## _cr0875 ## Source details **Canonical URL:** [_cr0875](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0875.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0875.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0875.pdf.json) --- ### Near-term outlook and key macro forecasts - Staff forecasts GDP growth of 1.6 percent in 2008, with a recovery in 2009. - Staff baseline for medium-term trend growth is just under 2.2 percent annually; the authorities’ baseline is 2.1 percent. - Staff projects 1 percent total factor productivity growth annually in the medium term. - Fiscal deficit is forecast to widen temporarily to 2.7 percent of GDP in 2008. - For 2007, growth is expected to be 1.9 percent, down from 2.0 percent in 2006. - Current account balance: surplus of 1.4 percent of GDP in 2002 deteriorating to a projected deficit of 2.0 percent of GDP in 2007. - Exports to GDP: ratio has risen by 2 percentage points versus a surge in import penetration of 5.1 percentage points of GDP. - Core inflation remains low at 1.7 percent; headline inflation rose to 2.8 percent in December (following a fall to 1.2 percent annual rate in August 2006/2007). - (EU harmonized) unemployment rate has fallen to 7.9 percent (decline of 1 point over the past year); youth unemployment near 20 percent. - Employment creation remains under 1 percent per year. - French labor costs rose 3.2 percent in the year to Q3 2007 (versus 2.5 percent for the euro area). - Monetary conditions have tightened since 2006 (MCI moved sharply upward since early 2006). - Lending survey through October: only 10 percent of French banks reported tightening conditions, versus 30 percent for the euro area as a whole. ### Risks to the near-term outlook - Downside risks identified: - Persistent tightening of financing conditions. - 10 percent euro appreciation. - 1 percent drop in foreign demand. - A US recession and a disorderly unwinding of global imbalances. - Depth and persistence of financial market turmoil and its effects on other advanced economies. - Upside risk identified: - Boost in domestic confidence reflecting steady progress in reform agenda. - Overall assessment: downside risks predominate. ### Sources of weakness and transmission channels - France is highly sensitive to global common shocks, especially U.S.-origin demand shocks, and adjusts more via employment and productivity than wages and prices. - Export performance has lagged: real export growth underperformed the euro area since 2003; market shares fell worldwide and within the EU. - Competitiveness indicators: - Real effective exchange rate has risen by 4½ to 12 percent since 2002 depending on deflator. - CGER-based estimates place France’s competitiveness gap in a range of 1 to 9 percent. - Within the euro area, competitiveness deteriorated against Germany but improved against other countries. - Structural constraints: high wage increases, supply constraints, and insufficient flexibility in responding to changing global demand. - Sectoral concentration of export weakness in automobiles and small firms; strengthening export capacity of SMEs and increasing R&D investment are major levers. ### Fiscal stance, projections, and policy differences - 2008 budget: entails no underlying adjustment (due to tax cuts); fiscal balance deferred to 2012 per authorities. - Staff view: - Postponement of the medium-term objective erodes credibility. - Critical of tax exemption of overtime as a second-best response. - Advocates return to an ambitious fiscal adjustment path going forward. - Authorities’ view: - See tax cuts as fulfilling campaign pledges and paving the way for broader reform efforts; conducting tax and spending reviews. - Staff fiscal projections and key figures (selected): - Tax revenue: 44.2 (2006), 44.0 (2007), 43.7 (2008); series through 2012 at 43.4. - Real spending growth (percent): staff 2.1 (2006), 2.0 (2007), 1.6 (2008); authorities 2.1 (2006), 2.0 (2007), 1.4 (2008). - Overall balance (percent of GDP): staff -2.5 (2006), -2.4 (2007), -2.7 (2008); authorities -2.5 (2006), -2.4 (2007), -2.3 (2008). - Structural balance (percent of GDP): staff -1.9 (2006), -1.6 (2007), -1.7 (2008); authorities -2.5 (2006), -2.2 (2007), -2.1 (2008). - Structural change (percent): staff 0.8 (2006), 0.3 (2007), -0.1 (2008); authorities 0.8 (2006), 0.3 (2007), 0.1 (2008). - Gross debt (percent of GDP): staff 64.2 (2006), 64.1 (2007), 64.6 (2008); authorities 64.2 (2006), 64.2 (2007), 64.0 (2008). - Real GDP growth assumption (staff) 2.0 (2006), 1.9 (2007), 1.6 (2008); (authorities) 2.0 (2006), 2.3 (2007), 2.3 (2008). - Staff expects structural balance deterioration of ¼ percent of GDP and overall deficit to reach 2.7 percent of GDP in 2008. - Memorandum: each 0.2 percentage point in lower growth increases the deficit by roughly 0.1 percent of GDP; if growth fell to 1 percent in 2008 (a 20 percent probability by staff’s estimate), the deficit could breach the Maastricht limit absent corrective action. ### Structural reform agenda and policy priorities - Authorities’ program: comprehensive structural reforms to generate higher growth, raise employment, and increase purchasing power; labor market reform central (“work more to earn more”). - Staff emphasis: - Need for ambitious, supply-side focused reforms addressing core deficiencies. - A “critical mass” of simultaneous reforms can exploit synergies and generate faster and larger payoffs. - Labor market rigidities and constraints on competition in services markets should be central. - Points of divergence: - Staff cautioned that emphasis on raising “purchasing power” and demand-side measures could obscure supply-potential weaknesses. - Labor market shortcomings and reforms: - Shortcomings: burdensome hiring/firing/working-hours rules, judicial involvement in labor relations, inefficiencies in job placement and unemployment compensation, high SMIC, and one of the highest tax wedges on employment in the OECD. - Reforms and measures: increased trial period, project-linked employment contracts, incentives for amicable separation, merger of unemployment and job placement agencies, review mechanism for SMIC, consideration of a U.K.-style “low pay commission”. - 35-hour workweek measures: elimination of taxes and social charges on overtime (budget cost about 0.3 percent of GDP); proposals for company-level majority agreements in exchange for wage increases. - Goods and services market reforms and competition policy: - Priorities: retail distribution reform, preparatory work for EU Services Directive, freeing wholesale margins, easing retail entry barriers, reforming regulated activities and professions. - Staff recommended a unified, independent, and reinforced competition authority with public advocacy mandate; authorities agreed on greater advocacy but questioned institutional change necessity. ### Financial sector resilience and reform opportunities - Financial turbulence to date: direct domestic impact limited; French banks generally well-capitalized; exposure to U.S. subprime market appears limited; households much less indebted than U.K. or U.S. counterparts; share of variable rate mortgages is low. - Société Générale episode: - SG reported a rogue dealing fraud costing €4.9 billion; also reported U.S. residential mortgage and monoline related write-downs of €2.1 billion (revised to €2.6 billion on February 11). - SG launched a rights issue to raise €5.5 billion. - Authorities concluded the fraud was isolated but revealed internal-control failures. - System-wide assessment: - Credit default swap spreads have risen, but less than for some other major European banks. - Banks’ profitability and exposure may worsen if monoline insurers’ situation deteriorates or turmoil persists. - Policy recommendations for financial sector: - Strengthen internal controls, operational risk management, and detection of internal fraud. - Improve crisis management communication and coordination among regulators. - Modernize the financial sector via the “Paris-Place Financière” initiative and phase out administered schemes. - Consider ending the monopoly on Livret A distribution to enhance banking efficiency and market competition. - Continue vigilance given market conditions have yet to return to normal. ### Fiscal policy recommendations and scenarios - Short-term: be vigilant to slippage risk in 2008; take early corrective action if growth weakens to prevent deficit approaching Maastricht limit. - Medium-term: from 2009 adopt a structural adjustment path of ¾ percentage points of GDP per year to bring fiscal accounts close-to-balance by 2010 and bolster credibility of medium-term objective. - Fiscal process: welcome ongoing expenditure and tax policy reviews but temper expectations on immediacy of results; base 2009–10 consolidation on tight spending plans and avoid further tax reductions. ### Selected projections and indicators (extracts from tables and staff projections) - Real GDP growth (selected): 2006 2.0; 2007 1.9; 2008 staff 1.6; 2008 Board/PIN 1.5; 2009 