cited in the content unit
- GDP rebound in 2021: 6.8 percent.
- Staff growth projection for 2022: 2.6 percent.
- Staff growth projection for 2023: 0.7 percent.
- Potential growth medium term: 1.3 percent.
- Output scarring: some 2 percentage points below pre-pandemic trend.
- HICP inflation expected average 2022: 6 percent; twelve-month rate in November 2022: 7.1 percent.
- Insee estimated inflation reduction from measures: 3.1 percent (1.9 percent direct diffusion to non-energy goods/services; 1.2 percent indirect).
- Wage increases: 3 percent; year-ahead wage expectations: 4 percent; overall inflation expectations in Q3 2022: 5 percent.
- Share of natural gas in French energy supply: about 16 percent (vs. 24 percent for the EU).
- Gas storage: 95 percent capacity in early December; buffer covering about 30 percent of annual consumption.
- Household burden of energy shock: about 3 percent of total household consumption in 2022 (3.3 percent for first quintile) and about 4 percent in 2023.
- Current Account balance 2021: surplus of 0.4 percent of GDP (2020: deficit of 1.8 percent).
- CA deficit expected 2022: about 1.5 percent of GDP.
- Fiscal deficit 2021: 6.4 percent of GDP (narrowed by 2.5 ppts).
- Purchasing power measures 2021: 1 percent of GDP.
- Energy measures 2021-22: ½ percent of GDP.
- Total energy/purchasing power support in 2022 after March/August/November: 2.1 percent of GDP.
- Debt service costs related to inflation-indexed debt increased by ½ percent of GDP.
- Savings ratio expected 2022-23: about 15.8 percent (2019 level: 15 percent).
- Required fiscal consolidation to reach MTO: annual effort averaging 0.7 percent over 2024-30; cumulative effort about 5 percent of GDP relative to staff’s baseline.
- Target in 2030: 0.4 percent of GDP.

*International Monetary Fund — France staff report (January 4, 2023).*

### 2025. The CA deficit is expected to shrink over the medium term as fiscal consolidation and

### 1fraea2023001 - 2025. The CA deficit is expected to shrink over the medium term as fiscal consolidation and

### Outlook and Risks
- The current account (CA) deficit is expected to shrink over the medium term as fiscal consolidation and structural reforms to improve competitiveness of the economy are implemented.
- Risks to the outlook are high and tilted to the downside.
  - Main downside risks: a prolonged war and an escalation of sanctions.
  - Gas and electricity prices could further spike, leading to another surge in inflation.
  - Inflationary pressures and higher wage demands could increase the risk of a wage-price spiral.
  - Faster-than-expected monetary policy adjustments in Europe or elsewhere could further depress output.
  - A deeper slowdown in the US or China could depress external demand.
  - Upside: swift adjustment to accelerate the green transition could ease energy shock risks and boost investment.

### Authorities’ Views
- Government short-term and medium-term views:
  - Government expects a 1 percent increase in GDP for 2023.
  - Government expects inflation to be about 4.7 percent (HICP) for 2023.
  - Authorities share staff’s view on main downside risks (prolonged war, additional inflationary pressures) but view some risks as symmetric (gas and electricity prices).
  - Authorities see more limited risks of a wage-price spiral.
  - Over the medium term, authorities expect:
    - Faster growth due to less scarring from the Covid and energy crises.
    - Gradual decrease in the savings rate from historically high levels, boosting consumption.
    - A boost in potential growth from labor market and pension reforms.

### Policy Discussions — General
- Fiscal policy should start tightening in 2023 after a highly stimulative position over the last 3 years.
- Priority: steady, expenditure-based consolidation for the remainder of the decade.
- Financial supervision: remain vigilant against negative effects from rising interest rates; tighter macroprudential policy advisable in the baseline scenario.
- Tighter fiscal and macroprudential policies would assist ECB monetary policy in easing inflationary pressures.
- Labor market policies: build on recent successes to ensure smooth transition of apprentices into permanent work; address skills shortages and inferior educational outcomes.
- Continue structural reforms, particularly in pensions, unemployment, and product and services markets, essential for future fiscal health, competitiveness, and growth.
- Accelerate the green transition through price and non-price measures and investment in renewable energy to help achieve emission reduction targets.

### Fiscal Policy: Focusing Crisis Support and Reducing the Deficit
- Assessment of past measures:
  - Support totaling 2 percent of GDP in 2021-22 centered on households and largely channeled through untargeted energy price measures and cash transfers.
  - Tariff shield (“bouclier tarifaire”) in 2022:
    - Capped increase in regulated electricity tariffs at 4 percent from February 2022 for one year.
    - Froze regulated gas tariffs at their October 2021 level until the end of 2022.
    - Cost of tariff shield: 1 percent of GDP excluding cost incurred by EDF (Box 1).
  - For 2023:
    - Price cap raised by 15 percent, with poorer households compensated upfront through cash transfers.
    - Fuel subsidy replaced by a more targeted fuel voucher (“chèque carburant”) for households earning up to median income.
    - Energy bill support to firms scaled up, funded from a new infra-marginal rent tax and a solidarity contribution from energy producers.
  - Net cost of support in 2023 remains substantial at 1 percent of GDP, reflecting large gap between market and regulated energy prices and modest demand reduction.
- Recommendations to reduce fiscal cost and incentivize energy savings:
  - Better target measures by accelerating phase-out of price controls and increasing support to the most affected.
  - Consider a tiered pricing mechanism with the tariff shield covering only basic energy needs as a second-best to a swift phase-out.

### Box 1 — EDF’s Renationalization (Key Points)
- Objective: give government more control over energy transition; risk of exposing state to further losses.
- Operational difficulties for EDF in 2022:
  - Nuclear power generation dropped to 280-300 TWh in 2022; expected to rebound to 300-330 TWh in 2023 (~30 percent below its 2005 peak).
  - Contributing factors:
    - Grand Carénage safety upgrades and tighter post-Fukushima inspection time (from 3 to 6 months).
    - Pandemic-created reactor maintenance backlog.
    - Corrosion led to temporary shutdown of 12 reactors (production loss of 60 TWh).
    - Delays to start operating Flamanville-3 reactor.
  - More than half of French nuclear reactors unavailable since beginning of 2022, turning EDF into a net importer of electricity.
  - Under the Arenh regime, EDF sold an extra 20 TWh at €46.2/MWh to competitors.
  - EDF estimated the impact on its 2022 EBITDA at €32bn (outages) and €10bn (regulatory measures).
- Government actions:
  - Capital injection in March of €2.6bn.
  - In July, announced acquisition of remaining 16 percent of capital for €12 per share for a total of €9.7bn.
- Investment plans and costs:
  - Government plans to build at least three pairs of new nuclear reactors at an estimated cost of €52bn, with possibly an additional eight reactors by 2050.
  - First two envisaged to operate by 2035-37.
  - Additional estimated €32bn for lifetime extensions of second-generation reactors under phase two of the Grand Carénage (2022-28).
- Fiscal and corporate implications:
  - Nationalization may facilitate financing conditions for low carbon investments and grid, but phasing out tariff shield and restoring EDF production capacity critical to rehabilitate company’s financials.
  - Nationalization entails a risk to the 2023 budget if considered a capital transfer.
  - Nuclear outages and energy shock measures have dented EDF’s revenues in 2022.
  - EDF expected to continue to be classified as a non-financial public enterprise; nationalization risks exposing the state to further losses.

### Recent and Near-Term Fiscal Trajectory
- Fiscal stance and measures:
  - Fiscal policy expected to remain supportive in 2023.
  - Budget envisages cutting CVAE (value-added tax) of 0.3 percent of GDP in half in 2023, remainder to be eliminated in 2024.
  - Earlier tax cuts for firms and households led to permanent revenue loss of 1½ percent of GDP since Macron’s first term.
  - Authorities target unchanged deficit of 5 percent of GDP in 2023.
  - Staff projects the deficit to widen by ¼ ppts to 5.3 percent of GDP, driven by a less favorable macro forecast.
- Staff recommendation for 2023:
  - Begin reducing the deficit by taking advantage of the phase-out of pandemic support.
  - Recommend a fiscal tightening of ¼ ppt of GDP relative to 2022 or 0.7 ppt relative to staff’s baseline—equivalent to savings from expiring temporary Covid-19 support.
  - Possible levers: better targeting energy support and fully funding it from savings from higher energy prices (under CSPE); postponing production tax cuts until compensatory measures are in place; temporarily indexing higher pensions and income tax brackets below inflation.
  - If downside risks materialize, allow automatic stabilizers to work; discretionary support should be well-targeted and offset by compensatory measures.
  - Under an upside scenario, save any revenue overperformance and phase out support faster to accelerate deficit reduction.

### Medium-Term Fiscal Adjustment and Debt Outlook
- Authorities’ medium-term plan:
  - Bring deficit below Maastricht ceiling of 3 percent of GDP by 2027 and put debt on a downward path from 2026.
  - Rely on pension and labor market reforms, rationalizing tax expenditures, improving social security administration efficiency and reducing fraud, and tightening health and local government spending control.
  - Savings reflected in real spending growth targets in draft medium-term programming bill; measures largely remain to be specified.
- Staff critique:
  - France’s fiscal watchdogs (Cour des Comptes; High Council for Public Finances) criticize optimistic assumptions in macro baseline that inflate deficit reduction and undermine credibility of adjustment path.
- Projections under current policies:
  - Fiscal deficit expected to reach about 4½ percent of GDP by 2027, well above the 3 percent SGP deficit ceiling and deficit levels of peers.
  - Primary deficit projected to narrow to 2¼ percent, more than 1½ ppts above its debt-stabilizing level.
  - Debt and financing needs:
    - Debt elevated at some 112 percent of GDP in 2022.
    - Gross financing needs at some 22 percent of GDP in 2022.
    - Risks to debt sustainability increased.
    - Risks include faster monetary tightening or materialization of contingent liabilities (e.g., loan guarantees under PGE/Resilience schemes, EDF losses).
    - Mitigants: large institutional investor base, home bias, lack of foreign currency debt, and long maturity profile.
- Staff recommended path:
  - Sustained adjustment to bring the deficit down to 0.4 percent of GDP by 2030—in line with France’s pre-crisis medium-term objective (MTO).
  - Timing: this target is one year later than staff advised last year to accommodate the energy shock response.
  - Adjustment implies a cumulative effort of about 5 ppts of GDP over 7-8 years, for an average annual effort of 0.7 percent.
  - Consolidation should be gradual and focus on current spending while protecting investment (notably green/digital investment needs), underpinned by structural reforms.

### Options and Quantified Measures to Achieve Adjustment in 2023 (Percent of GDP)
- Total potential cost savings: 0.7-0.9
- Energy measures: 0.6-0.6
- Accelerated phase-out energy price controls: 1.6-0.8
- Savings from higher energy prices: -1.1 0.0
- Targeted cash transfers: 0.2
- Other: 0.1-0.2
- Offset/postpone production tax cut (CVAE): 0.1-0.1
- Incomplete pension indexation: -0.1

### Fiscal Scenarios and Stress Considerations
- Under current policies, deficit and debt divergence from peers will persist without sustained consolidation.
- To reverse divergence and insure against faster monetary tightening, staff recommend the 0.4 percent of GDP deficit target by 2030 and cumulative 5 ppts of GDP adjustment over 7-8 years.
- Consolidation to minimize drag: gradual, focus on current spending, protect investment, and implement structural reforms.

