## _cr05399 — Executive Summary and Selected Findings (France) ## Source details **Canonical URL:** [_cr05399 — Executive Summary and Selected Findings (France)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05399.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05399.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05399.pdf.json) --- ### Overall assessment and outlook - Priority given to job creation; new labor market initiatives will facilitate hiring in the near term but additional reforms are necessary to deliver appreciably higher employment growth. - Staff sees GDP growth rising from 1.5 percent in 2005 to about 1.8 percent in 2006. - With the present outlook of below-potential near-term growth, it will be difficult to reduce the deficit to less than 3 percent of GDP. - Financial system appears resilient; supervisory authorities are vigilant about banks’ heightened exposure to the housing sector. ### Fiscal stance, targets, and recommendations - Fiscal consolidation progressed in 2004 but stalled in 2005; should be resumed in 2006. - Staff recommends a structural adjustment for 2006 of ½ of one percentage point of GDP. - Achieving a nominal deficit of less than 3 percent of GDP will remain beyond reach unless growth surprises on the upside. - Over the medium term, further fiscal adjustment and growth-enhancing reforms should deliver a small structural surplus in preparation for the rise in the fiscal costs of aging. - Specific fiscal facts and projections: - 2004: general government deficit = 3.6 percent of GDP. - Staff projects the actual deficit to reach about 3.5 percent of GDP in 2005. - Authorities’ draft 2006 budget target: reduce deficit to 2.9 percent of GDP (requires underlying adjustment of 0.5 percentage point of GDP). - Structural balance estimated by staff: deficit of about 2.6 percent of GDP in 2004 and 2005. - Staff advice: for 2006 ensure the structural deficit falls by ½ of one percentage point of GDP and rely on durable expenditure restraint rather than one-offs. - Medium-term fiscal adjustment needs: - Staff analysis: annual fiscal adjustment by nearly 0.5 percentage point of GDP would be needed over the next five years to secure fiscal sustainability; this implies about 1 percentage point of GDP more adjustment than envisaged under current policies. - Example measure: replace only one out of two retiring civil servants during 2006–10 (illustrative). - Of about 170,000 civil servants retiring during 2004–06, only 16,800 are not being replaced (quantified fact). ### Growth, demand, and external sector - Recent developments: - 2004: growth faster and more consumption-driven than in other large euro-area countries; recovery weaker than in previous cycle. - Household indebtedness at about 60 percent of GDP. - Fall in household consumption in Q2 2005 likely related to stagnating employment and political turmoil. - Exports and competitiveness: - After a decade of surpluses, France’s trade balance moved into deficit in 2004; net trade contributed negatively to growth for the third consecutive year. - Share of exports to the United States and Asia (excluding Japan) in 2004: 11.6 percent (compare: Italy 13.7 percent; Germany 15.9 percent; United Kingdom 22.4 percent). - Econometric finding: during 2001–04, real exchange rate appreciation in France is estimated to have reduced export growth on a cumulative basis by about 4 percentage points. - Substantial unexplained residual weakness in exports of about 6¾ percentage points over 2001–04 remains for France. - Oil price assumptions and effects: - Staff oil price assumptions: $54.23/bbl in 2005 and $61.75/bbl in 2006; actual price in Q2 2005 was $50.78/bbl. - These represent increases of 7 percent in 2005 and 16.5 percent in 2006 relative to the Q2 2005 price. - Staff’s estimated output elasticity of oil prices: a 20 percent permanent increase in prices reduces GDP growth in the current year by 0.1 percentage point and in the following year by 0.2 percentage point. - Key macro projections (staff): - GDP growth: 2005 = 1.5 percent; 2006 = 1.8 percent. - Headline inflation expected to average about 2 percent in the 12 months ahead; staff projects consumer price inflation to decline from 2.1 percent in 2005 to 1.9 percent in 2006 (as noted elsewhere). ### Labor market: performance, reforms, and policy implications - Labor market performance: - Recovery created fewer jobs than usual; unemployment crested in May 2005 at slightly more than 10 percent of the labor force; increase disproportionately affected the young and the low-skilled. - Firms increased hours per employee rather than hiring; employment hardly responded to growth. - New labor measures: - New employment contract (Contrat Nouvelle Embauche, CNE): term of up to two years for small enterprises (up to 20 employees) with no hiring and firing restrictions during the first two years; designed not to rely on budgetary support. - Authorities estimated the initiative and associated simplifications could reduce unemployment by 0.1 to 0.5 percentage point. - Staff concerns and recommendations: - Partial reform limited to small firms and limited-duration contracts risks more job turnover and less investment in human capital; may not reduce long-term unemployment. - Recommended integration of all existing labor contracts into a single one, internalize social costs of layoffs, and minimize legal uncertainty. - Strengthen employment services and job search incentives; cap and phase unemployment benefits; introduce sanctions for noncompliance with job search requirements (some measures partially enacted shortly after the mission). - Limit future minimum wage increases to changes in underlying consumer price inflation to improve employability of low-skilled workers. - Eliminate the dismissal tax on older workers (contribution Delalande) — staff welcomed intended elimination. ### Structural reforms and sequencing - Achievements and approach: - Pension reform (2003) and health care reform (2004) have made inroads toward fiscal sustainability; 2003 pension reform "had considerably cut contingent liabilities, reducing the estimated budgetary cost of aging by almost two fifths." - Authorities prefer gradual, consensus-building reforms involving technical studies and broad consultation; Advisory Council for Employment to be used for labor market reform. - Simulated impacts: - GEM simulations: structural reform in France alone could raise French GDP in the long run by more than 10 percentage points. Stand-alone contributions (deviations from baseline in percent): Services 5.8; Labor market 3.7; Goods 1.2; All Markets 10.7. - Coordination within the euro area yields additional benefits: long-run real GDP in France increases by an additional 3 percentage points due to spillovers. ### Financial sector: performance, risks, and reform priorities - Performance and indicators: - "The financial system has been performing well." - Real estate prices (index, 2000=100, period average): 2004 = 156.7; 2005 = 178.4 (June). - Mortgages growth (12-month, June): 2005 = 33.8. - Share of mortgage credit in bank credit to the private sector (2005, June): 35.2. - Nonperforming loans to total gross loans (2004): 4.2. - Return on equity (aggregated parent-company basis, 2005): 10.6. - Risks and supervisory focus: - Supervisory authorities focused on provisioning behavior, adoption of new accounting standards, and rising exposure to residential real estate. - Mortgage exposure: rapid growth increases long-term low-profit assets; many mortgages used as loss leaders; variable-rate mortgages exposure noted but bulk at fixed rates or interest rate caps. - Recommendations: phase out administered savings schemes and mortgage loan schemes; reduce transaction costs and facilitate home equity withdrawal; upgrade internal control systems; monitor hedge fund activities from less regulated jurisdictions. - Structural and market reforms: - End to prohibition to remunerate sight deposits and planned creation of the postal bank expected to promote competition. - Bankruptcy law enacted to improve creditor rights. ### Trade policy, development, and external competitiveness - Trade policy stance: - France urged to promote a successful conclusion of the Doha round and support comprehensive liberalization of agricultural markets, including market access. - Authorities determined to increase ODA from 0.41 percent of GNI in 2003 to the U.N. target of 0.7 percent of GNI in 2012. - Competitiveness notes: - Competitiveness deterioration appears partly cyclical and partly structural; preserving competitiveness through structural reforms is important given downside risks from oil prices and trade partner weakness. ### Scenarios and medium-term fiscal outcomes - Authorities’ scenarios for 2007–09: - Low-case: Growth = 2¼ percent per year; structural adjustment = 1.1 percentage points of GDP over three years; requires real central government spending to decline by 1 percentage point per year during 2007–09. - High-case: Growth = 3 percent per year; structural adjustment = 2.1 percentage points of GDP over three years; would eliminate the structural deficit over the medium term if implemented. - Staff view: - Taking into account known measures only, staff sees only marginal improvement in structural balance by 2009; on current policies staff projects structural balance to remain in deficit of about 2 percent of GDP over the medium term. - Achieving sustainability requires annual fiscal adjustment near 0.5 percentage point of GDP sustained over several years and durable expenditure measures. ### Key selected macro and fiscal indicators (as presented) - GDP growth (annual percentage change, constant prices): 2001: 2.1; 2002: 1.3; 2003: 0.9; 2004: 2.0; 2005: 1.5; 2006: 1.8; 2007: 2.6; 2008: 2.4; 2009: 2.3; 2010: 2.3. - Unemployment (percent of labor force, harmonized): 2001: 8.4; 2002: 8.9; 2003: 9.5; 2004: 9.7; 2005: 9.8; 2006: 9.6; 2007: 8.9; 2008: 8.2; 2009: 7.6; 2010: 7.0. - General government balance (percent of GDP): 2001: -1.6; 2002: -3.2; 2003: -4.2; 2004: -3.6; 2005: -3.5; 2006: -3.9; 2007: -3.2; 2008: -2.5; 2009: -1.8; 2010: -1.2. - Structural balance (percent of GDP): 2001: -2.1; 2002: -3.1; 2003: -3.4; 2004: -2.6; 2005: -2.6; 2006: -2.4; 2007: -2.2; 2008: -1.9; 2009: -1.6; 2010: -1.2. - Gross public debt (percent of GDP): 2001: 56.2; 2002: 58.2; 2003: 64.7; 2004: 66.3; 2005: 68.1; 2006: 68.1; 2007: 67.9; 2008: 67.1; 2009: 65.7; 2010: 65.7. - Trade balance (in billions of euros): 2001: 3.9; 2002: 8.0; 2003: 2.9; 2004: -6.3; 2005: -27.2; 2006: -31.4; 2007: -29.6; 2008: -28.8; 2009: -29.4; 2010: -30.7. - Real estate prices (index, 2000=100, period average): 2000: 100.0; 2001: 106.1; 2002: 118.7; 2003: 135.7; 2004: 156.7; 2005: 178.4 (June). - Mortgages growth (end-of-period 12-month, June): 2005: 33.8. - Household savings ratio (percent of household disposable income): 2001: 15.8; 2002: 16.9; 2003: 16.0; 2004: 15.4; 2005: 15.7. ### Policy priorities summary (staff advice) - Resume fiscal consolidation in 2006, implementing a structural adjustment of ½ of one percentage point of GDP. - Curtail the pace of social security and local spending increases; consolidate gains from health care reform. - Support new labor-market initiatives with broader reforms of labor market institutions and entitlements to raise long-term employment. - Pursue product and services market deregulation to complement labor market reforms and help preserve competitiveness. - Monitor and address banks’ exposure to housing; consider phasing out administered savings and mortgage loan schemes. - Support multilateral trade liberalization, including a successful conclusion of the Doha round. *IMF staff report excerpts: Executive Summary, Box 2 (External Competitiveness), Boxes 4–5, Sections 18–26, 42, 44, Appendix II, and selected tables from _cr05399.* ### Executive Summary ...................................................................................................... ### _cr05399 - Executive Summary ...................................................................................................... ### Executive Summary: key findings and outlook - Priority given to job creation in response to public discontent about unemployment; new labor market initiatives will facilitate hiring in the near term but important additional reforms are necessary to deliver appreciably higher employment growth. - The signal to rely less on budgetary resources to solve labor market problems is helpful, though more decisive and persistent fiscal adjustment is needed to reduce the high structural budget deficit. - With the present outlook of below-potential near-term growth, it will be difficult to reduce the deficit to less than 3 percent of GDP. - Staff sees GDP growth rising from 1.5 percent in 2005 to about 1.8 percent in 2006. - Authorities’ gradual consensus-building approach to structural reform has paid off; coordination between labor and product market reforms, within both France and the euro area, should be taken advantage of. - The financial system appears resilient; supervisory authorities are vigilant about banks’ heightened exposure to the housing sector. ### Fiscal stance and recommendations - Fiscal consolidation progressed in 2004 but stalled in 2005; should be resumed in 2006. - Health care reform is helping, but the pace of other social security and local spending needs to be curtailed. - Staff recommends a structural adjustment for 2006 of ½ of one percentage point of GDP. - Achieving a nominal deficit of less than 3 percent of GDP will remain beyond reach unless growth surprises on the upside. - Over the medium term, further fiscal adjustment and growth-enhancing reforms should deliver a small structural surplus in preparation for the rise in the fiscal costs of aging. - Authorities viewed their fiscal framework as sufficiently robust to deliver consolidation and saw no need for an independent fiscal council. ### Growth, demand, and external sector (Background) - 2004: growth was faster and more consumption-driven than in other large euro-area countries; recovery weaker than in previous cycle. - Private consumption benefited from a rebound in employment (in hours), increases in the minimum wage, and some fiscal measures, despite an overall contractionary fiscal stance. - House prices supported residential construction and mortgage credit expansion; direct effects on consumption limited as refinancing is costly and home equity lending nonexistent. - Household indebtedness at about 60 percent of GDP. - Fall in household consumption in Q2 2005 likely related to stagnating employment and turmoil around rejection of the EU constitution treaty. - Fixed capital formation revived in the upturn but stumbled in Q2 2005; strong productivity growth, low interest rates, and subdued wage pressures strengthened enterprise margins and internally-generated funds. - Stocks and specific industry developments (e.g., aeronautics) contributed erratically to growth. ### External competitiveness and trade performance - After a decade of significant surpluses, France’s trade balance moved into deficit in 2004; net trade contributed negatively to growth for the third consecutive year. - Real appreciation of the exchange rate (euro evolution) contributed to appreciation of the real effective exchange rate, but not more than elsewhere; developments in line with Germany and less worrisome than for Italy. - Weak export performance linked to lower foreign demand and geographical orientation: share of exports to the United States and Asia (excluding Japan) was 11.6 percent in 2004, compared to 13.7 percent in Italy, 15.9 percent in Germany, and 22.4 percent in the United Kingdom. - Since 2001, France faced consistently lower foreign demand than its large euro area neighbors and the United Kingdom. - Elasticity of exports to foreign demand near unity but much smaller than Germany’s, partly reflecting Germany’s specialization in capital goods. - Strong domestic demand in France in 2004 led to buoyant imports; since 2001, France had the most dynamic domestic demand among the three main euro area countries, exceeding Germany by 2½ percent per year on average over 2001–04. - Competitiveness deterioration appears partly cyclical and partly structural; preserving competitiveness through structural reforms is underscored, given downside risks from oil prices and trade partner weakness. ### Labor market: performance and policy implications - The recovery created fewer jobs than usual; unemployment continued to rise until recently while firms increased hours per employee. - Unemployment crested in May 2005 at slightly more than 10 percent of the labor force; increase disproportionately affected the young and the low-skilled. - New employment contract (contrat nouvelle embauche, CNE) is an innovation likely to have positive short-run effects in lowering unemployment but is too limited to significantly boost long-term employment growth unless supported by broader reform. - Firms reluctant to hire as minimum wage increases continue to outstrip growth of low-skilled workers’ productivity. - Reversal of some workweek restrictions favors increasing hours over adding workers in the short run. - To achieve appreciable results, the new labor contract needs to be supported by a fundamental revamp of labor market institutions and entitlements. ### Structural reforms and sequencing - Pension and health care reforms have made inroads toward fiscal sustainability. - Administrative deregulation is proceeding; further product and services market deregulation, also in the EU context, would facilitate labor market reform and enhance its benefits. - Authorities prefer a gradual approach to preserve social cohesion; intend to tread carefully to nurture confidence and reform momentum. - Coordination between labor and product market reforms, within France and across the euro area, should be exploited to enhance reform benefits. ### Financial sector and risks - Financial system found to be resilient. - Supervisory authorities are vigilant about banks’ risk exposure, especially to the housing market. - Phasing out of administered savings and mortgage loan schemes was deemed necessary, though no specific plans were set. - Staff urged France to promote a successful conclusion of the Doha round and welcomed the relatively high level of official development assistance. ### Policy messages (summary of staff advice) - Resume fiscal consolidation in 2006, implementing a structural adjustment of ½ of one percentage point of GDP. - Curtail the pace of social security and local spending increases, while consolidating gains from health care reform. - Support new labor-market initiatives with broader reforms of labor market institutions and entitlements to raise long-term employment. - Pursue product and services market deregulation to complement labor market reforms and help preserve competitiveness. - Monitor and address banks’ exposure to housing; consider phasing out administered savings and mortgage loan schemes. - Support multilateral trade liberalization, including a successful conclusion of the Doha round. *IMF staff report: Executive Summary (France).