2.2. - Public finances (selected): general government deficit (percent of GDP) staff -2.5 (2006), -2.4 (2007), -2.7 (2008); authorities -2.5 (2006), -2.4 (2007), -2.3 (2008). - Gross debt (percent of GDP, Table 1): 2006 64.2; 2007 64.1; 2008 64.6 (staff projection); 2008 64.7 (alternate table). - Trade and current account (selected): trade balance (percent of GDP) 2007 -2.1 (Table 1 series) / -2.0 (other table); current account (percent of GDP) 2007 -2.0 (earlier series) / -1.3 (other table); staff projects current account deterioration into 2008. - Monetary and financial indicators (selected): 3-month T-bill yield (end-of-period): 4.7 (2007, October); public sector debt (Maastricht): 65.3 (2007). ### Comparative and historical lessons - Box 3 (Canada’s experience) highlights that combining fiscal consolidation and structural reform—transparent budgeting, expenditure review, civil service cuts, privatization, deregulation, pension and employment insurance reform—can restore fiscal balance and raise growth; Canada achieved surplus in 1998 and highest job creation and output growth among G7 between 1997 and 2006. *Source: Executive Summary and selected excerpts, IMF staff report _cr0875.* ### Executive Summary ### _cr0875 - Executive Summary ### Near-term outlook and key macro forecasts - Staff forecasts GDP growth of 1.6 percent in 2008, with a recovery in 2009. - Staff baseline for medium-term trend growth is just under 2.2 percent annually; the authorities’ baseline is 2.1 percent. - Staff projects 1 percent total factor productivity growth annually in the medium term. - Fiscal deficit is forecast to widen temporarily to 2.7 percent of GDP in 2008. - For 2007, growth is expected to be 1.9 percent, down from 2.0 percent in 2006. - Current account balance: surplus of 1.4 percent of GDP in 2002 deteriorating to a projected deficit of 2.0 percent of GDP in 2007. - Exports to GDP: ratio has risen by 2 percentage points versus a surge in import penetration of 5.1 percentage points of GDP. - Inflation: - Core inflation remains low at 1.7 percent. - Headline inflation rose to 2.8 percent in December (following a fall to 1.2 percent annual rate in August 2006/2007). - Labor market and employment: - (EU harmonized) unemployment rate has fallen to 7.9 percent (decline of 1 point over the past year). - Unemployment particularly acute among younger workers (near 20 percent). - Employment creation remains under 1 percent per year. - Growth of the minimum wage (SMIC) has sharply outstripped general wages and productivity. - Labor costs and productivity: - French labor costs rose 3.2 percent in the year to Q3 2007 (versus 2.5 percent for the euro area). - Monetary and financial conditions: - Monetary conditions have tightened since 2006 (MCI moved sharply upward since early 2006). - Lending survey through October: only 10 percent of French banks reported tightening conditions, versus 30 percent for the euro area as a whole. ### Risks to the near-term outlook (as identified by staff) - Persistent tightening of financing conditions. - 10 percent euro appreciation. - 1 percent drop in foreign demand. - Boost in domestic confidence reflecting steady progress in reform agenda (upside). - A US recession and a disorderly unwinding of global imbalances. - Overall downside risks predominate, notably the depth and persistence of financial market turmoil and its effects on other advanced economies. ### Sources of weakness and transmission channels - France’s economy is highly sensitive to global common shocks (especially demand shocks originating from the U.S.) and reacts more through changes in employment and productivity than through wage and price flexibility. - Export performance has lagged: real export growth has underperformed the euro area since 2003, with market shares falling worldwide and within the EU. - Competitiveness: - Real effective exchange rate has risen by 4½ to 12 percent since 2002 depending on the deflator used. - CGER-based estimates place France’s competitiveness gap in a range of 1 to 9 percent. - Within the euro area, competitiveness deteriorated against Germany but improved against other countries. - Broader structural constraints include high wage increases, supply constraints, and insufficient flexibility in responding to changing global demand. - Sectoral specialization and firm-size issues: export weakness concentrated in automobiles and small firms; strengthening export capacity of SMEs and increasing R&D investment seen as major levers. ### Fiscal