*Source: IMF staff report excerpt (France).*

### 16.      A credible package of reforms is needed to rationalize spending and narrow the gap

### 16.      A credible package of reforms is needed to rationalize spending and narrow the gap with peers

### Pension reform
- Reform plans (still to be finalized) aim to increase the employment rate of older workers, the effective retirement age, and minimum pensions, and to gradually bring special regimes into the general regime for new participants.
- Proposed parameters and measures:
  - Raising the minimum retirement age at a rate of 3 months per year and contribution period for a full pension, with provisions for special circumstances (e.g., long or interrupted careers, arduous jobs).
  - Introducing automatic adjustment by indexing the retirement age to life expectancy.
  - Unifying the fragmented system comprising 42 different schemes to improve equity, lower administrative cost, and facilitate labor mobility.
- Estimated fiscal and macro benefits:
  - Earlier IMF staff estimates: bringing the increase in the effective retirement age to 64 forward from 2040 to 2030 could yield about ½ percent of GDP in savings over the medium-term.
  - OECD (2021) estimate: increasing it to 64 by 2025 would yield 0.9 percent of 2019 GDP in savings and increase GDP per capita by 0.5 percent through employment and productivity gains.
- Labour market indicators referenced:
  - Effective retirement age (simple average men/women, 2020) and Employment rate 55+, 2021 (sources: OECD, Eurostat, IMF staff calculations).

### Unemployment benefit reform
- 2019 reform (delayed) adjusted calculation and cumulation of benefits, tightened eligibility, introduced degressivity for higher incomes, and a modulation of employers’ unemployment contribution rate (bonus-malus) to discourage excessive use of short-term contracts.
- Recent law extends the application of the reform (which was due to expire on November 1) until end-2023 and allows the government to expand it with countercyclicality in unemployment benefits.
- Planned implementation details:
  - Reform to be enacted by decree and effective from February; envisages varying benefit duration with labor market conditions, with a 25 percent reduction in the maximum duration when the unemployment rate is below 9 percent and its quarterly rate of increase below 0.8 ppts.
  - Two safeguards: (i) a floor of 6 months minimum duration; and (ii) an extension of the duration in case the labor market deteriorates.
  - Tightens eligibility for workers who voluntarily resign and workers on fixed-term contracts who repeatedly refuse permanent contracts.
- Staff view: reform would strengthen automatic stabilizers and labor market incentives; staff encourage further revisiting eligibility and generosity as the reform firms up to generate additional savings.
- New rules after negotiations of social partners on the governance of unemployment insurance should apply from 2024.

### Other spending and tax-expenditure measures
- Spending gap relative to peers driven by social benefits, the wage bill, and subsidies—over 10 ppt of GDP.
- Tax expenditures to rationalize or redesign:
  - R&D tax credit (single largest tax expenditure) accounts for ¼ percent of GDP; introducing a ceiling and reducing overlap could improve effectiveness.
  - Fossil fuel tax expenditures account for about ½ percent of GDP.
  - Housing-related tax expenditures account for about ⅓ percent of GDP.
  - Tax breaks on household savings add another ¼ percent of GDP.
  - Rationalizing these tax expenditures could yield some ½-1 percent of GDP.
- Public sector workforce and administrative efficiency:
  - Reinvigorating plans to streamline the public sector workforce to improve efficiency and lower the public wage bill.
  - Reducing overlap between different levels of government to lower administrative costs.
- Social minima and social security benefit reforms:
  - Simplifying and unifying social minima schemes, differentiating for special conditions, could improve targeting and administration.
  - Build on social security benefit reform plans (solidarité à la source) to improve automation, digitalization, and data exchange.
- Spending reviews integrated into the budget process provide an opportunity to identify additional structural measures to reduce current spending over the medium term.

### Fiscal projections and recommended adjustment (selected series)
- Baseline and Recommended projections (2019–2027) — figures from IMF staff calculations:

  - Real GDP growth (percent):
    - Baseline: 1.9 -7.9 6.8 2.6 0.7 1.6 1.8 1.6 1.4
    - Recommended: 1.9 -7.9 6.8 2.6 0.4 1.3 1.6 1.4 1.1

  - Revenue:
    - Baseline: 52.3 52.5 52.5 53.5 52.8 51.6 51.4 51.2 51.2
    - Recommended: 52.3 52.5 52.5 53.5 52.8 51.6 51.4 51.2 51.2

  - Expenditure:
    - Baseline: 55.4 61.5 59.1 58.4 58.1 56.4 56.0 55.7 55.7
    - Recommended: 55.4 61.5 59.1 58.4 57.5 55.6 54.9 54.1 53.6

  - Overall balance (Percent of GDP):
    - Baseline: -3.1 -9.0 -6.5 -5.0 -5.3 -4.8 -4.7 -4.5 -4.5
    - Recommended: -3.1 -9.0 -6.5 -5.0 -4.7 -4.0 -3.5 -2.9 -2.4

  - Primary balance:
    - Baseline: -1.7 -7.8 -5.2 -3.2 -3.7 -3.1 -2.9 -2.5 -2.3
    - Recommended: -1.7 -7.8 -5.2 -3.2 -3.2 -2.3 -1.8 -1.0 -0.3

  - Fiscal effort (Computed as the change in the structural primary balance):  
    - Baseline: 1/1.2 -0.3 0.5 -0.1 0.2 0.2  
    - Recommended: 1/1.2 0.3 0.9 0.5 0.7 0.8

  - Cumulative fiscal effort since 2023:
    - Baseline: 0.3 1.2 1.7 2.4 3.2
    - Recommended: 0.3 1.2 1.7 2.4 3.2

  - o/w temporary Covid-19 measures:
    - Baseline: 2.0 0.6 0.1 0.0 0.1 0.0
    - Recommended: 0.6 0.7 0.8 0.8 0.8

  - Recommended additional fiscal effort 1/ (relative to the baseline projections):
    - 0.7 0.4 0.5 0.5 0.6

  - Cumulative recommended additional fiscal effort since 2023:
    - 0.7 1.1 1.6 2.1 2.7

  - Public debt (Percent of GDP):
    - Baseline: 97.4 114.7 112.6 111.6 112.0 112.2 113.0 114.2 115.7
    - Recommended: 97.4 114.7 112.6 111.6 111.6 111.1 110.6 110.0 109.3

- Note: 1/ Computed as the change in the structural primary balance. Recommended additional fiscal effort is relative to the baseline projections.

### Adoption of the medium-term programming bill
- The December 2021 organic budget law requires programming bills to include annual real spending targets and their corresponding nominal amounts for each level of government over the full 5-year horizon, with deviations to be reported in annual budgets and assessed by the Fiscal Council (HCFP).
- Adoption of the medium-term programming bill is key for the new fiscal framework to become fully operational, notwithstanding transposition of targets in annual budgets.

### Authorities’ views on fiscal strategy
- Authorities agree on the need to better target support and rebuild buffers through an expenditure-led fiscal consolidation but pursue more gradual adjustment.
- Key points from authorities:
  - Tariff shield effective in containing inflation and indexation; support should be temporary and better targeted but energy shock complicated targeting.
  - Plan to gradually ease price controls while protecting the vulnerable; exit strategy dependent on energy market developments and coordinated European responses.
  - Rebuilding fiscal buffers is a key priority via expenditure-led consolidation while preserving space for investment in the green and digital transition (including through France 2030).
  - Pace and composition of adjustment should balance credibility, growth, and reform momentum, relying more on supply-side reforms to boost growth and job creation.
  - Emphasis on unemployment, pension, and vocational training reforms and measures to foster youth employment to raise labor supply and potential growth.
  - Authorities agree spending reviews are underway and adoption of the medium-term programming bill is important to operationalize the new fiscal framework.

### Financial sector stability — risks and recent developments
- Systemic risks increased since the onset of Russia’s war against Ukraine: darker outlook, sharp reduction in asset prices, market volatility, possible housing market downturn, and increased credit risk.
- Banking sector performance and vulnerabilities:
  - Five major French banks doubled annual net profit in 2021, to about 25 percent above pre-crisis levels.
  - CET1 ratio increased by 4 percentage points to 15.5 percent at end-2021; LCR about 150 percent.
  - NPL ratio fell to 3.4 percent, but NPL volumes increased by 60 percent in pandemic-affected sectors (hospitality and recreation).
  - About 75 percent of combined loan exposure is to energy and inflation-affected sectors—expected higher credit risk.
  - Direct exposures to Russia and Ukraine are low (at about €30 billion), reduced further after Société Générale sold its Russian subsidiaries in April 2022.
- Corporate sector liquidity and support:
  - Corporate liquidity weakening with firms reporting cash outflows in H1 2022; slight increase in corporate net debt.
  - Firm bankruptcies trend higher; pockets of risk among smaller enterprises.
  - Liquidity support measures: guaranteed loans (€150bn envelope) and grants to energy-intensive firms (€3bn envelope); uptake low so far.
  - Staff encourage authorities to consider more targeted liquidity support options for critically integrated wholesale energy producers to help cover large margin requirements.
  - European power producers estimated to face costs of over €1tn in margin calls; Engie faced an increased margin requirement of over €4 billion in recent quarters.
- Housing market and borrower risk:
  - Mortgage loan volumes were 9 percent lower through end-August compared to same period last year.
  - Effective interest rates on housing loans increased by about 50 basis points compared to a year ago; government-mandated usury rate increased by only about 10 basis points in recent months.
  - Narrowing gap between effective rates and legal cap constrains banks’ pricing flexibility and raises risk of credit rationing or riskier credit instruments.
  - HCSF legally binding limits effective January 1, 2022: loan maturity 25 years and debt-service-to-income ratios 35 percent; about 15 percent of loans remain above limits but within 20 percent exemption margin.
  - Staff analysis: percentage of borrowers-at-risk could increase by 5 percentage points from a cost-of-living shock (20 percent increase in food and energy prices).
  - Staff view: current borrower-based measures are adequate; authorities adjusted the usury rate mechanism in April 2022; additional modifications may be considered to enable full pass-through of monetary policy and prevent undue exclusion of marginal borrowers from credit.

*Source: IMF staff calculations and analysis (excerpt from the chapter).*

### 23.      St  aff support the authorities’ plan to tighten the counter-cyclical buffer (CCyB) to a

### 1fraea2023001 - 23. Staff support the authorities’ plan to tighten the counter-cyclical buffer (CCyB) to a

### Counter-cyclical capital buffer (CCyB) — assessment and recommendation
- The countercyclical capital buffer (CCyB) rate was returned in March 2022 to its pre-crisis level of 0.5 percent, and the HCSF has recently decided to raise it by a further 0.5 points.
- Staff support this decision and believe that targeting a CCyB rate between 1 to 1.25 percent would be appropriate at this juncture given that:
  - (i) current credit-gap metrics remain around pre-crisis levels and would call for a commensurate increase in the buffer to address pre-existing debt vulnerabilities and to prevent an abrupt reversal of the credit cycle under the worsening outlook; and
  - (ii) constraints on increasing the CCyB is not large at this juncture, given significant excess capital buffers, but could increase if downside risks materialize.
- Rationale for raising the buffer now:
  - Leaves banks with ample space should financial stability risks materialize.
  - Creates room to promptly lower the buffer later, in response to future downturns.
- The HCSF should stand ready to release the buffer should there be a sudden deterioration of financial conditions.
- Given concentration of debt vulnerabilities in the corporate sector, the authorities could explore deployment of a sectoral systemic risk buffer directed at corporate exposures.
- Staff note consistency with the monetary stance aimed at curbing inflation and reference IMF policy work on the interaction of monetary and macroprudential policies.