* ### Box 2. France: External Competitiveness (Concluded) ### Box 2. France: External Competitiveness (Concluded) ### Econometric findings on external trade - Econometric analysis for four European countries points to a significant impact of the euro’s appreciation on exports, and to a lesser extent on imports. - During 2001–04, real exchange rate appreciation in France is estimated to have reduced export growth on a cumulative basis by about 4 percentage points. - Comparative cumulative impacts on exports during 2001–04: - Germany: less than France (exact cumulative value not stated). - Italy: reaches 9 and 16 percentage points, for goods and services exports, respectively. - On import determinants: - Domestic demand is dominant for import growth in France and in the United Kingdom. - Exports are important in explaining German imports. - Currency appreciation had a small boosting effect on imports in all three euro area countries analyzed. - For France, a reduction in export margins mitigated loss of market share. ### Unexplained residuals and competitiveness interpretation - The methodology does not fully explain recent export developments. - For France, substantial residual weakness in exports of about 6¾ percentage points over 2001–04 remains unexplained. - The mission notes it is too early to interpret this as a structural loss in competitiveness. - Country-specific residuals: - Italy: an even larger negative residual. - Germany: some unexplained gains, at least for goods. - United Kingdom: apparent shift in export specialization from goods toward services. ### Labor market, wages, productivity, and inflation - Employment and hours: - Employment has hardly responded to growth; firms appear to favor increasing hours over hiring workers. - Wages, productivity, and unit labor costs: - Productivity and tax cuts helped contain costs. - Overall unit labor costs appear well behaved, in part because of exceptionally strong productivity gains, which may be hard to sustain. - Unemployment and demographics: - Unemployment has risen, affecting young adults disproportionately. - Aging will reduce the labor force, but higher-than-expected fertility and lower mortality may moderate the impact on potential growth. - Minimum wage: - The SMIC increased by 3.7 percent in real terms on July 1, 2005. - Going forward, the single minimum wage will be indexed to a weighted average of inflation and the average wage, possibly topped up by a discretionary amount (coup de pouce). - Inflation dynamics: - Slack in the labor market has not resulted in declining inflation, due to mostly temporary factors. - Core and headline inflation have exceeded the euro area average since 2003, owing to increases in indirect taxation and administered prices, including health care. - Energy prices played a key role in pushing up headline inflation but did not trigger second-round effects. - Rents edged up because they are legally tied to the construction price index, pulled by a strong housing market. - Services provided by unskilled labor imparted some marginal cost-push pressures, reflecting higher labor costs amid the workweek reduction. - Headline inflation is expected to average about 2 percent in the 12 months ahead, though core inflation will be considerably lower. - Upward inflation risks: further oil price increases and health care reforms. - Downward inflation risk: reform of regulations governing distribution margins could increase competition and lower consumer prices appreciably below baseline. - Authorities and staff agreed on the importance of avoiding second-round effects from energy and regulated price hikes. ### Macroeconomic outlook and monetary conditions - Potential growth: - Without reforms, annual potential growth is projected to decline moderately from 2.1 percent at present to 1.9 percent in the medium term and 1.8 percent by 2040. - Policy conditions: - In 2004, with buoyant domestic demand, policy conditions tightened as the euro appreciated and the structural fiscal balance improved by about 0.8 percentage point of GDP. - With growth weakening but projected to exceed the euro area average in 2005, and the euro having lost some strength, monetary conditions remained supportive for the French economy. - A key administered interest rate declined by 25 basis points on August 1, 2005, in accordance with its automatic adjustment formula. - Administered interest rates cover half of bank deposits and are adjusted at six-month intervals; with inflation as a floor, downward adjustments are limited. - Near-term GDP projections and revisions: - The staff lowered its growth outlook by ¼ of one percentage point in both 2005 and 2006, to 1.5 percent and 2 percent, respectively, reflecting less robust domestic demand. - Subsequent downside risks from oil prices prompted further reduction: - Oil price assumptions: $54.23/bbl and $61.75/bbl in 2005 and 2006, respectively, compared to an actual price of $50.78/bbl in the second quarter of 2005. - These represent increases of 7 percent in 2005 and 16.5 percent in 2006 relative to the second quarter 2005 price. - Adverse effects are marginal in 2005, leaving average GDP growth at 1.5 percent, but are projected to constrain growth to 1.8 percent in 2006. - The staff’s estimated output elasticity of oil prices: a 20 percent permanent increase in prices reduces GDP growth in the current year by 0.1 percentage point and in the following year by 0.2 percentage point. - Risk assessment: - Risks around the lowered baseline are broadly balanced. - External downside risks include oil prices and possible weaker demand from trading partners. - Authorities viewed export weakness as largely cyclical and related to regional trade and product specialization, but agreed that continuing structural reforms are needed. - A disorderly unwinding of global imbalances with euro appreciation would slow growth directly and indirectly, through declines in profits and wealth, as France has a net dollar asset position. - The financial sector was not seen as a risk since it appeared fully hedged against exchange risks. - Domestic risks: - Primarily related to private consumption. - Authorities did not view house prices as a major concern; recent increases were seen as driven by fundamentals and household indebtedness remained low by international standards. - Household savings remained high (and rose again in the second quarter), so private consumption could surprise on the upside if job creation efforts were successful. ### Fiscal consolidation, execution, and strategy - Progress and remaining gaps: - Fiscal consolidation progressed significantly in 2004, but the general government deficit remained high and public debt rose. - The 2004 deficit was 3.6 percent of GDP. - The debt-to-GDP ratio reached a historic peak. - The staff estimates the structural balance to have been in a deficit of about 2.6 percent of GDP in 2004. - 2005 developments: - Fiscal consolidation faltered in 2005, mainly because objectives were unambitious. - Excluding exceptional one-off operations, there is no structural adjustment; modest initial plans (0.2 of one percentage point of GDP) were undermined by a lower-than-projected GDP deflator and nominal spending. - This contributed to raising expenditure to almost 55 percent of GDP (Text Table 1). - In execution, expenditure appeared broadly on track; health care reform was keeping spending in line with targeted deceleration. - The authorities were uncertain about achieving an actual deficit below 3 percent of GDP in 2005 and had frozen some central government spending; social partners renounced conventional indexation of unemployment benefits to limit overruns. - The staff projects the actual deficit to reach about 3.5 percent of GDP in 2005. - To stem the increase in debt, the authorities were accelerating divestiture, expected to yield about 1.5 percentage points of GDP in 2005. - An exceptional revenue item—state takeover of the electricity utility’s pension fund assets and liabilities—boosted revenue by ½ of one percentage point of GDP. - 2006 stance and medium-term strategy: - At mission time, authorities aimed for a deficit of less than 3 percent of GDP in 2006 but acknowledged the difficulty of achieving it, especially if growth disappointed. - Central government spending would be kept constant in real terms for the fourth year running—yielding underlying adjustment of ¼ of one percentage point of GDP—and promised income tax cuts would be postponed. - Continued success of the health care reform and measures to eliminate the deficit of the unemployment insurance system were seen as imperative; these reforms would reduce the deficit by ¾ of one percentage point of GDP over the medium term. - The authorities wished to avoid entering the 2007 elections with a deficit in excess of 3 percent of GDP. *Italic: IMF staff report excerpt: Box 2. France: External Competitiveness (Concluded).