stance, policy differences, and fiscal projections - 2008 budget: entails no underlying adjustment (due to tax cuts); fiscal balance deferred to 2012. - Staff view: - Postponement of the medium-term objective erodes credibility. - Critical of some measures, notably the tax exemption of overtime (described as a second-best response to the original distortion of the mandatory workweek reduction). - Advocates a return to an ambitious fiscal adjustment path going forward. - Authorities’ view: - See tax cuts as fulfilling campaign pledges and paving the way for broader reform efforts. - Conducting potentially far-reaching tax and spending reviews. - Staff estimates that incentive effects of reduced taxation on overtime and other measures of the 2007-08 fiscal package might marginally boost growth, but simultaneous and more far-reaching reforms could boost long-run GDP much more—up to 10 percentage points over 10 years. ### Structural reform agenda and policy priorities - Authorities’ program centered on comprehensive structural reforms to generate higher growth, raise employment, and increase purchasing power; labor market reform is central with the slogan “work more to earn more.” - Staff emphasis: - Need for ambitious, supply-side focused reforms to address core deficiencies. - A “critical mass” of structural reforms is most apt to exploit synergies and generate faster and larger payoffs. - Labor market rigidities and pervasive constraints on competition in services markets should be at the center of the reform agenda. - Points of divergence: - Staff and authorities differ on the importance assigned to raising “purchasing power” and the demand-side orientation of some government measures. ### Financial sector resilience and reform opportunities - Financial turbulence to date: - Direct impact on the domestic economy has been limited. - Bank losses to date imply manageable effects; exposure to the U.S. subprime market appears limited. - Credit default swap spreads have risen, but less than for some other major European banks. - French banks generally well-capitalized; no domestic subprime market as such. - French households are much less indebted than U.K. or U.S. counterparts; share of variable rate mortgages is low. - Nonetheless, global market conditions have yet to return to normal and risks of a deeper fallout remain. - Authorities’ initiatives: - Launched a “Paris-Place Financière” initiative to modernize France’s financial system and boost its contribution to growth. - Supportive of efforts to strengthen the EU’s cross-border crisis management framework. *Source: Executive Summary, IMF staff report _cr0875.* ### 13. The move to a more forceful reform stance raises several political economy ### _cr0875 - 13. The move to a more forceful reform stance raises several political economy ### Political economy of simultaneous reforms - Authorities opted for simultaneous reforms across a wide range of areas, breaking with the incrementalist approach of the past; staff supported this strategy, noting important synergies in contemporaneous action. - Properly calibrated, simultaneous reforms—addressing rents in several areas—could help attenuate political opposition of special interests and create a “critical mass” yielding faster and larger payoffs in growth, employment, productivity, and lower prices for consumers. - Authorities justified early tax reduction measures to fulfill campaign pledges and provide early tangible benefits to pave the way for longer-term reforms; these measures also addressed electorate concerns about stagnant or declining real incomes (pouvoir d’achat). - Staff assessment contrasts with authorities on purchasing power: staff’s reading suggests French incomes have risen more than in other euro area countries (see Box 1) and cautioned that emphasis on purchasing power could obscure supply-potential weaknesses and raise unmet expectations. - Staff viewed fiscal adjustment and structural reforms as complementary and considered the decision to pause fiscal consolidation in 2008 ill-advised. ### Box 1 — Pouvoir d’Achat: Perception and Reality (key findings) - Public perception: French consumers rank eroding purchasing power as their greatest economic concern, above unemployment. - National accounts data: over the past seven years, real disposable household income increased in France faster (18 percent) than in the euro area (11 percent). - Possible reasons for disparity between perception and national accounts: - Income per head has