### Key numerical and technical points on CCyB and credit dynamics
- Pre-crisis CCyB level returned in March 2022: 0.5 percent.
- Staff-recommended CCyB target range: between 1 to 1.25 percent.
- HCSF decision: raise CCyB by a further 0.5 points (from 0.5 percent to 1.0 percent implied by text).
- Credit dynamics: Overall credit growth eased in early 2021, reflecting the phase-out of pandemic support loans, which helped reduce the large and positive credit gap to pre-crisis levels. Corporate credit growth also rebounded and may increase further if liquidity pressures intensify.

### Authorities’ views on macroprudential measures
- Authorities broadly shared staff’s assessment of financial stability risks due to the energy crisis and Russia’s war in Ukraine and the need for heightened vigilance of all banks.
- Authorities reiterated the need to raise the CCyB rate further to guard against the buildup of these risks, taking into account the high and still increasing debt trajectory as well as the low cost of raising capital for banks from increased profitability.
- Authorities consider current borrower-based limits sufficient to contain credit growth in riskier segments of the mortgage market as rates rise.
- Authorities disagreed with staff on the need to further adjust the usury rate, noting parliamentary approval would be required and that it is politically costly at this stage; they felt current adjustments and communication were sufficient to prevent borrower exclusion.

### Structural policies to increase potential growth — labor market and education
- Labor market policies
  - Further efforts to reduce labor market frictions, increase labor supply, and improve worker training will help raise potential growth.
  - France has had historically high employment and labor force participation and historically low unemployment, but participation rates remain below many peer countries, with challenges among low-skilled and young workers.
  - Recommended policies: combine job-search assistance with training programs; improve quality of training; monitor apprenticeship system to ensure smooth transition to permanent work; improve job-to-job and geographical mobility; continue unemployment benefits and pension reforms to improve participation.
- Education policies and spending efficiency (Box 2 highlights)
  - Public education spending: 5.2 percent of GDP in 2019, higher than other advanced European countries.
  - Non-teaching staff compensation share of current expenditure: 22 percent in non-tertiary and 38 percent in tertiary education, vs. 12 and 28 percent in peers, respectively.
  - Expenditure per student: 5 percent higher than peers for secondary education; over 30 percent higher for upper secondary level; 20 percent lower for primary; 8 percent lower in tertiary education.
  - Educational attainment and outcomes: PISA test scores in secondary education in France are below Germany, the UK and other advanced economies. Only 30 percent of the population have completed a post-secondary education cycle, versus 35 and 33 percent in the UK and Germany, respectively.
  - Policy recommendations: rebalance spending from upper secondary to primary education; rationalize non-teaching staff spending; improve teacher training and align compensation with performance; incentivize teachers to teach in disadvantaged areas; give more responsibilities and autonomy to school administrations.
  - Equity concerns: more than 20 percent of math performance was explained by the PISA index of socio-economic status; disadvantaged students have lower shares of top performers and lower tertiary completion rates.

### Product and service market efficiency
- Recent laws under the National Recovery and Resilience Plan introduced measures to encourage competition in network sectors and ease administrative burden.
- France lags peers on regulatory barriers, including entry barriers and competition in regulated professional services (accounting and legal services), retail services, and network sectors.
- Easing these restrictions would help raise potential growth.

### Green transition and climate investment needs
- The energy crisis presents opportunities to accelerate the green transition: promote energy conservation and increase the use of renewables.
- IMF staff support draft legislation aimed at streamlining regulatory and judicial procedures to accelerate renewable and nuclear energy development.
- Financial support for capital-intensive conservation measures (e.g., thermal renovation, heat pumps) or renewables investments (e.g., rooftop solar) is appropriate; investments of the France 2030 plan are welcomed.
- Non-pricing instruments like feebates and regulations can reinforce incentives for low-carbon investments, especially in transport and building sectors.
- Any future moderation in global energy prices could be used to increase carbon taxation without further hikes in retail energy prices; scaling up carbon pricing should be paired with support for vulnerable households.
- Illustrative emissions impact (Ari et al., 2022): combination of higher projected carbon prices and energy prices would reduce emissions by about a third relative to the pre-crisis baseline in the EU Emissions Trading System (ETS) sectors and about one fourth in the Effort Sharing Regulation (ESR) sectors.
- Carbon price projection in the price surge scenario: nominal ETS price rises from €87 per ton/CO2 in 2022 to €112 by 2030.

### Investment needs and transition risks (Box 3)
- Illustrative net increase in non-fossil fuel energy investment for France: approximately €200-250 billion over 8 years, including new nuclear reactors and life-cycle extension of existing ones and scaling up renewables.
- Additional investments in upgrading transportation and residential infrastructure (e.g., electric vehicles, thermal renovation): approximately €200-250 billion over the same period.
- Overall economy-wide estimates place net climate investment needs at around €70-90 billion per year (around 2.5 percent of GDP or 10-12 percent in additional gross fixed capital formation).
- Global estimate for stranded fossil-fuel assets consistent with achieving a 2⁰C climate goal: around $1.4 trillion.
- For France, financial losses linked to companies’ and investors’ exposure to physical assets worldwide are large, at around 1.2 percent of GDP.
- Transition effects on capital stock: taking the lower bound estimate for additional investment needs, a transition path would increase the level of capital stock in 2030 by about 5 percent compared to the baseline, and its growth rate by 0.5 percentage points if the investment is sustained.

*Source: IMF staff report excerpt (Content unit: 1fraea2023001 - 23).*

### 2.5 percent instead. Alternatively, there  could be  a  lower

### 1fraea2023001 - 2.5 percent instead. Alternatively, there  could be  a  lower

### Net capital stock and transition scenarios
- Net capital stock (NCS) formula as presented:
  - N et  capital  stock (N CS) is  given by 푁푁푁푁푁푁
    푡푡
    =
    [
    1−
    (
    푟푟
    푡푡
    +푑푑
    푡푡
    )
    ]
    푁푁푁푁푁푁
    푡푡−1
    +퐺퐺퐺퐺푁푁퐺퐺
    푡푡
    , where 푟푟
    푡푡
     and 푑푑
    푡푡
    are the retirement and depreciation rates respectively.
- Baseline projection method:
  - Baseline projected using the 5-year average growth rate of GFCF and retirement/depreciation rates backed out from historical data.
- Scenario assumptions:
  - A doubling of the deprecation rate is assumed for the scenario with faster deprecation for the small share of energy capital stock (to approximate for stranded fossil-fuel assets).
- Net Capital Stock under Transition Scenarios (billions of EUR) — plotted values shown:
  - 7900, 8100, 8300, 8500, 8700, 8900, 9100, 9300, 9500 corresponding to years 2022 2023 2024 2025 2026 2027 2028 2029 2030
  - Scenario labels shown: Baseline; Transition; Transition w fast depn.; No Transition w fast depn.
- Sources: IMF Staff Estimates

### Stranded assets and losses
- Loss metrics (percent of GDP) by country grouping shown as points:
  - Physical stranded asset loss: 0.3, 0.7, 1.2, 1.8, 2.9
  - Financial loss to ultimate owners: 0.0, 0.5, 1.0, 1.5, 2.0, 2.5, 3.0, 3.5
  - Country codes shown: DEU ITA FRA USA GBR
- Source for stranded asset loss figures: Semieniuk, G., et. al., Nat. Clim. Chang.12, 532–538 (2022).

### Additional capital needs (cumulative, 2023-2030)
- Investment in energy (gross / net*):
  - Nuclear 1/ : Gross 85 (implicit unit: billion euros)
  - Renewable 2/ : Gross 150-175
  - Sub-total 3/ : Gross 235-260; Net* 185-210
- Additional investment in:
  - Transportation 4/ : 50-94
  - Buildings (Residential + Tertiary) 4/ : 250-333
  - Sub-total: 300-427
- Grand Total (approx.): 485-640
- Notes and sources included in original:
  - 3/ Difference between gross and net figures approximately derived from I4CE 2022, assuming no further investments in fossil fuel are made (see Pfeiffer et. al, 2016, who show that no new emitting electricity infrastructure can be built after 2017 for the 2°C pathway, to be met).
  - 4/ Rexcode (2022) for upper bound; lower bound deducts some overlaps from energy investments due to boiler renewal or electricity generation needs.
  - 1/ Incl. announced pledges on new reactors and existing life-cycle extensions.
  - * Net of planned investment in fossil-fuel assets (baseline) excl. stranded assets.
  - 2/ Mahfouz and Pisani-Ferry (2022); IRENA ReMap 2050 scenario for EU-28 with French share inferred from French share of renewables.
- Amount units: (amount in billion euros)

### Authorities’ views (labor market and green transition)
- Labor market:
  - Authorities emphasized strong labor market performance in recent years, attributed largely to recent reforms.
  - Shared concerns with staff on labor market frictions and weak educational outcomes relative to spending.
  - Agreed that alleviating skills mismatches via improved worker training and addressing inefficiencies in education spending remain key for reskilling/upskilling the workforce.
  - Noted upcoming unemployment benefits and pension reforms will help raise labor supply further.
  - Stressed need to develop competencies and skills for jobs of the future and for youth to reduce long-term unemployment.
  - Agreed on ensuring smooth transition of apprentices into permanent work; some evidence points to a relatively high job insertion rate.
- Green transition:
  - Authorities agreed on the need for carbon taxation, emphasizing it should be within a package of measures as part of a medium-term strategy.
  - Current high energy prices and anticipated declines could provide an opportunity to incentivize strengthening carbon pricing, but increases should be reflected in a planned medium-term strategy and completed with a package of measures.
  - France is implementing a strategy of strengthening the carbon price within the “Fit for 55” which is strengthening the existing EU ETS and extending it to the housing and road transport sectors.

### Staff appraisal — macroeconomic outlook and risks
- Recent shocks and outlook:
  - After a strong recovery from the Covid pandemic, France was hit by an energy shock driven by Russia’s invasion of Ukraine.
  - France less affected than most EU countries due to lower reliance on Russian gas and a strong (but costly) policy response, but still faces high inflation and a sharp slowdown in economic activity.
  - Energy crisis effects: reducing consumer purchasing power, denting confidence, exacerbating supply-side difficulties.
  - Inflation has surged over the past year, driven by the energy price shock and an increase in core inflation due to both higher goods and services price rises.
  - Inflation remains well below the EU average, largely due to energy price controls and subsidies.
  - Staff projects growth at 0.7 percent in 2023, while inflation will remain persistent over the next two years as price controls ease.
  - External position in 2022 assessed to be moderately weaker than level implied by medium-term fundamentals and desirable policies.
- Risks:
  - Near-term risks tilted to the downside: prolonged war, escalation of sanctions, further spike in gas and electricity prices, faster-than-expected monetary policy adjustments in Europe or elsewhere, deeper slowdown in the US or China.
  - Medium-term: output will grow near potential but scarring from the pandemic and the energy shock will leave output some 2 percentage points below the pre-pandemic trend.