* ### 18. The authorities intended to proceed with fiscal adjustment, though specifics ### 18. The authorities intended to proceed with fiscal adjustment, though specifics remained to be elaborated. ### Fiscal outlook and sustainability - The 2003 pension reform "had considerably cut contingent liabilities, reducing the estimated budgetary cost of aging by almost two fifths." - The structural deficit "was well below 3 percent of GDP (Text Table 2)." - Without adjustment, "the public debt ratio was vulnerable to significant increases," as shown by standard debt sustainability analysis (Table 4 and Figure 11). - "In the long run, the remaining costs of aging still threatened fiscal sustainability (Figure 12, current policies)." - Staff analysis: even with reforms in line with a (delayed) Lisbon agenda, "annual fiscal adjustment by nearly 0.5 percentage point of GDP would be needed over the next five years to secure fiscal sustainability (Figure 12, reform and adjustment)." - This "implies about 1 percentage point of GDP more adjustment than envisaged under current policies." ### Fiscal measures discussed and staff recommendations - The authorities "affirmed their preference to achieve most of the needed fiscal consolidation through growth-enhancing reforms, some of which would simultaneously reduce budgetary outlays (e.g., the increased flexibility of the new labor contract, if it led to higher employment, would reduce transfer spending)." - The staff "supported this approach," but emphasized: - If relying on structural reforms, still need "annual fiscal adjustment by nearly 0.5 percentage point of GDP" over five years. - As an example, the additional adjustment "could for example be achieved by replacing only one out of two retiring civil servants during 2006–10." - Staff underscored that it would be crucial "to no longer rely on budgetary means to promote employment and product market reforms, e.g., divestiture. Otherwise, upfront adjustment would need to be larger." - "Efforts at expenditure restraint would need to be broadened beyond the central government." - Quantified civil service replacement fact: "Of about 170,000 civil servants retiring during 2004–06, only 16,800 are not being replaced." ### Expenditure reform priorities and recommendations - The staff urged "the authorities to proceed with durable expenditure reforms." - Health care reform had been effective, "but the reform would not contribute to overall consolidation as the pace of health spending was unlikely to fall below that of potential GDP." - Staff recommended utilizing the ongoing wave of retirements to help with medium-term consolidation, while recognizing that "an across-the-board approach to nonreplacement of retiring civil servants was undesirable" and "political will appeared to be lacking." - Need to "take advantage of synergies between structural reforms and fiscal adjustment and curb local spending to safeguard the credibility of the decentralization process." - To improve labor market performance, staff advised to "curtail out-of-work benefits and phase out special retirement regimes." - The staff welcomed the authorities’ recognition that "the avenue of relying on budgetary resources to solve labor market problems had been exhausted," noting that "implementation of past initiatives (such as the social cohesion plan) continued to weigh on the budget." ### Tax reforms and revenue measures - "Awareness is building of the need to overhaul the tax system, and some important tax distortions are being addressed." - Reforms to the taxe professionnelle: "mitigated by capping the tax as a percentage of value added at the level of the enterprise while broadening its base." - Authorities "agreed that ultimately this tax (which had been suspended for new investments) should be eliminated, but its large yield prevented them from doing so immediately." - General tax strategy agreed with staff: - "Phase out tax exemptions and tax credits (except for the earned income tax credit) and broaden tax bases." - "Simplification of the taxation of savings products and a shift in focus of tax incentives to the promotion of retirement savings would benefit the budget and the economy’s efficiency." ### Fiscal framework and institutions - Central government fiscal governance strengthened: "a new organic budget law, in effect with the 2006 budget, had increased the oversight role of parliament, heightened the accountability of spending agents, and enhanced the assessment role of the Cour des Comptes (the independent audit office)." - A similar organic budget law "is set to be adopted for social security," and for health care spending "a watchdog is in place with the formal powers to ask parliament to adopt corrective measures." - Unemployment insurance "is run by social partners and designed to be in balance in the medium term." - Authorities saw "no need for an independent fiscal council," arguing that under the (modified) SGP, "the independent assessment of the EU was a strong safeguard." - Staff response: "more national ownership of budgetary analysis through independent forward-looking assessments by a domestic institution could provide added momentum for fiscal adjustment" and "assist in making local authorities and the various watchdogs internalize the overall consolidation requirement." ### Structural reforms: strategy and impact - Authorities favor a gradual, consensus-building approach to structural reforms involving "technical studies and committees" and broad stakeholder consultation (Box 3). - Pension reform (2003) and health care reform (2004) cited as successful examples following this approach; an Advisory Council for Employment was to be used for labor market reform. - Staff GEM simulations: "structural reform in France alone could raise French GDP in the long run by more than 10 percentage points (Box 4)." - Reform contributions (stand-alone, deviations from baseline in percent): Services 5.8, Labor market 3.7, Goods 1.2, All Markets 10.7. - GEM assumption for reform and adjustment scenario: "implementation of product and labor market reforms, which raise steady state GDP by about 10 percentage points (consistent with the GEM simulations of Box 4)." - Coordination within the euro area yields additional benefits: "In the long run, real GDP in France increases by an additional 3 percentage points, due to spillovers from higher output in the other euro area member states." ### Labor market issues and measures - Labor market weaknesses: "overall utilization of labor potential remains among the lowest of OECD countries," characterized by strong employment protection, a high labor tax wedge, limited wage flexibility for the low-paid, high structural unemployment, low youth participation, early exits of older workers, and declining annual hours worked per worker. - Past policy emphasis: "fiscally expensive active labor market programs," leaving institutional obstacles to flexibility unaddressed. - Authorities’ new plan to promote job creation seen as "a breakthrough" because it addresses key rigidities (Box 5): - Builds on easing of the 35-hour workweek restrictions, the social cohesion plan, promotion of personal services, and an enabling framework for life-long learning. - Proposed new labor contract (CNE): "term of up to two years," "has no firing restrictions and does not rely on budgetary support to facilitate job creation," focused on small enterprises. - Authorities estimated that this initiative "and its associated administrative and fiscal simplifications could reduce the unemployment rate by 0.1 to 0.5 percentage point." *Source: IMF staff report excerpt (section 18–25 from the provided PDF).* ### 26. There was agreement that additional, supporting reforms would be essential to ### _cr05399 - 26. There was agreement that additional, supporting reforms would be essential to ### Labor market reforms and employment outcomes - Finding: The new labor contract (CNE) increases flexibility of fixed-term contracts but does not address rigidities in open-ended contracts. - Risk: Partial reform (flexibility only for fixed-term or limited-duration contracts) can lead to more job turnover and less investment in human capital, ultimately raising rather than lowering unemployment. - Recommendation: Integrate all existing labor contracts into a single one, internalize the social costs of layoffs, and minimize legal uncertainty. - Staff stance: Strengthen employment services and job search incentives; modify minimum wage adjustment mechanism. - Specific policy measures urged by staff: - Cap and phase unemployment benefits. - Introduce sanctions for noncompliance with job search requirements (partially enacted shortly after the mission). - Limit future minimum wage increases to changes in underlying consumer price inflation to increase the employability of low-skilled workers and wage dispersion at the low end of the pay scale. - Decrease benefits in some cases to make the return to work pay and remove incentives inducing premature exit from the workforce. - Eliminate the dismissal tax on older workers (contribution Delalande) — staff welcomed intended elimination. - Authority response: UNEDIC renegotiation provides an opportunity to consider proposals; social partners bear primary responsibility for implementation. ### Box 5 — Are New Labor Market Initiatives a Breakthrough? - Emergency plan (le plan d’urgence pour l’emploi) mid-2005 includes: - (i) Introducing a new employment contract (CNE) for small enterprises with up to 20 employees, with no hiring and firing restrictions during the first two years. - (ii) Simplifying administrative procedures and extending certain tax exemptions by raising eligibility threshold from 10 to 20 employees. - (iii) Providing an income tax credit to promote youth employment in specific sectors and more support to facilitate job search. - (iv) Fiscal incentives and administrative deregulation to improve employment in the personal service sector. - Historical context: Past policies relied on employment subsidies, earned income tax credits, cuts in social security contributions, and work redistribution; results were modest and unemployment remained higher than the euro area average. - Evaluation of the new plan: - CNE is a partial reform limited to small enterprises and to flexibility for only up to two years. - Academic studies (e.g., Blanchard and Landier; Kramarz-Cahuc) find partial reforms can be ineffective and produce high turnover with insufficient human