increased less than the aggregate due to population growth (0.6 percent). - Real wages per hour have risen, but real wage incomes have stagnated since the 1980s largely due to a decline in paid hours worked. - Perceived inflation has been persistently higher than measured inflation since early 2001; highly visible price increases (e.g for food) may disproportionately affect perceptions. - Strong increases in rents, which are weighted less in the consumer price index (6.1 percent) than in the national accounts (18.6 percent weight in private consumption, including imputed rents by owners). - A rising share of non-discretionary spending (housing, financial services, insurance); down payments on housing loans are savings in national accounts but seen by many households as reducing purchasing power. - Unequal distribution of income: income distribution data (available only through 2004) indicate real incomes for the lowest and highest deciles rose between 2002-04, but most other deciles were stagnant or declining, producing a middle class “squeeze.” - Additional notes: INSEE tasked with elaborating new purchasing power data; Stiglitz and Sten asked to consider including “quality of life” factors in measuring growth. ### Freeing the labor market — main shortcomings and reforms - Consensus: labor market rigidities are probably the single most significant barrier to higher economic growth and employment; France’s already low labor input declined further, reflecting both high unemployment and lower working hours among the employed. - Main shortcomings identified: - (i) Burdensome legal restrictions on hiring, firing, working hours, and functional mobility under permanent contracts, generating an “insider-outsider” divide. - (ii) Pervasive judicial involvement in labor relations. - (iii) Inefficiencies and lack of coordination among public job placement and unemployment compensation agencies. - (iv) A high minimum wage (SMIC). - (v) One of the highest tax wedges on employment in the OECD. - Recent labor contract reforms and initiatives: - Social partners concluded a 4-month negotiation on labor contract reform: increase in trial period, new project-linked employment contract, incentives to end permanent contracts through amicable separation; dismissed workers retain rights to complementary health insurance, training, and unemployment benefits reflecting contributions while employed. - Staff cautioned that marginal reforms may increase turnover and only modestly affect job creation, with potential welfare harms. - Government initiatives: review mechanism for setting the SMIC; merger of unemployment and job placement agencies to promote “return-to-work” orientation; measures to impart greater flexibility to the 35-hour workweek arrangement. - To correct SMIC-related distortions, the government omitted the habitual discretionary increase of the SMIC in 2007 (“coup de pouce”), limiting adjustment to the indexation formula. - Authorities consider a U.K.-style “low pay commission” to provide technical input and de-politicize decisions. - 35-hour workweek measures: - Elimination of taxes and social charges on overtime work; uncertain estimates suggest the measure would create relatively few new jobs, at a budget cost of about 0.3 percent of GDP. - President proposed other possibilities to ease the workweek limit, including majority agreements in individual companies in exchange for wage increases; reception mixed due to administrative complexity for smaller firms. ### Goods and services markets — raising competition and consumer welfare - Agreement that further goods and services market reforms could significantly boost potential output, competitiveness, and consumer welfare; studies show sizeable benefits. - Authorities prioritized early reforms in retail distribution and preparatory work for implementation of the EU Services Directive; action need not await the Directive’s timetable. - Promising reform areas (Box 2 highlights): - Supplier-retailer relations: reforms to loi Galland and freeing wholesale margins to pass savings to consumers. - Retail space and openings: legal entry barriers have reduced new establishment of large retail shops, hotels, and restaurants by almost 60 percent and limited “maxi-discounters” share to 13 percent in France versus 30 percent in Germany; authorities intend to ease regulations on retail opening hours and sales periods. - Regulated activities and professions: entry barriers (training requirements, licenses, establishment