### Staff appraisal — fiscal policy recommendations
- Near-term fiscal stance:
  - Fiscal policy should take advantage of the phase-out of pandemic support to begin reducing the deficit in 2023.
  - Two-thirds of the fiscal cost of the energy response reflect untargeted price and purchasing power measures that pushed up costs while reducing incentives to lower energy consumption.
  - Recommendation: modest fiscal tightening of ¼ ppt of GDP relative to 2022, largely achievable by faster phase-out of energy price controls and more targeted support.
  - If downside risks materialize, allow automatic stabilizers to fully operate; any discretionary support should be well-targeted and offset by compensatory measures.
  - Under an upside scenario, any revenue overperformance should be saved and support phased out faster to accelerate deficit reduction.
- Medium-term consolidation and debt sustainability:
  - Further efforts needed to rebuild buffers through gradual but sustained fiscal consolidation.
  - With elevated debt and gross financing needs, risks to debt sustainability have increased.
  - Staff recommends ambitious adjustment totaling some 5 ppts of GDP over 7-8 years for an average annual effort of 0.7 percent of GDP—to bring the deficit down to around ½ percent of GDP by 2030.
  - Efforts should focus on rationalizing current spending, underpinned by structural reforms, while leaving space to accelerate green and digital investment.
  - Implementation of recently approved unemployment benefits reform and upcoming pension reform could deliver part of the needed adjustment, but additional reforms are needed to sustainably reduce current spending.
  - Potential areas for savings: tax expenditures, social benefits, education, healthcare, and subnational spending.
  - Adoption of—and adherence to—the medium-term programming bill is critical to implement the new fiscal framework that strengthens fiscal governance and the credibility of fiscal targets.

### Staff appraisal — financial sector and housing
- Banking sector:
  - Five major French banks increased profits in 2021; bank solvency and liquidity indicators remain solid.
  - Near-term risks: increased credit risk from SMEs and energy intensive sectors could weaken overall banking performance.
  - Staff supports authorities’ plan to tighten the counter-cyclical buffer (CCyB) to a rate above pre-crisis levels by the end of the year, but advises reconsideration if there is sudden deterioration of financial conditions.
- Housing market and borrower protections:
  - Housing market has started to cool amidst rate hikes and tighter prudential requirements.
  - Staff judges borrower-based measures to be sufficient but encourages authorities to keep adjusting the legal cap on consumer credit to enable full pass-through of monetary policy and to prevent borrower exclusion.

### Staff appraisal — policies to boost potential growth and the green transition
- Labor market and productivity:
  - Continued action needed to reduce labor market frictions and increase labor supply, and to improve product and services market efficiency.
  - Labor force participation rates remain below many peers; employment rates for disadvantaged groups, particularly youth and low-skilled, remain lower.
  - To alleviate skill mismatches: combine training programs with job-search assistance; recently approved unemployment benefits reform and upcoming pension reform will help raise labor supply.
  - Improve quality of education and worker training to boost productivity and potential growth, including improved certification of worker training and reorienting educational spending away from non-teaching staff and toward classroom teachers, particularly outside upper secondary level.
  - Increasing competition in product and services markets will further help raise potential growth.
- Energy transition:
  - Energy price shock underscores urgency of transition to cleaner and more secure energy sources.
  - Allowing fuller passthrough of prices and other incentives will promote energy conservation and increased production of renewable energy, with benefits for climate mitigation.
  - To speed up investments in low carbon energy, particularly renewables, it would be critical to streamline regulatory and judicial procedures for renewable energy development.
  - Anticipated decline in fossil fuel prices as the current crisis eases may provide an opportunity to scale up carbon pricing while providing support for vulnerable households.
  - Well-designed fiscal incentives, feebates and regulations can accelerate the transition to electric/other zero-emission vehicles and increase building efficiency.

*Source: IMF staff estimates and text from the provided chapter excerpt.*

### 38.      It is proposed that the next Article IV consultation take place on the standard 12-

### 1fraea2023001 - 38.      It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

### Real sector developments
- Output recovered to pre-crisis levels; pre-crisis losses were regained by the third quarter of 2021.
- PMIs have fallen since the beginning of the war, with manufacturing and services moving into recessionary territory.
- Confidence measures have fallen, with some more recent rebound.
- Industrial production and retail sales volumes have been affected by supply-side constraints and confidence.
- Capacity utilization remains below pre-crisis levels.
- Key headline indicators (selected):
  - Real GDP growth: 2019 = 1.9; 2020 = -7.9; 2021 = 6.8; 2022 = 2.6; 2023 = 0.7; 2024 = 1.6; 2025 = 1.8; 2026 = 1.6; 2027 = 1.4 (percent)
  - Private consumption growth: 2019 = 1.8; 2020 = -6.8; 2021 = 5.3; 2022 = 2.6; 2023 = 0.5; 2024 = 1.7; 2025 = 2.1; 2026 = 1.6; 2027 = 1.4 (percent)
  - CPI (year average): 2019 = 1.3; 2020 = 0.5; 2021 = 2.1; 2022 = 5.9; 2023 = 5.0; 2024 = 2.8; 2025 = 2.1; 2026 = 1.6; 2027 = 1.6 (percent)
  - Nominal GDP (billions of euros): 2019 = 2,438; 2020 = 2,310; 2021 = 2,499; 2022 = 2,631; 2023 = 2,741; 2024 = 2,871; 2025 = 2,984; 2026 = 3,085; 2027 = 3,181

### Labor market and inflation
- Employment rebounded sharply in H1 2021, especially among youth, and moderated thereafter.
- Labor force has rebounded and exceeded pre-crisis levels.
- Unemployment rate has remained virtually stable relative to pre-crisis, at par with the Euro area.
- Beveridge Curve has shifted upward: vacancies are higher for a given level of unemployment.
- Inflation surged driven by supply chain bottlenecks and the energy price shock; price expectations of households and firms have been increasing.
- Key labor indicators:
  - Employment (percent change): 2019 = 0.8; 2020 = -0.3; 2021 = 1.7; 2022 = 0.4; 2023 = -0.1; 2024 = 0.1; 2025 = 0.1; 2026 = 0.1; 2027 = 0.1
  - Labor force (percent change): 2019 = 0.1; 2020 = -0.7; 2021 = 1.6; 2022 = 0.0; 2023 = 0.0; 2024 = 0.1; 2025 = 0.0; 2026 = 0.0; 2027 = 0.0
  - Unemployment rate (percent): 2019 = 8.4; 2020 = 8.0; 2021 = 7.9; 2022 = 7.5; 2023 = 7.6; 2024 = 7.5; 2025 = 7.5; 2026 = 7.4; 2027 = 7.4

### External sector developments
- Current account moved to a deficit in H1 2022 from a surplus in 2021, driven by a large terms-of-trade shock and lower external demand.
- Trade balance deteriorated: oil and non-oil goods deficits increased sharply while services surplus strengthened.
- Increase in oil prices weighed on the oil goods deficit in H1 2022.
- REER (ULC and CPI-based) continues to depreciate in 2022, driven by euro depreciation against the dollar.
- Net International Position improved by about 1.4 percent of GDP in 2021 and continued to improve in H1 2022 due to a decrease in gross liabilities across sectors.
- Key external numbers:
  - Current account (percent of GDP): 2019 = 0.5; 2020 = -1.8; 2021 = 0.4; 2022 = -1.5; 2023 = -1.6; 2024 = -1.0; 2025 = -0.7; 2026 = -0.6; 2027 = -0.4
  - Exports of goods and services (percent of GDP): 2019 = 32.7; 2020 = 28.4; 2021 = 31.2; 2022 = 39.3; 2023 = 40.7; 2024 = 41.3; 2025 = 42.7; 2026 = 44.3; 2027 = 46.2
  - Imports of goods and services (percent of GDP): 2019 = -33.6; 2020 = -30.2; 2021 = -32.4; 2022 = -41.1; 2023 = -42.2; 2024 = -42.2; 2025 = -43.3; 2026 = -44.8; 2027 = -46.5

### Fiscal sector developments and outlook
- Public debt trended up over four decades as France struggled to contain fiscal deficits; debt rachet effects occurred when fiscal support was not fully unwound after crises.
- Debt is not projected to decline or return to pre-crisis levels following fiscal response in 2020–22, widening the gap with peers.
- With debt trending up and pre-crisis expenditure the highest in Europe, consolidation will need to focus on containing spending, requiring substantial effort to reverse real spending growth trends.
- Borrowing costs have increased significantly after years of low rates.
- Key fiscal indicators:
  - General government balance (percent of GDP): 2019 = -3.1; 2020 = -9.0; 2021 = -6.5; 2022 = -5.0; 2023 = -5.3; 2024 = -4.8; 2025 = -4.7; 2026 = -4.5; 2027 = -4.5
  - Revenue (percent of GDP): 2019 = 52.3; 2020 = 52.5; 2021 = 52.5; 2022 = 53.5; 2023 = 52.8; 2024 = 51.6; 2025 = 51.4; 2026 = 51.2; 2027 = 51.2
  - Expenditure (percent of GDP): 2019 = 55.4; 2020 = 61.5; 2021 = 59.1; 2022 = 58.4; 2023 = 58.1; 2024 = 56.4; 2025 = 56.0; 2026 = 55.7; 2027 = 55.7
  - General government gross debt (percent of GDP): 2019 = 97.4; 2020 = 114.7; 2021 = 112.6; 2022 = 111.6; 2023 = 112.0; 2024 = 112.2; 2025 = 113.0; 2026 = 114.2; 2027 = 115.7
  - Primary balance (percent of GDP): 2019 = -1.7; 2020 = -7.8; 2021 = -5.2; 2022 = -3.2; 2023 = -3.7; 2024 = -3.1; 2025 = -2.9; 2026 = -2.5; 2027 = -2.3
  - Nominal expenditure growth (percent): 2019 = 2.6; 2020 = 5.3; 2021 = 3.9; 2022 = 4.2; 2023 = 3.5; 2024 = 1.7; 2025 = 3.3; 2026 = 2.8; 2027 = 3.0
  - Real expenditure growth (percent): 2019 = 1.3; 2020 = 4.7; 2021 = 1.8; 2022 = -1.7; 2023 = -1.5; 2024 = -1.0; 2025 = 1.2; 2026 = 1.1; 2027 = 1.5