capital investment. - International evidence: Spain saw an initial fall in unemployment after partial EPL reform in late 1980s, then a rapid rise; significant sustained fall occurred only after reform of EPL for permanent contracts in mid-1990s. - Quantitative simulation results: - A reform that merges existing contracts into a single one by eliminating firing restrictions and legal uncertainty would lower the structural unemployment rate by 2 percentage points. - If firing costs are completely eliminated, the effect could be about 3 percentage points. - Caution: Estimates sensitive to high and binding minimum wages and inefficient employment services slowing matches. ### Product markets - Ongoing actions: - Privatization accelerated; gas utility shares floated, electricity utility flotation and further divestiture of highways planned. - Legislation restricting retailers’ ability to lower distribution margins (loi Galland) set to be modified, expected to reduce consumer prices significantly. - Assessment: - Good progress in reducing administrative regulation, but more deregulation needed, particularly in the service sector. - Authorities favor services sector liberalization in the EU but have reservations about the “origin” principle of the Bolkenstein directive. - Charted indicators (descriptive): Overall product market regulation declined; trade liberalization increased; administrative burden significantly lower; level of economic regulation remains high. ### Financial sector - Reforms and developments: - Bankruptcy law enacted enabling Chapter 11 type procedures and improving creditors’ rights. - Prohibition to remunerate sight deposits lifted; one bank remunerated sight deposits. - Administered interest rates mostly operated by automatic formulas. - Planned creation of the postal bank (by separating mail activities) expected to establish a level-playing field with private institutions and increase competition, particularly for mortgage loans. - Mortgage market reforms planned: introduction of home equity loans and reduction of legal and regulatory transaction costs (changes effective in the course of 2006). - Performance and risks: - Financial sector performed well; part of increased profitability stemmed from a transitory reduction in provisioning as risk declined. - Drivers of good results: excellent retail banking performance, drop in nonperforming loans, diversification. - Supervisory concerns: recent losses in derivatives by some institutions did not raise systemic concerns but prompted calls for upgraded internal control systems; vigilance about hedge funds operating from less regulated jurisdictions. - Mortgage exposure: rapid growth of mortgage loans increases long-term low-profit assets on bank balance sheets; mortgage interest rates very low as mortgages are used as loss leaders. - Interest rate risk: A sharp increase would reduce financial sector activity and negatively impact households because a larger proportion of mortgages is now at variable rates; impact limited because bulk of mortgages is at fixed rates or subject to interest rate caps. - Supervisory assessment: banks still had sufficient buffers against mortgage-related risks. ### Other issues - Trade and aid: - Authorities committed to a successful completion of the Doha round but noted slow progress. - Supported EU initiatives on textile imports from China consistent with prior quota agreements; adjustment in the textile sector ongoing with employment declining by more than half over past 10–15 years. - CAP reforms agreed in 2003 to be implemented in 2007; authorities resisted acceleration as reneging on agreements with farmers. - Development aid: authorities determined to increase ODA from 0.41 percent of GNI in 2003 to the U.N. target of 0.7 percent of GNI in 2012 and expressed concern about lack of funding hampering progress toward the millennium goals. ### Staff appraisal — macro outlook and policy recommendations - Growth projections and risks: - Growth projected to edge up from 1.5 percent in 2005 to about 1.8 percent in 2006. - Domestic demand expected to recover after a poor second quarter of 2005. - Downside risks from oil prices and trade partner weakness; export growth likely to remain sluggish. - Monetary conditions likely to remain quite accommodative given growth still ahead of the rest of the euro area. - Fiscal policy and consolidation: - Fiscal consolidation needs to resume in 2006 and be sustained at a steady pace. - Objective: achieve structural balance by 2010 before rising costs of aging set in. - For 2006, further measures required to ensure the structural deficit falls by ½ of one percentage point of GDP. - On current growth projections, bringing the deficit to less than 3 percent of GDP in 2006 will require more adjustment. - Recommendation: durable expenditure restraint; stop using budgetary resources to solve structural problems; exploit synergies between structural reform and fiscal adjustment. - Use UNEDIC renegotiation to eliminate the deficit of the unemployment insurance system. - Utilize ongoing sizable wave of retirements to help with medium-term consolidation. - Tax and fiscal governance: - Overhaul of the tax system could improve efficiency but should be revenue-neutral unless accompanied by additional spending restraint. - No further budgetary room for targeted reductions in social security contributions. - Recommendation: eliminate taxe professionnelle in context of broader reform and establish alternative revenue sources for local authorities. - Lower marginal tax rates by using room from base-broadening. - Strengthen fiscal governance: institutionalize an independent forward-looking budget assessment body to provide momentum for fiscal adjustment and increase buy-in from all sectors of general government, including local authorities. - Coordination and sequencing: - Continue consensus-building approach to reform; coordinate labor and product market reforms to harness benefits. - Accompany labor market reforms with product market reforms to mitigate transition costs and boost consumer welfare. - In the context of monetary union, coordinate timing of reforms within the euro area to allow monetary policy easing to mitigate transition costs. - Final labor market prescription: - Recent innovative labor market initiative needs supporting reforms to lower unemployment permanently. - Integrate all labor contracts into a single one and eliminate legal uncertainty. - Strengthen employment services and complement them with capping and phasing of unemployment benefits, strict enforcement of benefit duration limits, and sanctions for noncompliance with job search requirements. - Future minimum wage increases should be restricted to underlying consumer price inflation to price low-skilled workers back into the labor market. *Source: _cr05399 (selected excerpts).* ### 42. The financial system has been performing well, while reforms to improve its ### _cr05399 - 42. The financial system has been performing well, while reforms to improve its ### Financial system: performance, risks, and reform priorities - Findings: - "The financial system has been performing well." - Supervisory authorities are focused on: - "the financial sector’s provisioning behavior," - "the adoption of new accounting standards," - "the rising exposure to residential real estate." - "The end to the prohibition to remunerate sight deposits and the planned creation of the postal bank will promote competition." - Policy recommendations / reform priorities: - "Long-standing administered savings schemes should be eliminated, given that their objectives are no longer relevant." - Reforms to improve efficiency "should be complemented by the phasing out of remaining administered savings and loan schemes." - "As planned, mortgage markets should be further developed by reducing transaction costs and facilitating home equity withdrawal." ### Trade policy and development contribution - Findings: - "In the trade area, France should promote a successful completion of the Doha round and support comprehensive liberalization of agricultural markets, in particular of market access." - "France’s contribution to development through its relatively high and steadily increasing level of ODA is commendable, as is its intention to reach the UN target by 2012." - Policy recommendations: - "In this context, rapid progress with the implementation of the CAP reform would be helpful." - "It should avoid recourse to protectionist measures." *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05399.pdf* ### 44. It is proposed that the next Article IV Consultation ### _cr05399 - 44. It is proposed that the next Article IV Consultation ### Article IV Consultation scheduling - It is proposed that the next Article IV Consultation take place on the standard 12-month cycle. - The last Article IV consultation was concluded at October 20, 2004. France is on the standard 12-month consultation cycle. ### Macroeconomic projections and main indicators (selected) - GDP growth (annual percentage change, constant prices): 2001: 2.1; 2002: 1.3; 2003: 0.9; 2004: 2.0; 2005: 1.5; 2006: 1.8; 2007: 2.6; 2008: 2.4; 2009: 2.3; 2010: 2.3. - Private consumption (constant prices): 2001: 2.4; 2002: 2.4; 2003: 1.6; 2004: 2.3; 2005: 1.9; 2006: 2.1; 2007: 2.6; 2008: 2.4; 2009: 2.3; 2010: 2.3. - Public consumption (constant prices): 2001: 1.9; 2002: 2.9; 2003: 2.1; 2004: 2.7; 2005: 1.5; 2006: 2.1; 2007: 2.1; 2008: 2.1; 2009: 2.1; 2010: 2.1. - Gross fixed investment (constant prices): 2001: 2.3; 2002: -1.7; 2003: 2.7; 2004: 2.1; 2005: 2.9; 2006: 2.7; 2007: 2.7; 2008: 2.7; 2009: 2.7; 2010: 2.7. - Business investment: 