### Financial sector developments and vulnerabilities
- Credit to the private sector accelerated during the pandemic and is now at pre-pandemic growth levels; NFC (non-financial corporations) credit remains buoyant.
- Market funding pressures appear to have constrained NFC financing, but bank finance to NFCs is steady.
- Interest rates on loans (bank and market-based) are steeply rising.
- Credit standards and conditions began tightening especially toward 2021Q4.
- Business sentiment and wholesale trade have deteriorated since 2021Q4.
- Housing price acceleration and house sales volume appear to be slowing down.
- Key financial indicators:
  - Growth of credit to the private non-financial sector (percent): 2019 = 5.3; 2020 = 8.1; 2021 = 2.5; 2022 = 3.8; 2023 = 4.2; 2024 = 4.7; 2025 = 3.9; 2026 = 3.4; 2027 = 3.1
  - Government bond yield, 10-year: 2019 = 0.1; 2020 = -0.1; 2021 = 0.0; 2022 = 0.0 (series indicates limited data)
  - Household savings ratio (percent): 2014 = 14.5; 2015 = 14.1; 2016 = 14.0; 2017 = 14.1; 2018 = 14.4; 2019 = 15.0; 2020 = 21.0; 2021 = 18.7; 2022 = 16.4
  - Share of nonperforming loans in total loans (percent): 2016 = 4.2; 2017 = 4.0; 2018 = 3.7; 2019 = 3.1; 2020 = 2.7; 2021 = 2.5; 2022 = 2.4
  - Regulatory capital to risk-weighted assets (percent): 2016 = 16.3; 2017 = 17.1; 2018 = 18.3; 2019 = 18.9; 2020 = 18.8; 2021 = 19.6; 2022 = 19.4

### Authorities’ response to past IMF recommendations (Annex I)
- Fiscal policy:
  - IMF recommended maintaining a supportive fiscal stance in 2022 while targeting additional stimulus on supply-side measures and providing targeted temporary support to vulnerable households amid rising energy prices.
  - Authorities provided additional, mostly broad-based support to mitigate rising energy prices, largely offsetting expiring Covid-19 support. Energy price controls extended into 2023, allowing a 15 percent increase in regulated tariffs coupled with (moderately) targeted cash transfers.
  - IMF recommended a gradual expenditure-based fiscal consolidation over 2023–29 to rebuild buffers and lower debt. Authorities committed to bring the deficit below 3 percent of GDP in 2027 and debt on a declining path from 2026 based on an objective to limit real expenditure growth to 0.6 percent, but key measures are yet to be specified.
- Structural reforms:
  - IMF recommended addressing labor-market frictions and opportunities for youth. The 2022 budget included measures to tackle skills shortages and aid labor market integration of youth; the Contrat Engagement Jeune (CEJ) was launched in March 2022.
  - IMF recommended policies to increase product/services market efficiency and competitiveness. The National Recovery and Resilience Plan introduced measures to increase competition in some network sectors, reduce administrative burdens and invest in innovation and the digital economy.
  - IMF recommended additional green policies and adequate carbon pricing with mitigation for low-income households. Policy proposals were announced in the context of the “Fit For 55” EU initiative, including a new ETS for transport and buildings and harmonization of energy taxation; the second supplementary budget included additional cash transfers ("chèques énergie") to compensate households in the bottom two income quintiles (12mn) for a 15 percent increase in regulated tariffs in 2023.
- Financial sector:
  - IMF recommended phasing out corporate support measures and reducing leverage risks. Covid-related corporate support measures have mostly been scaled down but new programs to support firms affected by the war in Ukraine have been launched; PGE availability has been extended to such firms.
  - IMF recommended raising the counter-cyclical capital buffer depending on recovery. The HCSF decided in March 2022 to normalize the countercyclical capital buffer rate to 0.5 percent as a preventative measure.

*Source: 1fraea2023001.*

### Annex II. 2019 Key  FSAP Recommendations—Implementation

### Annex II. 2019 Key  FSAP Recommendations—Implementation Status

### Preemptive Management of Systemic Vulnerabilities
- 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.
  - Agency: ACPR
  - Timing: I D
  - Implementation status: Done/Largely Done details:
    - The ECB published further explanation with the ‘guide on leveraged transactions’ dated May 2017.
    - Bank-specific letters were sent to the most exposed banks (of which 4 French groups).
    - Banks provided detailed information on their risk appetite framework; responses were analyzed by the SSM and fed to the SREP analysis.
    - HCSF issued a decision in 2018 limiting exposure of systemic banks to highly indebted big French companies to 5% of their eligible funds.
    - A recommendation of reciprocity was adopted at the European level; seven countries have applied it in the EU. Compliance is closely monitored.
- Develop an analytical framework for borrower-based measures for corporates. Consider a sectoral Systemic Risk Buffer (SRB) if risks intensify.
  - Agency: HCSF
  - Timing: NT
  - Implementation status: PD / NT commentary:
    - Two options were expertized before HCSF decided to extend Art.458 as a potential alternative.
    - BBM measures for NFC cannot be addressed domestically alone; European agencies left this topic out of their work program.
    - sSyRB analytical assessment carried out to substitute Art.458 concluded the measure does not fit the risks and would be less effective than maintaining Art.458.
- Evaluate options to further incentivize corporates to finance through equity rather than debt.
  - Agency: MoF
  - Timing: NT
  - Implementation status: NA

### Ensuring Adequate Liquidity Management and Buffers
- Develop with the ECB options to manage any disruptions in wholesale funding markets. Consider liquidity buffers to cover at least 50 percent of wholesale funding outflows over/up to five days horizon for all major currencies.
  - Agency: ACPR, ECB
  - Timing: NT
  - Implementation status: PD
  - Implementation details:
    - Banks maintain a significant liquidity buffer, above the 100% usual threshold for LCR and NSFR introduced as a prudential requirement in June 2021.
    - Within SREP analysis in 2022 the ECB judged liquidity risks not particularly high and liquidity risk management frameworks globally adequate.
    - No need currently to add or change liquidity buffer requirements.
    - Monitoring of liquidity risk will be reinforced to monitor effects of termination of extraordinary monetary policy actions (TLTRO reimbursement notably) and impacts of higher funding prices.
- Actively engage with the ESRB and others for speedy development of liquidity and leverage related tools for insurers and investment funds.
  - Agencies: BdF, HCSF, ACPR, AMF
  - Timing: NT
  - Implementation status: PD
  - Implementation details:
    - BdF contributed to the “low-interest expert group report” discussing leverage and liquidity.
    - BdF and AMF take active part in ESRB’s Policy Task Force on macroprudential tools for investment funds, assessing transmission mechanisms and adequacy of existing tools; next step focuses on new tools reducing systemic risk.
    - BdF and AMF involved in Research Task Force on ETFs vulnerabilities assessment.
    - For insurers, review of Directive 2009/138/EC aims at enhancing liquidity monitoring and supervising by introducing a liquidity risk management plan and new supervisory powers, such as temporarily stopping redemption of contracts.

### Further Integration of Financial Conglomerate Oversight
- Report intragroup exposures and transactions within conglomerates on a flow and stock basis at quarterly or regular frequency. Develop guidance to address direct and indirect, and common exposures of entities in the conglomerate.
  - Agencies: ACPR, AMF
  - Timing: NT
  - Implementation status: PD
  - Implementation details:
    - French conglomerates report on common exposures and intragroup transactions at a regular frequency (CONGLOMER reporting).
    - Enhanced reporting developed by the European Joint Committee on Financial Conglomerates; the European Commission should adopt it through an Implementing Technical Standard by 2024.
    - The first reporting date should be 31/12/2023.
- Develop with the ECB and other EU agencies liquidity risk management requirements and stress testing at the conglomerate level.
  - Agencies: ACPR, AMF
  - Timing: NT
  - Implementation status: PD
  - Implementation details:
    - No liquidity risk management requirement considered at this stage because current supervisory framework coinciding with the prudential consolidation perimeter is deemed satisfactory.
    - ACPR carries out ad hoc research projects on liquidity analysis and conduct of stress testing at the conglomerate level; research presented to the ACPR Scientific Committee and ongoing.
- Strengthen conglomerate oversight and work with the Joint Committee of the ESAs to finalize common reporting templates, and with the ECB on common supervisory guidance for conglomerates.
  - Agencies: ACPR, AMF
  - Timing: NT
  - Implementation status: PD
  - Implementation details:
    - ACPR maintained high engagement; an ACPR deputy Secretary General chairs JC of the ESAs on common reporting templates; group expected to deliver full set of reporting by end 2021.
    - ACPR actively participated in ESA’s work answering the Commission’s call for advice on digital finance, including potential review of FICOD to supervise mixed-activity groups.
    - ACPR favors exchange of information between insurance and banking supervision and discusses development of joint supervisory guidance with ECB staff.
    - ACPR and the ECB are putting in place coordination arrangements for each Financial conglomerate to formalize and strengthen cooperation.

### Enhancing Governance, Financial Policies and Financial Integrity
- The ACPR and AMF should have autonomy to determine their resource levels based on a forward-looking review of supervisory and monitoring needs.
  - Agencies: ACPR, AMF, MoF
  - Timing: I
  - Implementation status: NA (constitutional constraint)
  - Details:
    - NSAs are free to allocate resources to the most needed fields, but cannot determine their global resource level constitutionally as these resources are fiscal and require parliamentary decision.
    - Parliamentary decision is informed by an independent report from the NSA. Current arrangement with a vote on a resource threshold guarantees stable funding of NSAs.
- To avoid perception of conflict of interest and facilitate operational independence, government should recuse itself from all supervisory decision-making committees at the ACPR and the AMF.
  - Agency: MoF
  - Timing: I
  - Implementation status: NA (provides the legal underpinning to sharing confidential information)
  - Details:
    - Presence of MoF as an observer at NSAs’ board does not prevent independent decisions; cross participation and non-voting MoF representative give a legal framework for sharing information between NSAs and with MoF on policy and oversight issues.
- Reduce further the spread between market interest rates and the return on regulated savings products. Ensure timely and effective implementation of CDC governance reform under the Loi PACTE and undertake a full review of regulated savings framework at the appropriate time.
  - Agency: MoF
  - Timing: NT
  - Implementation status: NA
- Enhance AML/CFT supervision of smaller banks rated as high-risk. Explore ways to provide systematic guidance on detection of potential terrorist financing activities. (¶67)
  - Agencies: ACPR, Tracfin
  - Timing: I D
  - Implementation status: Done details:
    - ACPR implements a risk-based AML/CFT supervisory approach linking supervisory intensity to individual risk assessment across banks, insurance companies, payment services, and electronic money providers.
    - Over the 2015-2020 onsite inspection cycle: 88% of the higher-risk banks were subject to an onsite inspection, 44% of medium-high-risk banks, 9% of medium-low risk banks, and 1% of lower-risk banks.
    - ACPR/TRACFIN joint Guidelines list criteria for detection of terrorist financing; ACPR’s Sectoral Risk Assessment describes risks and gives a focus on CFT for each activity.