2001: 3.4; 2002: -3.0; 2003: 0.8; 2004: 1.4; 2005: 3.0; 2006: 3.4; 2007: 3.6; 2008: 3.6; 2009: 3.6; 2010: 3.6. - Residential investment: 2001: 1.4; 2002: 1.3; 2003: 3.8; 2004: 3.2; 2005: 2.9; 2006: 1.9; 2007: 1.2; 2008: 1.1; 2009: 1.1; 2010: 1.1. - Exports of goods and NFS (constant prices): 2001: 2.6; 2002: 1.5; 2003: -1.7; 2004: 2.0; 2005: 2.1; 2006: 6.2; 2007: 7.9; 2008: 6.8; 2009: 6.6; 2010: 6.3. - Imports of goods and NFS (constant prices): 2001: 2.5; 2002: 1.5; 2003: 1.3; 2004: 6.1; 2005: 5.2; 2006: 6.6; 2007: 7.2; 2008: 6.5; 2009: 6.5; 2010: 6.4. - GDP deflator (annual percentage change): 2001: 1.8; 2002: 2.2; 2003: 1.4; 2004: 1.6; 2005: 1.3; 2006: 1.7; 2007: 1.8; 2008: 1.7; 2009: 1.7; 2010: 1.7. - Consumer prices (average, harmonized CPI): 2001: 1.8; 2002: 1.9; 2003: 2.2; 2004: 2.3; 2005: 1.9; 2006: 1.8; 2007: 1.8; 2008: 1.7; 2009: 1.7; 2010: 1.7. - Employment and labor market: - Employment (annual percentage change): 2001: 1.7; 2002: 0.7; 2003: -0.1; 2004: -0.1; 2005: 0.3; 2006: 0.5; 2007: 0.9; 2008: 0.7; 2009: 0.5; 2010: 0.4. - Unemployment (percent of labor force, harmonized index): 2001: 8.4; 2002: 8.9; 2003: 9.5; 2004: 9.7; 2005: 9.8; 2006: 9.6; 2007: 8.9; 2008: 8.2; 2009: 7.6; 2010: 7.0. - Productivity (GDP over total employment): 2001: 0.3; 2002: 0.6; 2003: 1.0; 2004: 2.1; 2005: 1.2; 2006: 1.2; 2007: 1.7; 2008: 1.7; 2009: 1.8; 2010: 1.8. - Output gap (percent of potential GDP): 2001: 1.0; 2002: 0.0; 2003: -1.5; 2004: -1.4; 2005: -2.0; 2006: -2.1; 2007: -1.4; 2008: -0.9; 2009: -0.4; 2010: 0.0. - Personal sector: - Real disposable income (annual percentage change): 2001: 3.3; 2002: 3.6; 2003: 0.6; 2004: 1.6; 2005: 1.8; 2006: 2.0; 2007: 2.6; 2008: 2.5; 2009: 2.3; 2010: 2.2. - Savings ratio (percent of household disposable income): 2001: 15.8; 2002: 16.9; 2003: 16.0; 2004: 15.4; 2005: 15.7; 2006: 15.8; 2007: 15.8; 2008: 15.9; 2009: 15.9; 2010: 15.9. ### External sector and balance of payments (selected) - Trade balance (in billions of euros): 2001: 3.9; 2002: 8.0; 2003: 2.9; 2004: -6.3; 2005: -27.2; 2006: -31.4; 2007: -29.6; 2008: -28.8; 2009: -29.4; 2010: -30.7. - Trade balance (percent of GDP): 2001: 0.3; 2002: 0.5; 2003: 0.2; 2004: -0.4; 2005: -1.6; 2006: -1.8; 2007: -1.6; 2008: -1.5; 2009: -1.5; 2010: -1.5. - Current account (in billions of euros): 2001: 24.0; 2002: 15.4; 2003: 7.0; 2004: -6.8; 2005: -21.8; 2006: -25.6; 2007: -21.1; 2008: -18.7; 2009: -17.9; 2010: -17.7. - Current account (percent of GDP): 2001: 1.6; 2002: 1.0; 2003: 0.4; 2004: -0.4; 2005: -1.3; 2006: -1.5; 2007: -1.2; 2008: -1.0; 2009: -0.9; 2010: -0.9. - Terms of trade (annual percentage change): 2001: 0.6; 2002: 2.6; 2003: 0.4; 2004: 0.8; 2005: -1.8; 2006: -0.2; 2007: 0.3; 2008: 0.3; 2009: 0.2; 2010: 0.2. - Nominal effective exchange rate (index, Base 2000=100): 2000: 100.4; 2001: 101.7; 2002: 106.1; 2003: 107.6. - Real effective exchange rate (index, Base 2000=100): 2000: 97.6; 2001: 98.7; 2002: 102.6; 2003: 103.9. ### Public sector accounts and debt sustainability (selected) - Public sector revenue (percent of GDP): 2001: 50.1; 2002: 49.6; 2003: 49.5; 2004: 49.8; 2005: 51.4; 2006: 50.8; 2007: 50.8; 2008: 50.8; 2009: 50.8; 2010: 50.8. - Public sector expenditure (percent of GDP): 2001: 51.7; 2002: 52.8; 2003: 53.7; 2004: 53.5; 2005: 54.9; 2006: 54.7; 2007: 54.0; 2008: 53.3; 2009: 52.6; 2010: 52.0. - General government balance (percent of GDP): 2001: -1.6; 2002: -3.2; 2003: -4.2; 2004: -3.6; 2005: -3.5; 2006: -3.9; 2007: -3.2; 2008: -2.5; 2009: -1.8; 2010: -1.2. - Central Government balance: 2001: -2.4; 2002: -3.8; 2003: -3.9; 2004: -3.2; 2005: -3.1; 2006: -2.8; 2007: -2.2; 2008: -1.7; 2009: -1.2; 2010: -0.8. - Social Security balance: 2001: 0.4; 2002: -0.2; 2003: -0.6; 2004: -1.0; 2005: -0.6; 2006: -0.6; 2007: -0.3; 2008: -0.1; 2009: 0.1; 2010: 0.3. - Structural balance (percent of GDP): 2001: -2.1; 2002: -3.1; 2003: -3.4; 2004: -2.6; 2005: -2.6; 2006: -2.4; 2007: -2.2; 2008: -1.9; 2009: -1.6; 2010: -1.2. - Primary balance (percent of GDP): 2001: 1.5; 2002: -0.1; 2003: -1.2; 2004: -0.6; 2005: -0.5; 2006: -0.9; 2007: -0.1; 2008: 0.6; 2009: 1.3; 2010: 1.9. - Gross public debt (percent of GDP): 2001: 56.2; 2002: 58.2; 2003: 64.7; 2004: 66.3; 2005: 68.1; 2006: 68.1; 2007: 67.9; 2008: 67.1; 2009: 65.7; 2010: 65.7. - Public sector debt-stabilizing primary balance: 1 (table entry). - Baseline public sector debt profile (percent of GDP): 2000: 56.7; 2001: 56.2; 2002: 58.2; 2003: 62.8; 2004: 64.7; 2005: 66.3; 2006: 68.1; 2007: 68.1; 2008: 67.9; 2009: 67.1; 2010: 65.7. - Change in public sector debt (percent of GDP): 2000: -1.6; 2001: -0.5; 2002: 2.1; 2003: 4.6; 2004: 1.9; 2005: 1.6; 2006: 1.8; 2007: 0.0; 2008: -0.2; 2009: -0.8; 2010: -1.4. - Automatic debt dynamics contribution (percent of GDP): 2000: 0.1; 2001: 1.1; 2002: 1.2; 2003: 1.6; 2004: 0.8; 2005: 1.2; 2006: 0.7; 2007: 0.3; 2008: 0.4; 2009: 0.4; 2010: 0.5. - Contribution from real interest rate (percent): 2000: 2.3; 2001: 2.2; 2002: 1.9; 2003: 2.2; 2004: 2.0; 2005: 2.1; 2006: 1.9; 2007: 1.9; 2008: 1.9; 2009: 1.9; 2010: 2.0. - Contribution from real GDP growth (percent): 2000: -2.2; 2001: -1.1; 2002: -0.7; 2003: -0.5; 2004: -1.2; 2005: -0.9; 2006: -1.1; 2007: -1.7; 2008: -1.6; 2009: -1.5; 2010: -1.5. - Gross financing need (percent of GDP): 2000: 1.5; 2001: 1.5; 2002: 3.2; 2003: 4.2; 2004: 3.6; 2005: 3.5; 2006: 3.9; 2007: 3.2; 2008: 2.5; 2009: 1.8; 2010: 1.2. - Gross financing need (in billions of U.S. dollars): 2000: 19.5; 2001: 20.8; 2002: 46.4; 2003: 75.3; 2004: 74.7; 2005: 75.4; 2006: 85.5; 2007: 74.2; 2008: 60.5; 2009: 46.3; 2010: 32.3. ### Financial sector and vulnerability indicators (selected) - Public sector debt (Maastricht definition): 2000: 56.7; 2001: 56.2; 2002: 58.2; 2003: 62.8; 2004: 64.7. - Short-term market rates and spreads (selected, period indicated June unless noted): - 3-month T-bill yield: 2000: 4.9; 2001: 3.3; 2002: 2.9; 2003: 2.2; 2004: 2.2; 2005: 2.1 (June). - Spread of 3-month T-bill with the United States (percentage points, end-of-period): 2000: -0.9; 2001: 1.6; 2002: 1.7; 2003: 1.3; 2004: 0.0; 2005: -0.6 (June). - 5- to 8-year government bond: 2000: 5.1; 2001: 5.1; 2002: 4.4; 2003: 4.4; 2004: 3.7; 2005: 3.3 (June). - Real estate prices (index, 2000=100, period average): 2000: 100.0; 2001: 106.1; 2002: 118.7; 2003: 135.7; 2004: 156.7; 2005: 178.4 (June). - Credit growth (end-of-period 12-month growth rates, June): - Credit to the private sector: 2000: 9.6; 2001: 6.1; 2002: 4.0; 2003: 5.3; 2004: 8.3; 2005: 8.4. - Bank credit to households: 2000: 6.9; 2001: 6.1; 2002: 7.1; 2003: 7.8; 2004: 9.6; 2005: 9.9. - Mortgages: 2000: 7.1; 2001: 6.3; 2002: 8.0; 2003: 9.9; 2004: 13.6; 2005: 33.8. - Bank credit to nonfinancial enterprises: 2000: 10.7; 2001: 3.3; 2002: 2.8; 2003: -1.1; 2004: 6.0; 2005: 5.7. - Household sector indicators: - Household savings ratio: 2000: 15.1; 2001: 15.8; 2002: 16.9; 2003: 16.0; 2004: 15.4. - Household financial savings ratio: 2000: 7.2; 2001: 7.4; 2002: 8.5; 2003: 6.9; 2004: 6.0. - Real estate household solvency ratio (index, 2000=100): 2000: 100.0; 2001: 99.1; 2002: 101.9; 2003: 97.9; 2004: 89.4; 2005: 91.7 (June). - Banking sector indicators (selected): - Share of mortgage credit in bank credit to the private sector: 2000: 29.4; 2001: 29.4; 2002: 31.0; 2003: 32.8; 2004: 34.7; 2005: 35.2 (June). - Share of nonperforming loans in total loans: 2000: 5.0; 2001: 5.0; 2002: 5.0; 2003: 4.8; 2004: 4.2. - Ratio of nonperforming loans net of provisions to capital: 2000: 12.8; 2001: 12.6; 2002: 12.6; 2003: 11.6; 2004: 9.8. - Liquid assets to total short-term liabilities: 2000: 147.9; 2001: 138.5; 2002: 152.5; 2003: 157.0; 2004: 153.6; 2005: 155.2. - Return on assets (aggregated parent-company basis): 2000: 0.4; 2001: 0.5; 2002: 0.5; 2003: 0.5; 2004: 0.4; 2005: 0.4. - Return on equity (aggregated parent-company basis): 2000: 9.1; 2001: 9.7; 2002: 9.6; 2003: 9.1; 2004: 8.5; 2005: 10.6. - Core financial soundness indicators (selected, 1999-2004): - Regulatory capital to risk-weighted assets: 1999: 12.7; 2000: 11.9; 2001: 12.1; 2002: 11.5; 2003: 11.9; 2004: 11.5. - Nonperforming loans to total gross loans: 1999: 5.7; 2000: 5.0; 2001: 5.0; 2002: 5.0; 2003: 4.8; 2004: 4.2. - ROE (main groups consolidated basis): 1999: 11.8; 2000: 15.3; 2001: 10.8; 2002: 9.6; 2003: 10.0; 2004: 12.7. - Real estate prices (annual growth rate): 1999: 7.1; 2000: 8.8; 2001: 7.9; 2002: 8.3; 2003: 11.7; 2004: 15.3. ### Fiscal, statistical, and institutional notes (from appendices) - Fund relations and membership: - France joined the IMF December 27, 1945; Article VIII. - Quota: 10,738.50 SDR Million (100.00 percent of quota). - Fund holdings of currency: 7,846.30 (73.06 percent of quota); Reserve position in Fund: 2,892.52 (26.94 percent of quota). - Net cumulative SDR allocation: 1,079.87 SDR Million (100.00); Holdings: 589.99 (54.64). - Outstanding Purchases and Loans: None; Latest Financial Arrangements: None. - Projected payments to the Fund (SDR million): 2005: Charges/interest 6.39; 2006: 12.96; 2007: 12.96; 2008: 13.00; 2009: 12.96. Total row: 2005: 6.39; 2006: 12.96; 2007: 12.96; 2008: 13.00; 2009: 12.96. - Exchange rate arrangements and restrictions: - Since January 1, 1999, France has participated in Stage III of EMU. - Certain restrictions are maintained on payments and transfers for current international transactions with respect to specified countries and persons in accordance with EU regulations and UN Security Council resolutions; measures taken to freeze accounts of listed persons and entities linked to terrorists pursuant to relevant EU regulations and UN Security Council resolutions. - FSAP and ROSC participation and outputs (dates and documents listed, including Transparency in Monetary and Financial Policies 10/17/00; Fiscal Transparency Module 10/17/00; Data Module 10/29/03; Publication of FSAP—Detailed Assessment 06/08/05). - Statistical system assessment and data quality: - France’s economic database is comprehensive and of high quality; authorities regularly publish a full range of economic and financial data and provide calendar dates of main statistical releases. - France is a subscriber to the Special Data Dissemination Standard (SDDS) and posts metadata on the Fund’s DSBB. - Monetary and banking statistics methodology changed since 1999 to reflect EMU standards; banking and monetary statistics prepared monthly and timely. - France adopted ESA95 in 1999; data for GDP and expenditure components available from 1978 onwards. In 2005, national accounts data were rebased to 2000 prices; INSEE will publish the complete set with base 2000 starting in 1978. - Data gaps and recommendations: need to provide monthly or quarterly developments for finances of central government, social security, and local governments on a national accounts basis to facilitate monitoring; recommended greater coherence between external current account and rest of the world account in national accounts; work on transportation account showing promising early results. *Sources: Banque de France; INSEE; data provided by the authorities; IMF staff estimates; IMF staff calculations; Commission Bancaire; BIS; ECB (as presented in the source document).* ### APPENDIX II ### APPENDIX II: _cr05399 ### Summary - Recent short-term indicators are consistent with the mild recovery projected for the second half of 2005; oil prices remain a risk and have pushed up headline inflation. - Additional measures have brought the 2005 deficit target of 3 percent of GDP within reach. - Underlying adjustment in 2005 is now estimated to be 0.4 percentage point of GDP (previously assessed as unchanged). - Authorities project 2006 growth of 2¼ percent with central government spending constant and higher social security contributions to reduce the deficit to 2.9 percent of GDP. - Staff projects the deficit to increase to 3.3 percent of GDP in 2006, owing mainly to lower growth; corresponding structural adjustment is similar to the staff report (0.3 versus 0.2 percentage point of GDP). - Enterprises have begun to hire under the Contrat Nouvelles Embauches (CNE); impact on employment remains too early to assess. - Authorities seek to limit proposed EU concessions on agricultural tariffs and subsidies. ### Output and inflation - Authorities’ growth projection: rise from 1½–2 percent in 2005 to 2-2½ percent in 2006 (largely due to increasing exports). - Staff projections: 1.5 percent for 2005 and 1.8 percent for 2006 (same as October Consensus; for 2005, same as INSEE). - Recent indicators: - Consumers slightly more confident; increased spending on manufactured goods; high stocks persist. - Industrial production appears to be recovering; services to enterprises continue to grow. - Employment edging up; unemployment rate fell to just below 10 percent of the labor force. - Oil-driven headline inflation: 2.4 percent in September. - Staff adjusted projections: slightly higher average consumer price inflation in both 2005 and 2006; lowered GDP deflator in 2006 reflecting squeeze on profit margins. ### 2005 Budget (execution and outcomes) - 2005 budget deficit target: 3 percent of GDP — within reach. - Structural adjustment in 2005: 0.4 percentage point of GDP. - Contributing factors: - Revenues stronger in relation to income. - Credits equivalent to 1/4 of one percentage point of GDP cancelled. - Health care spending growth sharply reduced compared to 2004. - Income support to mitigate high oil prices: well targeted, limited fiscal consequences. - Strengthened fiscal incentives for energy conservation and refining investment. ### 2006 Budget (draft and measures) - Draft 2006 budget target: reduce deficit marginally to 2.9 percent of GDP; requires underlying adjustment of 0.5 percentage point of GDP to offset decline in one-off revenues. - Authorities’ growth assumption for 2006: 2¼ percent. - Text Table 1 (Impact of New Measures on 2006 Deficit, in percent of GDP) highlights: - 2005 Revenue: 50.8; Tax revenue: 43.9; Nontax revenue: 6.9; Expenditures: 53.9; Balance: -3.1. - Impacts summarized: Central government -0.2; Social security 0.1; Dynamism of tax base 0.2; Nontax revenue -0.5/0.2; Total impact -0.6/0.4; Resulting balances shown (sources: Projet de loi de finances 2006; IMF staff). - Key policy measures: - Expenditure: general government spending set to grow no more than 1.6 percent in real terms; central government spending constant in volume for fourth consecutive year; moving some spending to revenue side as negative items; civil servants to decline by 9,700 (5,300 in full-time equivalents). - Health care: target to reduce nominal health care spending growth from 3¾ percent in 2005 to 2½ percent in 2006 via measures including limits on reimbursements and coverage of copayments. - Revenues: taxes and social security contributions stable at about 44 percent of GDP; earned income tax credit (prime pour l’emploi) raised; temporary incentives for job-taking by welfare recipients and long-term unemployed; permanent exemption of new investment from taxe professionnelle for first two years and cap at 3.5 percent of value added; contributions raised to reduce social security deficit. - Windfalls: all revenue windfalls, except those related to higher oil prices, intended for deficit reduction; national committee established to allocate windfalls from higher oil prices. - Tax reform: no effect on 2006 cash budget; lowers revenues in 2007 by about 0.3 percentage point of GDP; reduces number of income brackets and simplifies rate structure; statutory marginal rates lowered but marginal effective tax rates largely unchanged due to elimination of a 20 percent across-the-board exemption. - Nontax revenue: maintained above-trend in 2006 through dividends by state-owned energy utilities, Banque de France, Caisse des dépôts, and a transfer of pension fund assets of the post office against equivalent future liabilities. ### Medium-term fiscal outlook (2007–09) - Authorities’ low-case scenario: - Growth: 2¼ percent per year. - Real general government spending growth: fall from 1.2 percent in 2007 to 0.6 percent by 2009. - Requires decline in real central government spending by 1 percentage point per year during 2007–09 and durable nominal health care spending growth of 2.4 percent per year. - Structural adjustment: 1.1 percentage points of GDP over three years. - Staff view (explicit measures only): - Real general government spending would continue to increase at about 1.4 percent per year. - Projected outcome: only marginal improvement in structural balance by 2009. - Authorities’ high-case scenario: - Growth: 3 percent per year. - Additional spending restraint (mainly local level) reduces real general government expenditure growth to 0.3 percent. - Structural adjustment: 2.1 percentage points of GDP over three years. - Staff assessment: achieving the high-case scenario would eliminate the structural deficit over the medium term; this requires identifying durable expenditure measures and leveraging civil servant retirements for efficiency gains. ### Key projections and fiscal numbers (selected figures preserved exactly as in source) - Staff growth projections: 2005 = 1.5 percent; 2006 = 1.8 percent. - Authorities’ growth projections: 2005 = 1½–2 percent; 2006 = 2-2½ percent; authorities count on 2¼ percent for 2006. - Headline inflation: 2.4 percent in September (2005). - 2005 budget deficit target: 3 percent of GDP; structural adjustment in 2005 = 0.4 percentage point of GDP. - 2006 draft budget deficit target: 2.9 percent of GDP; underlying adjustment required = 0.5 percentage point of GDP. - Text Table 2 (2004–09, in percent of GDP, authorities vs staff highlights): - Authorities’ Budget 2006: Overall balance -3.6 (2004), -3.0 (2005), -2.9 (2006), -2.7 (2007), -2.1 (2008), -1.4 (2009). - Staff projections (current policies): Overall balance -3.6 (2004), -3.1 (2005), -3.3 (2006), -3.3 (2007), -2.8 (2008), -2.4 (2009). - Structural balance (staff): -2.6 (2005), -2.2 (2006), -2.0 (2007), -2.3 (2008), -2.2 (2009), -2.1 (2010). - Authorities’ estimate/plans (excl. EDF soulte) structural improvement: ... , 0.4 (2005), 0.5 (2006), 0.1 (2007), 0.4 (2008), 0.6 (2009). - Selected 2001–10 macro indicators (Table 1 extracts, annual percentage changes unless otherwise indicated): - Real GDP growth: 2001=2.1; 2002=1.3; 2003=0.9; 2004=2.1; 2005=1.5; 2006=1.8; 2007=2.5; 2008=2.4; 2009=2.3; 2010=2.3. - CPI (average): 2001=1.8; 2002=1.9; 2003=2.2; 2004=2.3; 2005=2.1; 2006=1.9; 2007=1.7; 2008=1.7; 2009=1.7; 2010=1.7. - Unemployment rate (percent of labor force, harmonized): 2001=8.4; 2002=8.9; 2003=9.5; 2004=9.7; 2005=9.8; 2006=9.8; 2007=9.1; 2008=8.3; 2009=7.6; 2010=7.0. - General government balance (percent of GDP): 2001=-1.6; 2002=-3.2; 2003=-4.2; 2004=-3.6; 2005=-3.1; 2006=-3.3; 2007=-3.3; 2008=-2.8; 2009=-2.4; 2010=-2.0. - Gross debt (percent of GDP): 2001=56.2; 2002=58.2; 2003=62.8; 2004=64.7; 2005=66.1; 2006=66.9; 2007=67.3; 2008=67.3; 2009=66.9; 2010=66.3. - Trade balance (billions of euros): 2001=3.9; 2002=8.0; 2003=2.9; 2004=-6.3; 2005=-26.2; 2006=-30.1; 2007=-29.1; 2008=-28.3; 2009=-28.8; 2010=-30.0. - Current account (billions of euros): 2001=24.0; 2002=15.4; 2003=7.0; 2004=-6.8; 2005=-20.8; 2006=-24.2; 2007=-20.6; 2008=-18.3; 2009=-17.4; 2010=-17.2. ### Conclusion and policy recommendations - Execution of the 2005 budget likely delivers more fiscal