### Reinforcing Crisis Management, Safety Nets, Resolution Arrangement
- Work toward an enhanced resolution framework for insurers by including wider powers to restructure liabilities (bail-in), and enhanced safeguards and funding.
  - Agency: ACPR
  - Timing: MT
  - Implementation status: NA (EU single market issue)
  - Details:
    - Authorities recognize benefits from additional tools, especially bail-in powers and adequate resolution funding arrangements.
    - In September 2021 the European Commission published a proposal for a directive for a harmonized recovery and resolution regime in the EU within its Solvency II package review, including: a write-down or conversion tool, a solvent run-off tool, an asset and liability separation tool, a sale of business tool, and a bridge undertaking tool.
    - No funding arrangements or harmonization of national Insurance Guarantee Schemes foreseen in the first proposal version.
    - Authorities consider an EU Directive essential for advancing recovery and resolution framework for insurers; ACPR provided technical input during the French Presidency of the EU and will continue support.
- The eligibility of the FGDR’s Supervisory Board membership, which is formed by bank executives in activity, should be changed to independent members only.
  - Agency: FGDR
  - Timing: MT
  - Implementation status: NA
- Develop modalities for providing ELA in currencies other than euros and establish general rules to assist banks in identifying assets which might be proposed as ELA collateral and buttress operational readiness to pledge them.
  - Agencies: BdF, ACPR
  - Timing: MT
  - Implementation status: PD
  - Details:
    - Main responsibility for provision of ELA lies with National Central Banks but must comply with general principles in ECB ELA agreement.
    - Banque de France has an internal and recently updated procedure to ensure efficient and quick implementation of ELA; arrangements are confidential.

### Overall Assessment and Potential Policy Responses (External Sector Assessment excerpt)
- Overall Assessment:
  - On a preliminary basis, the external position in 2022 is moderately weaker than the level implied by medium-term fundamentals and desirable policies.
  - The CA balance is expected to decline in 2022 driven by the large terms-of-trade shock and lower external demand from trading partners affected by the war in Ukraine, as well as through supply-chain effects.
  - Over the medium term, the CA deficit is expected to shrink as effects of the pandemic and the war fade and fiscal consolidation and structural reforms to improve competitiveness are implemented.
  - This assessment is preliminary; a final assessment for 2022 will be presented in the 2023 External Sector Report.
- Potential Policy Responses:
  - In response to the energy crisis, France deployed significant fiscal resources to shield households from high energy prices.
  - Maintaining consistency of the external position with medium-term fundamentals will require structural reforms to enhance productivity and sustain higher private investment to facilitate the green transition and digitalization, while rebuilding fiscal space once the shock dissipates.

### Foreign Asset and Liability Position and Trajectory
- Background and assessment highlights:
  - NIIP stood at 26 percent of GDP in the second quarter of 2022, only slightly below the range observed during 2014–19 (between −16 and −23 percent of GDP).
  - NIIP improved by about seven percent of GDP since the end of 2021, largely driven by an increase in direct and portfolio investment.
  - Net position is moderately negative, but gross positions are large.
  - Gross assets stood at 329 percent of GDP in the second quarter of 2022, of which banks’ non-FDI-related assets accounted for about 43 percent.
  - Gross liabilities fell to 354 percent of GDP in the second quarter of 2022, of which external debt was about 228 percent of GDP (56 percent accounted for by banks and 23 percent by the public sector).
  - About three-quarters of France’s external debt liabilities are denominated in domestic currency.
  - The average TARGET2 balance in 2022 was about €61.4 billion.
  - Assessment: NIIP is negative but its size and projected stable trajectory do not raise sustainability concerns; vulnerabilities arise from large public external debt (52 percent of GDP in the second quarter of 2022) and banks’ gross financing needs—the stock of banks’ short-term debt securities was €96 billion in the second quarter of 2022 (3.5 percent of GDP), and financial derivatives stood at about 43.5 percent of GDP.
- Key 2022 (% GDP) figures (exact as reported):
  - NIIP: −34.3
  - Gross Assets: 341
  - Debt Assets: 194.3
  - Gross Liab.: 375.2
  - Debt Liab.: 237.2

### Current Account
- Background and projections:
  - CA balance is expected to move to a deficit of 1.5 percent of GDP in 2022 (from a surplus of 0.4 percent in 2021), driven by a large terms-of-trade shock and lower external demand.
  - The increase in the energy bill of about 1 percent of GDP in 2022 contributed to this change.
  - Temporary COVID-19 factors expected to normalize gradually (e.g., services balance, including business and tourism travel).
  - Over the medium term, IMF staff projects the CA deficit to shrink by 2026 as temporary factors dissipate, war effects fade, and reforms improve competitiveness; fiscal consolidation will help reduce the CA deficit.
- Assessment and adjustments:
  - The 2022 cyclically adjusted CA balance is estimated at −0.8 percent of GDP compared with an EBA-estimated norm of 0 percent.
  - IMF staff estimates CA net adjustments related to COVID-19 at −0.8 percent of GDP, driven by transport (−1 percent of GDP) and exports of aeronautics (0.2 percent of GDP).
  - On this basis, IMF staff assesses that the CA gap in 2022 is between −2.1 and −1.1 percent of GDP (compared with −0.5 to 0 percent of GDP in 2021), with a midpoint of −1.6 percent of GDP.
  - Despite an important domestic gap from looser fiscal policy of about −1.1 percent of GDP, the total policy gap is zero.
- Key 2022 (% GDP) figures (exact as reported):
  - CA: -1.5
  - Cycl. Adj. CA: -0.8
  - EBA Norm: 0
  - EBA CA Gap: −0.8
  - COVID-19 Adj.: -0.8
  - Other Adj.: 0.0
  - Staff CA Gap: −1.6

### Real Exchange Rate
- Background:
  - REER movements: ULC-based REER appreciated 4.7 percent in 2020 and CPI-based REER depreciated 0.9 percent in 2020; both REER measures depreciated in 2021 and H1 2022.
  - ULC-based REER depreciated by 2.3 percent with respect to the 2021 average; CPI-based REER depreciated by 3.9 percent.
  - Between 2008 and 2020 both REER measures depreciated by about 7 to 9 percent; France has not regained the loss of about one-third of its export market share registered in the early 2000s.
  - As of September 2022, the REER was 6.8 percent below the 2021 average.
- Assessment:
  - IMF staff CA gap implies a REER gap of 6.1 percent in 2022 (applying an estimated elasticity of 0.26).
  - EBA REER index model points to a REER gap of −5.3 percent.
  - EBA REER level model points to a REER gap of 4.2 percent.
  - Consistent with the IMF staff CA gap, IMF staff assesses the REER to be overvalued in the range of 4.2 to 8 percent, with a midpoint of 6.1 percent.

### Capital and Financial Accounts: Flows and Policy Measures
- Background and assessment:
  - Inward foreign direct investment normalized in 2021 after decreasing significantly between 2019 and 2020 by 2.3 percent of GDP.
  - The 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 and assessment:
  - 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.

*Annex II. 2019 Key  FSAP Recommendations—Implementation Status (excerpt) — 1fraea2023001 - Annex II. 2019 Key  FSAP Recommendations—Implementation*

### Annex IV. Risk  Assessment  Matrix

### Annex IV. Risk Assessment Matrix

### Key risks, likelihoods, expected impacts, and policy responses
- Intensifying spillovers from Russia’s war in Ukraine.
  - Likelihood: High
  - Expected impact: High: Lower consumption and production (i.e. manufacturing industry) due to weakened consumer and business confidence. Lower investment due to heightened uncertainty and tightening of financial conditions.
  - Policy response: Accelerate green transitions and diversify energy sources further. Conserve energy and provide targeted financial support to vulnerable households and firms.

- Commodity price shocks.
  - Likelihood: High
  - Expected impact: Low: Gas shortages and further supply disruptions could lead to spikes in gas and electricity prices fueling higher and more persistent inflation, lowering the purchasing power of consumers and increasing input costs for firms. Rising commodity prices could also increase the current account deficit. Trade partner growth could also be affected, further weakening the external position.
  - Policy response: Provide targeted financial support to vulnerable households and firms impacted by high energy prices. If inflation became substantially higher and/or more protracted, the policy mix may need to be rebalanced.

- Systemic social unrest.
  - Likelihood: High
  - Expected impact: Medium: Social unrest could impact consumer and business confidence and slow growth.
  - Policy response: Provide targeted financial support to vulnerable households and firms.

- De-anchoring of inflation expectations and stagflation.
  - Likelihood: Medium
  - Expected impact: Medium: Persistently high inflation, pressure for second-round effects, and lower purchasing power. Weaker confidence could reduce consumption and investment.
  - Policy response: Diversify supply sources and undertake competitiveness enhancing reforms.

- Abrupt global slowdown or recession (including Europe-specific scenario: gas shutoff by Russia triggering an EU recession).
  - Likelihood: High
  - Expected impact: Medium: Lower exports due to weakened external demand. Larger economic scarring and increase in unemployment, wiping out previous gains.
  - Policy response: Fiscal policy could remain flexible and cushion shocks in the near term, including through targeted support to vulnerable households and firms. Fiscal policy should coordinate and be in accordance with the stance of monetary policy.

- Local Covid-19 outbreaks (more contagious vaccine-resistant variants).
  - Likelihood: Medium
  - Expected impact: Medium: Tourist arrivals remain low, lowering the current account. Domestic demand especially in contact-intensive sectors will weaken. Larger economic scarring.
  - Policy response: Targeted support to affected businesses and households. Maintain public health safeguard measures. Use available fiscal space to support households and firms and encourage reallocation of resources.

- Structural risks: Deepening geo-economic fragmentation and geopolitical tensions.
  - Likelihood: High
  - Expected impact: Medium: Increased geo-economic fragmentation could undercut France’s already decreasing trade market share and lower potential growth.
  - Policy response: Diversify supply chains and undertake competitiveness enhancing reforms.

- Structural risks: Cyberthreats.
  - Likelihood: Medium
  - Expected impact: Medium/Low: Cyberattacks could trigger confidence shocks and threaten financial stability ultimately disrupting the real economy.
  - Policy response: Strengthen the operational resilience of the financial system. Adopt best practices and prevention and crisis management tools and strengthen coordination at the European/international level.

- Note on likelihood categories: “Low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more.

*Italic final source attribution line.*

### Annex V. OECD Phase 4 Report (summary)

### Main findings
- The OECD Working Group on Bribery evaluated France’s implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Phase 4 report, published December 2021).
- The report highlighted progress by France in combatting foreign bribery but also identified critical shortcomings.
- France is a voluntary participant in the Fund’s assessment of transnational aspects of corruption under the Framework for Enhanced Engagement on Governance.

### Notable progress
- Steps to strengthen legal and institutional frameworks and notable progress enforcing the foreign bribery offence.
- Major legislative and institutional reforms since 2012 and additional important legal reforms since the 2019 staff report:
  - Amendments strengthening the plea-bargaining procedure.
  - Improving the operational autonomy of prosecutors.
  - Broadening the types of information to which judicial authorities have access.
  - Prohibiting the tax deductibility of bribes paid to foreign public officials in overseas territories.
- Reorganization of the criminal court system to improve efficiency in the delivery of justice.
- Marked increase in the number of criminal investigations and prosecutions, including proceedings resulting in sanctions against five legal persons.
- The number of investigations initiated for foreign bribery increased by almost three and a half times since the last OECD evaluation. Concluded cases involved larger corruption schemes.