adjustment than anticipated; fiscal discipline set to continue. - The 2006 draft budget falls short of staff recommendations: - Achieving the modest 2006 deficit reduction relies on higher-than-consensus growth, increased social security contributions, and further nontax revenue measures. - Underlying fiscal adjustment excluding one-offs is well below ½ of one percentage point of GDP and less than in 2005. - The tax reform improves efficiency but its attendant revenue loss (affecting 2007) precedes identification of specific expenditure cuts. - Income support for high oil prices is welcome; most income support measures should include sunset clauses to avoid permanent price distortions. - Medium-term recommendations: - Additional structural reforms and a considerable reduction in spending as a share of GDP (in line with authorities’ high-case scenario) are needed to address aging. - On current policies, staff projects structural balance to remain in deficit of about 2 percent of GDP over the medium term. - Implementation of the authorities’ low-case scenario would still leave a structural deficit and be insufficient for aging-related costs. - High-case scenario (sharp local spending curbs and central spending reduction) would eliminate structural deficit; requires early identification of durable expenditure measures. - Greater use of civil servant retirements to realize efficiency gains; current plans foresee a reduction in the number of civil servants equivalent to 15 percent of retirements (note: plan also states reduction by 9,700, 5,300 FTE in 2006). *Prepared by the European Department; Supplementary Information to the Staff Report for the 2005 Article IV Consultation with France (October 27, 2005).* ### 1.8 percent in 2006 as domestic demand and exports recover. The authorities foresee higher ### _cr05399 - 1.8 percent in 2006 as domestic demand and exports recover. The authorities foresee higher ### Economic outlook and inflation - Growth projections and outlook: - Authorities foresee growth in a range of 1.5 to 2 percent for 2005 followed by 2 to 2.5 percent in 2006. - Staff projects inflation to decline from an average of 2.1 percent in 2005 to 1.9 percent in 2006. - Reflecting adverse demographics, potential output growth is projected to fall to 1.9 percent from 2006 onward. - Near-term risks and drivers: - Growth likely to pick up from its trough earlier in 2005, driven by improvement in the external environment and return of domestic demand to a normal pace. - Downside risks: oil prices and trade partner weakness could keep export growth sluggish. - Importance of avoiding second-round effects from high oil prices on wages. ### Fiscal policy, targets, and structural balances - Budget targets and outcomes: - The 2006 draft budget targets a reduction in the general government deficit to 2.9 percent of GDP from 3.0 percent of GDP in 2005 and 3.6 percent of GDP in 2004. - Following a structural improvement of about 0.4 percentage point of GDP in 2005, the staff estimates the structural balance to improve by 0.3 percentage point of GDP in 2006. - For 2007–09, authorities present: - High-case scenario: cumulative structural fiscal adjustment over three years of 2.1 percent of GDP. - Low-case scenario: cumulative structural fiscal adjustment over three years of 1.1 percent of GDP. - Staff view: Taking into account known measures only, the staff sees no improvement in the structural deficit over this period. - Policy guidance and recommendations from Directors: - Urged authorities to sustain recent pace of fiscal consolidation in 2006 and beyond and to build further structural reform momentum. - Encouraged stepping up the pace of underlying adjustment in 2006 and avoiding recourse to one-off measures. - Suggested considering additional measures to ensure the underlying deficit falls by ½ of one percentage point of GDP in 2006. - Emphasized focusing fiscal consolidation squarely on expenditure restraint; cautioned against renewed increases in social security contributions. - Urged ambitions to reduce the share of public spending in GDP and to aim for structural budget balance before rising costs of aging set in at the end of the decade. - Supported planned tax reforms (permanent reform of the taxe professionnelle; reduction in marginal income tax rates and simplification of the rate structure) while warning revenue loss should not derail consolidation. - Recommended strengthening the framework for fiscal governance, welcomed the new objective-oriented budgeting framework for the central government (effective with the 2006 budget), and noted the value of involving local governments in consolidation plans. ### Labor market and structural reforms - Recent and planned measures: - New labor contract without firing restrictions introduced for small firms. - Social partners agreed on a special fixed-term contract for workers aged 57 or older to raise their employment rate. - Earned income tax credit (PPE) is being increased. - Relocation subsidies offered to those who accept work far from home. - Fiscal incentives increased for return of the long-term unemployed and for employment in personal services. - Public employment services and job search obligations strengthened. - Product market measures: accelerated divestiture from commercial activities; relaxation of margin regulations in the distribution sector. - Directors’ views and recommendations: - Strong support for recent labor market initiatives; regarded new labor contract for small enterprises, strengthened employment services, job search compliance, and PPE as helpful to lower unemployment. - Urged adoption of more flexible labor contracts throughout the entire labor market to secure durable and significant unemployment reduction. - Recommended restricting future minimum wage increases to underlying consumer price inflation to bring low-skilled workers back into employment. - Encouraged coordinated package of labor and product market reforms and exploiting synergies between structural reforms and fiscal adjustment, especially in labor market programs. - Noted ongoing civil servant retirements provide an opportunity for efficiency gains in civil service reform. ### Financial sector and market reforms - Reforms and developments: - New bankruptcy law enacted, improving creditor rights. - Prohibition to remunerate sight deposits lifted. - A postal bank is being created by separating mail activities. - Transaction costs in mortgage markets are set to be reduced. - Bank profitability increased and nonperforming loans declined. - Supervisors urged banks to improve internal control systems and closely watch exposure to mortgage risk, especially in light of possible increases in interest rates. - Directors’ views: - Observed financial system performing well; supervisors appropriately focused on provisioning behavior, adoption of new accounting standards, and rising exposure to the residential housing market. - Most Directors welcomed the postal bank and end to prohibition to remunerate sight deposits to promote competition. - Encouraged phasing out remaining administrative interventions in the financial system to improve overall efficiency. ### External sector and trade policy - External balances and risks: - Export growth could remain sluggish due to trade partner weakness and oil price effects, underscoring need for structural reforms to contain labor costs and preserve competitiveness. - Trade policy recommendation: - Directors urged France to show flexibility necessary to contribute to a successful conclusion of the Doha round, with particular emphasis on greater liberalization of the agricultural sector. ### Key statistics and selected indicators (as presented) - Real economy (annual percentage change): - Real GDP: 2001: 2.1 2002: 1.3 2003: 0.9 2004: 2.1 2005: 1.5 - Domestic demand: 2001: 2.0 2002: 1.3 2003: 1.8 2004: 3.2 2005: 2.4 - CPI (year average): 2001: 1.8 2002: 1.9 2003: 2.2 2004: 2.3 2005: 2.1 - Unemployment rate (in percent): 2001: 8.4 2002: 8.9 2003: 9.5 2004: 9.7 2005: 9.8 - Gross national savings (percent of GDP): 2001: 21.7 2002: 20.0 2003: 19.5 2004: 19.2 2005: 19.0 - Gross domestic investment (percent of GDP): 2001: 20.1 2002: 19.0 2003: 19.1 2004: 19.6 2005: 20.2 - Public finance (percent of GDP): - Central government balance: 2001: -2.4 2002: -3.8 2003: -3.9 2004: -3.2 2005: -3.4 - General government balance: 2001: -1.6 2002: -3.2 2003: -4.2 2004: -3.6 2005: -3.1 - General government gross debt: 2001: 56.1 2002: 58.1 2003: 62.7 2004: 64.8 2005: 66.2 - Money and interest rates: - Money market rate (in percent): 2001: 4.3 2002: 3.3 2003: 2.3 2004: 2.1 2005: 2.1 - Government bond yield (in percent): 2001: 5.0 2002: 4.9 2003: 4.2 2004: 4.1 2005: 3.3 - Balance of payments (percent of GDP): - Trade balance: 2001: 0.3 2002: 0.5 2003: 0.2 2004: -0.4 2005: -1.5 - Current account: 2001: 1.6 2002: 1.0 2003: 0.4 2004: -0.4 2005: -1.2 - Official reserves (US$ billion, end-of-period): 2001: 31.7 2002: 28.4 2003: 30.2 2004: 32.5 2005: ... - Fund position (as of August 31, 2005): - Holdings of currency (percent of quota): 73.9 - Holdings of SDRs (percent of allocation): 55.8 - Quota (SDRs million): 10,738.5 - Exchange rates: - Exchange rate regime: Participant in EMU - Euro per U.S. dollar (October 19, 2005): 1.20 - Nominal effective rate (2000=100): 2001: 100.4 2002: 101.7 2003: 106.2 2004: 107.6 2005: 107.5 - Real effective exchange rate (2000=100): 2001: 98.7 2002: 99.8 2003: 103.5 2004: 104.4 2005: 102.8 *Public Information Notice summarizing the views of the Executive Board based on the staff report.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05399.pdf_