### Shortcomings and recommendations
- A bill approved by Parliament in November 2021 limits the duration of preliminary investigations to two or three years, which could have a detrimental impact on complex and time-consuming cases such as foreign bribery.
- The Working Group deemed the number of resolved cases—especially against legal persons—to be low relative to France’s economic size and exposure to corruption risks.
- Increasing number of foreign bribery allegations that are not pursued.
- Recommendations: take all necessary measures to enable proactive and effective detection, investigation, prosecution, and sanctioning of foreign bribery; provide adequate resources to investigative and judicial bodies; make full use of confiscation measures provided for in law for both natural and legal persons.

*Italic final source attribution line.*

### Annex VI. Sovereign Risk and Debt Sustainability Analysis (DSA)

### Background and recent developments
- The large fiscal response to successive shocks over 2020-22 pushed up deficit and debt levels expected to remain well-above precrisis baseline projections, reflecting permanent measures, output losses, and less favorable automatic debt dynamics.
- Public debt: Having peaked at close to 115 percent of GDP in 2020, public debt is expected to bottom below 112 percent in 2022 before increasing to 116 percent over the medium term.
- More than a tenth of debt is indexed to inflation—two thirds of which to European inflation.
- Bank loan guarantees under the PGE program amount to some 3.3 percent of GDP (and elsewhere noted as some 6 percent of GDP in reporting on bank loan guarantees issued in response to the pandemic and energy crisis).

### Baseline projections (staff)
- Data sources: initial 2022 budget law, amendments voted in August and November, the Stability Program 2022-27, and the draft 2023 budget and medium-term programming bills.
- Excludes insufficiently specified measures or spending targets not underpinned by concrete measures.
- Macroeconomic path:
  - Economy projected to slow to 0.7 percent in 2023 and recover in 2024 and beyond, growing above potential until converging in the medium term as the output gap closes.
  - Interest rates projected to increase over the forecast horizon, with effective rates following with a lag.
- Fiscal path:
  - Deficit projected to widen to 5.3 percent of GDP in 2023 before gradually narrowing to 4.5 percent in the medium term.
  - Primary deficit projected to stabilize at about 2.2 percent of GDP, some 1.5 ppt above its debt-stabilizing level.
  - Debt will continue to increase, exceeding 120 percent of GDP by the end of the decade.

### Realism of projections
- Forecast errors point to some optimism in staff’s projections for near-term cyclical conditions and medium-term primary balances.
- Projected fiscal adjustment and debt reduction are within the normal historical range observed in peer countries; a maximum adjustment over any three years is an outlier reflecting the unwinding of large fiscal responses over 2020-23.

### Risks and mitigating factors
- Risks:
  - High and rising debt levels with primary deficits remaining well-above precrisis levels (½ ppt of GDP above its 2019 level and 1 ppt above the medium-term level projected before the pandemic) erode fiscal buffers and expose France to shocks.
  - Higher and more persistent inflation would weigh on debt service, as more than a tenth of debt is inflation-indexed.
  - Faster normalization of monetary policy, higher policy rates, and lower reinvestment of maturing sovereign debt held by the ECB would increase yields and possibly spreads if fragmentation risk resurfaces.
  - Contingent liabilities could be triggered given tightening financial conditions and slowing activity (e.g., bank loan guarantees under the PGE program amount to some 3.3 percent of GDP).
- Mitigating factors:
  - Long average debt maturity that limits pass-through from higher yields to effective interest rates.
  - Large institutional investor base and home bias mitigating liquidity risks.
  - Low share of debt denominated in foreign currency mitigating FX risks.

### Staff assessment and mechanical signal
- Staff's assessment of the medium-term risk of sovereign stress is moderate, consistent with the mechanical signal.
- Overall risk of sovereign stress: Low.
- Commentary: France is at a low overall risk of sovereign stress and debt is sustainable. However, the large response to successive shocks and permanent output losses keep deficit and debt levels elevated, with large financing needs and debt non-stabilization reflected in a moderate medium-term risk score. With higher borrowing costs increasingly weighing on France's debt service burden as low-cost debt matures, tailwinds from favorable debt dynamics will dissipate over the longer term, requiring an increasingly large effort to stabilize debt at a time that investment needs to facilitate the green and digital transition are rising.

### Key quantitative indicators and projections (from Figure VI.4 and text)
- Public debt (percent of GDP):
  - Actual 2021: 112.6
  - 2022: 111.6
  - 2023: 112.0
  - 2024: 112.2
  - 2025: 113.0
  - 2026: 114.2
  - 2027: 115.7
  - 2028: 117.1
  - 2029: 118.9
  - 2030: 120.6
- Change in public debt (percent of GDP):
  - 2021: -2.1
  - 2022: -1.0
  - 2023: 0.4
  - 2024: 0.2
  - 2025: 0.8
  - 2026: 1.1
  - 2027: 1.5
  - 2028: 1.4
  - 2029: 1.8
  - 2030: 1.7
- Primary deficit (percent of GDP):
  - 2021: 5.2
  - 2022: 3.2
  - 2023: 3.7
  - 2024: 3.1
  - 2025: 2.9
  - 2026: 2.5
  - 2027: 2.3
  - 2028: 2.2
  - 2029: 2.2
  - 2030: 2.2
- Noninterest revenues (percent of GDP):
  - 2021: 52.4
  - 2022: 53.4
  - 2023: 52.7
  - 2024: 51.5
  - 2025: 51.3
  - 2026: 51.2
  - 2027: 51.1
  - 2028: 51.1
  - 2029: 51.1
  - 2030: 51.1
- Noninterest expenditures (percent of GDP):
  - 2021: 57.7
  - 2022: 56.6
  - 2023: 56.4
  - 2024: 54.6
  - 2025: 54.2
  - 2026: 53.7
  - 2027: 53.4
  - 2028: 53.4
  - 2029: 53.3
  - 2030: 53.3
- Automatic debt dynamics (percent of GDP):
  - 2021: -7.4
  - 2022: -3.9
  - 2023: -2.8
  - 2024: -3.2
  - 2025: -2.4
  - 2026: -1.6
  - 2027: -1.2
  - 2028: -0.8
  - 2029: -0.6
  - 2030: -0.4
- Real GDP growth (percent):
  - 2021: 6.8
  - 2022: 2.6
  - 2023: 0.7
  - 2024: 1.6
  - 2025: 1.8
  - 2026: 1.6
  - 2027: 1.4
  - 2028: 1.3
  - 2029: 1.3
  - 2030: 1.3
- Inflation (GDP deflator; percent):
  - 2021: 1.3
  - 2022: 2.6
  - 2023: 3.5
  - 2024: 3.1
  - 2025: 2.1
  - 2026: 1.8
  - 2027: 1.7
  - 2028: 1.7
  - 2029: 1.7
  - 2030: 1.7
- Nominal GDP growth (percent):
  - 2021: 8.2
  - 2022: 5.3
  - 2023: 4.2
  - 2024: 4.7
  - 2025: 3.9
  - 2026: 3.4
  - 2027: 3.1
  - 2028: 3.1
  - 2029: 3.0
  - 2030: 3.0
- Effective interest rate (percent):
  - 2021: 1.3
  - 2022: 1.7
  - 2023: 1.6
  - 2024: 1.7
  - 2025: 1.8
  - 2026: 1.9
  - 2027: 2.1
  - 2028: 2.3
  - 2029: 2.5
  - 2030: 2.7
- Local currency debt share in projections: values shown include 18.9, 18.4, 17.6, 18.2, 19.3, 19.5, 22.4, 21.8, 22.4, 22.1 (percent values listed in the table under "Local currency").
- Residual maturity: 8. years (noted in public debt structure commentary).
- Debt characteristics:
  - Debt is predominantly in domestic currency and marketable.
  - The share held by the central bank has increased steadily since 2015.
  - All public debt is governed by domestic law.
  - Debt is mostly long-term, with the average residual maturity above 8 years (expected to increase during the forecast period).

*Italic final source attribution line.*

### 1.5 ppts of GDP above its debt-stabilizing level.

### 1fraea2023001 - 1.5 ppts of GDP above its debt-stabilizing level.

### Projection realism and forecast track record
- Headline statement: "1.5 ppts of GDP above its debt-stabilizing level."
- Forecast errors and bias:
  - The realism analysis shows "a large median forecast error for medium-term primary deficit projections over 2011-19, suggesting an optimistic bias, and more moderate ones for debt and r-g projections."
  - The projected fiscal adjustment and debt reduction are "well within norms"; the maximum adjustment over any three years is "3.7" (above the threshold "2"), reflecting the unwinding of the large fiscal response to shocks over 2020-23.
- Distributional and percentile indicators:
  - "3-year adjustment above 75th percentile (2 ppts of GDP)" — percentile rank "71".
  - "3-year adjustment" and "Max. 3-year adjustment" referenced in distributions and historical comparisons.
- Complementary drivers shown in forecast decomposition charts (categories preserved from source):
  - Cumulative, Primary deficit, Real Interest rate and relative inflation, Real GDP growth, Exchange rate depreciation, Residual, Change in public sector debt.

### Fiscal adjustment, growth scenarios, and multipliers
- Fiscal adjustment and growth path presentation preserves baseline and alternative multiplier assumptions shown:
  - Baseline real growth (lhs), Baseline real potential growth (lhs), 10-yr avg. real growth (lhs), Output gap (rhs).
  - Fiscal multiplier scenarios labeled: "Multiplier=0.5", "Multiplier=1", "Multiplier=1.5".
- Historical and projected fiscal-term structure indicators:
  - Debt issuance terms shown across maturities: "5+ yr term", "1-5 yr term", "< 1 yr term".
  - Spread indicators include "Spread vs 10-yr US Treas." and "Implied spread, Laubach rule".
- Debt reduction distributions:
  - "3-year reduction above 75th percentile (5.9 ppts of GDP)" — percentile rank "54."

### Medium-term risk analysis — Debt Fanchart and GFN Financeability
- Aggregate indicators and indexes (values preserved as in source):
  - "Fanchart width 29.10.4"
  - "Probability of debt not stabilizing (pct)96.80.8"
  - "Terminal debt level x institutions index30.50.7"
  - "Debt fanchart index...1.9"
  - "Average GFN in baseline22.17.5"
  - "Bank claims on government (pct bank assets)3.51.2"
  - "Chg. in claims on govt. in stress (pct bank assets)3.91.3"
  - "GFN financeability index...10.0"
- Risk classification and commentary:
  - Both the Debt Fanchart and GFN Financeability Modules point to "moderate risk."
  - For the fanchart, moderation arises from "a high probability of debt non-stabilization but moderate debt levels when adjusted for institutional quality."
  - Moderate financing risk reflects "high average GFNs but limited reliance on bank financing in the baseline, combined with moderate risk under a stress scenario with limited rollover of external private financing."
- Crisis signal statistics:
  - "Prob. of missed crisis, 2022-2027 (if stress not predicted): 18.2 pct."
  - "Prob. of false alarm, 2022-2027 (if stress predicted): 26.1 pct."
- Module-level risk signals:
  - Debt fanchart module: "Moderate"
  - GFN financeability module: "Moderate"
  - Medium-term index and normalized levels shown with Low risk / High risk thresholds and weights in MTI.

### Key fiscal and financing magnitudes (as presented)
- Gross Financing Needs (GFN) and related indicators are presented in percent of GDP and in index form in the source charts (values summarized above as reported).
- Financing composition highlights:
  - Baseline shows limited reliance on bank financing; stress scenarios show changes in bank claims on government and corresponding effects on GFN financeability.

### Data, institutional, and statistical notes
- Membership and IMF position:
  - France joined December 27, 1945; Article VIII.
  - Quota: "20,155.10" SDR Million — "100.00" Percent of Quota.
  - Fund Holding of Currency (Exchange Rate): "14,682.22" SDR Million — "72.85" Percent of Quota.
  - Reserve Tranche Position: "5,473.05" SDR Million — "27.15" Percent of Quota.
  - New Arrangements to Borrow: "111.52" (SDR Million).
- SDDS Plus and data practices:
  - France is in observance of the Fund’s Special Data Dissemination Standard (SDDS) Plus.
  - National accounts: adopted ESA 2010 in May 2014; historical series available from 1949.
  - Government finance statistics: reported on ESA 2010 basis from September 2014; revised time series from 1995 onwards.
  - External sector: monthly balance-of-payments statistics published using BPM6 from June 2014; consistent quarterly series covering 1999:Q1 to date.
- Statistical dissemination timetables (selected from Table 1, preserved exactly as in source):
  - Exchange Rates: "11/22" latest observation; "11/22" date received; Frequency of Data/Reporting/Publication: "Daily Daily Daily".
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: "11/22" / "11/22" / "Monthly Monthly Monthly".
  - GDP/GNP: "Q3:2022" latest observation; "Q4:2022" date received; "Quarterly Quarterly Quarterly".
  - External Current Account Balance: "09/22" / "11/22" / "Monthly Monthly Monthly".
  - Stock of Central Government Debt: "09/22" / "11/22" / "Monthly Monthly Monthly".

*Source: IMF staff report excerpts and annexes as presented in the supplied PDF content.*

### 1.      The latest high frequency  indicators point to the continued resilience of

### 1.      The latest high frequency  indicators point to the continued resilience of 

### High-frequency indicators and near-term activity
- French composite flash PMI decreased slightly to 48, driven by services, while manufacturing output improved (although it remains below 50 as well).
- Banque de France business confidence survey (conducted Nov. 28-Dec. 5) suggests activity has held up well in industry, services, and construction, with business leaders expecting activity to remain stable in December.
- INSEE’s household confidence indicator remained relatively stable in December.
- Based on the survey and other indicators, GDP growth is estimated to be around 0.1 percent (q/q) in the fourth quarter of 2022.
- State revenue performance was better-than-expected, with some €1bn in additional collection driven by corporate and personal income taxes.
- HICP inflation: fell to 6.7 percent year-on-year in December from 7.1 percent in November, as energy prices and, to a lesser extent, service prices slowed, suggesting inflation may have reached its peak and gradually decline over 2023.

### Pension reform: parameters, objectives, and reactions
- Reform presented on January 10, 2023; aims to balance the pension system by 2030 and increase employment rate of older workers by raising the minimum retirement age and minimum contribution period, while aligning special regimes with the general regime for new hires.
- Key parameters (as specified in the source footnote and text):
  - The minimum retirement age would be raised from 62 to 63 years and 3 months by the end of the current term (2027) and 64 years by 2030 at a rate of 3 months/year from September 2023.
  - The minimum contribution period for a full pension would be raised from 42 years to 43 years by 2027 rather than 2035 (thus accelerating the rate of increase from one month per year to three months per year).
  - The age at which workers can retire without having met the minimum contribution period and without incurring any discounts will remain 67.
  - Main special schemes (RATP, electricity and gas industries, Banque de France, clerks and notaries, and CESE) will be eliminated for all new hires and brought under the general regime; current participants will be grandfathered, but the increase in the minimum retirement age and contribution period for a full pension will also apply to them.
- Complementary measures to enhance employment of older workers include:
  - Easing access to partial retirement (retraite progressive);
  - Allowing retirees who return to work to continue acquiring rights;
  - Enhancing working time flexibility by introducing a universal time savings account (compte épargne-temps universel, CETU);
  - Changing rules regarding accumulation of benefits and salary when job seekers resume work;
  - Introducing a “seniority index” to provide more transparency in firms’ hiring and other practices or policies for older workers.
- Social and political context:
  - Many complementary measures need to be fleshed out and negotiated with social partners.
  - The proposal has been rejected by all major trade unions and by opposition parties on the far right and left; conservative party (Les Republicains) likely to support the reform after extracting concessions.
  - Unions have announced industrial action.
- Social protection adjustment:
  - The reform envisages increasing minimum pensions to 85 percent of minimum wage for workers with a full career (about €100 increase to €1,200 per month).

### Renewable Energy Acceleration Act
- On January 10, 2023, Members of the Parliament in the lower chamber passed the ‘Renewable Energy Acceleration Act’.
- Policy targets stated in the law:
  - A 10-fold increase in solar capacity.
  - Building of 50 offshore wind plants by 2050.
- Status: the law is subject to compromise talks between Members of Parliament and senators before being approved.

### Key macroeconomic and fiscal indicators (as presented in the source table)
- Table header line preserved as in source:
  - Est. 20202021202220232024
- Output (%)
  - Real GDP growth-7.96.82.60.71.6
  - Nominal GDP (billions of euros)2,3102,4992,63127412871
- Employment (%)
  - Unemployment rate8.07.97.57.67.5
- Prices (year average, %)
  - Inflation0.52.15.95.02.8
- General government finance (% GDP)
  - General government balance-9.0-6.5-5.0-5.3-4.8
  - Revenue52.552.553.552.851.6
  - Expenditure61.559.158.458.156.4
  - Structural balance (percent of pot. GDP)-5.8-5.2-4.4-4.512.2
  - Primary balance-7.8-5.2-3.2-3.7-3.1
  - General government gross debt114.7112.6111.6112.0112.2
- Balance of payments (% GDP)
  - Current account-1.80.4-1.5-1.6-1.0

### Fiscal policy stance, protection measures, and fiscal trajectory
- 2022 measures to protect households and businesses from high short-term inflation included a tariff shield on electricity and gas prices (benefiting very small businesses) deployed from October 2021 and extended until 2023.
- Gas price context: gas prices in October 2021 were already 50% higher than in January (as noted in the authorities’ statement).
- As of January 2023, the gas price cap has been increased by 15%, and the electricity price cap will be increased by 15% in February.
- The untargeted “fuel discount” was removed and replaced by a “fuel allowance” targeted on the poorest households using their vehicles to go to work.
- Support for businesses: cushioning mechanism to cover part of the electricity bill of very small businesses and SMEs; targeted measures for agriculture, transport, construction, bakery industry.
- Cost of measures: would amount to 2 ½% of GDP but largely offset by fiscal windfalls from renewable energy producers funding (1.3% of GDP), for a net cost around 1% of GDP.
- Authorities’ fiscal objectives:
  - Bring the public deficit back to below 3% of GDP in 2027.
  - Get the debt on a declining path by 2026.
  - Consolidation to be achieved by boosting potential growth, improving spending efficiency, and controlling public expenditure while protecting investment for the green and digital transition.
- Medium-term programming bill: still in legislative procedure; authorities view adoption as important for fiscal credibility; spending review mechanism already included in the annual financial bill.

### Labor market, unemployment benefits, and reforms
- Labor market strength: unemployment rate declined from 8.2% in the fourth quarter of 2019 to 7.3% in the third quarter of 2022 (as noted by authorities).
- Unemployment benefits and pension reform are underway; reforms broadly in line with staff advice:
  - Legal retirement age gradually raised to 64 by 2030, from 62 currently.
  - Contribution period for a full pension extended to forty-three years by 2027 (instead of by 2035).
  - Main special sectoral pension schemes to be extinguished.

### Financial sector resilience and macroprudential policy
- Authorities’ assessment:
  - Banks and insurers are in a solid financial and prudential position.
  - CET1 capital ratio of the six main banking groups is close to its all-time high.
  - Insurers' solvency capital requirement coverage ratio increased in the first half of 2022.
- Energy producers and liquidity:
  - Despite volatility in gas and electricity prices, large French energy producers were able to cover margin requirements in 2022; French banks have provided liquidity support as part of their clearing business.
  - Staff recommended targeted liquidity support for critically integrated wholesale energy producers, but authorities had not deemed such measures necessary so far.
- Non-bank financial intermediation (NBFI): authorities consider swift reinforcement of the regulatory framework necessary, with reforms under discussion at EU level.
- Macroprudential measures:
  - High Council for Financial Stability decided in December 2022 to raise the countercyclical buffer (CCyB) to 1%.
  - In 2023, given the economic slowdown, a balanced approach is advised; the CCyB could be “paused” at 1%.
  - Structural lending conditions for housing loans remain in place (borrower-based limits imposed by the High Council for Financial Stability).
  - Over 97% of housing loans are at fixed rate.
  - The interest rate cap (usury rate) remains a protective feature.
  - Vigilance on systemic risks, especially in commercial real-estate and the non-bank segment; macroprudential measure regarding banks’ exposure to highly indebted non-financial corporations remains in place.

### Structural policy priorities and green transition
- Four pillars of government action:
  1. Invest massively to increase pace of green transition; raise greenhouse gas emissions reduction objective to around 50% versus 1990 levels by 2030 and achieve carbon neutrality by 2050.
     - Two investment plans (France Relance and France 2030) finance decarbonization, infrastructure, green mobility, low-carbon energies and technologies, and energy retrofitting.
     - Carbon pricing should be enhanced and reflected in a medium-term manner; France and the UE implementing Fit for 55 measures (strengthening EU ETS and extension to housing and road transport sectors).
  2. Achieve full employment and reduce recruitment pressures by modulating unemployment insurance duration, improving skills development, and promoting senior employment (unemployment benefits reform, pension reform, expansion of Youth Employment Contract, training measures, amplify apprenticeship dynamics, renovate public employment service by creating France Travail, reform support for RSA beneficiaries).
  3. Bolster resilience of value chains and ensure energy, economic and digital sovereignty:
     - Implement "sobriety" plan to reduce energy consumption and secure short-term supply; complement with medium-term diversification of low-carbon energy sources, Renewable Energy Fast-Tracking Bill, and strengthening nuclear industry (including construction of new EPRs).
     - Authorities cite average electricity consumption 7,6% lower during the month of December 2022 compared to December 2021.
     - Continue Program of Investments for the Future (PIA 4) and France 2030 investment plan for strategic sectors (hydrogen, batteries, semiconductors, digital data); finalize country-wide rollout of mobile and high-speed broadband.
     - Removal of remaining share of value-added contribution for businesses (CVAE) to deepen cut in distortive production tax.
  4. Build equal opportunities: increase investment in education, improve attractiveness of teaching profession, create additional daycare spots, promote access to healthcare and disease prevention (free consultations at key moments in life), increase assistance to elderly and autonomy for people with disabilities, and expand access to decent housing in the context of rising life costs.

*Italic: IMF — France Article IV Consultation (excerpt), January 19, 2023.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1fraea2023001.pdf_