restrictions) limit supply of services and create rents; significant scope for reforms recognized by earlier reports (e.g., Camdessus; Cahuc and Kramarz) including lists of 75 regulated activities and 28 regulated liberal professions. - Competition policy institutional reform: - Staff advocated a unified, independent, and reinforced competition authority, modifying dualistic setup (split between Conseil de la Concurrence and a Directorate at the Ministry of Economy and Finance) and removing merger control responsibility from the ministry. - Authorities agreed on scope for greater public advocacy of competition but doubted that the institutional arrangement had compromised policy effectiveness, citing favorable ratings and questioning superiority of a unified authority. ### Achieving Fiscal Sustainability — fiscal position and objectives - Past adjustment and 2007 outcome: - Between 2003 and 2006, the structural deficit fell by over 1½ percentage points of GDP, bringing the overall deficit to 2½ percent of GDP in 2006. - Higher revenues contributed most to the adjustment; share of general government outlays to GDP remained broadly unchanged. - Strong growth of social security and local government spending largely offset central government expenditure control; slippages in health and pension-related spending continued into 2007. - General government deficit estimated broadly unchanged in 2007 (at 2.4 percent of GDP), implying an underlying adjustment of only ¼ percentage point of GDP—half the SGP-recommended pace for countries and distant from medium-term objectives. - 2008 fiscal plans and components: - Real general government spending growth limited to 1.4 percent, producing a 0.6 percentage point decline in the expenditure-to-GDP ratio (to 52.6 percent of GDP). - Budget includes an unprecedented reduction in public employment (by 23,000); improved coverage of central government expenditure norm; limits on transfers to local authorities; increased precautionary reserves; and containment measures for health care co-responsibility and discouraging early retirement. - Cost of the tax package: ½ percent of GDP (including tax exemption for overtime hours and tax credits for mortgage interest); staff viewed mortgage-interest tax credits critically due to demand-side orientation and likely little impact on home ownership or economic growth. - 2008 budget includes a reformed research tax credit. - Authorities project general government deficit of 2.3 percent of GDP (based on GDP growth of 2¼ percent), with an essentially unchanged structural balance and a marginal reduction in public debt ratio (to 64 percent of GDP). - Risks and staff projections: - Budget subject to slippage risks: optimistic macroeconomic and revenue assumptions, social security overruns (notably in health care), and uncertain efficiency gains in central government outlays. - Staff expects a structural balance deterioration of ¼ percent of GDP and the overall deficit to reach 2.7 percent of GDP in 2008, close to the Maastricht limit. - Text Table highlights (selected figures, staff projection baseline and authorities' budget plan): - Tax revenue: 44.2 (2006), 44.0 (2007), 43.7 (2008) ... (staff and authorities show same tax revenue series through 2012 at 43.4). - Real spending growth (in percent): staff projection 2.1 (2006), 2.0 (2007), 1.6 (2008); authorities' plan 2.1 (2006), 2.0 (2007), 1.4 (2008). - Overall balance (percent of GDP): staff -2.5 (2006), -2.4 (2007), -2.7 (2008); authorities -2.5 (2006), -2.4 (2007), -2.3 (2008). - Structural balance (percent of GDP): staff -1.9 (2006), -1.6 (2007), -1.7 (2008); authorities -2.5 (2006), -2.2 (2007), -2.1 (2008). - Structural change (in percent): staff 0.8 (2006), 0.3 (2007), -0.1 (2008); authorities 0.8 (2006), 0.3 (2007), 0.1 (2008). - Gross debt (percent of GDP): staff 64.2 (2006), 64.1 (2007), 64.6 (2008); authorities 64.2 (2006), 64.2 (2007), 64.0 (2008). - Real GDP growth assumption (staff) 2.0 (2006), 1.9 (2007), 1.6 (2008); (authorities) 2.0 (2006), 2.3 (2007), 2.3 (2008). - Memorandum: staff notes that each 0.2 percentage point in lower growth increases the deficit by roughly 0.1 percent of GDP; if growth fell to 1 percent in 2008 (a 20 percent probability by staff’s estimate), the deficit could breach the Maastricht limit absent corrective action. - Divergent views on 2008 fiscal pause: - Authorities considered 2008 budget to contain positive pro-growth measures and other underestimated effects, and viewed goodwill generation for future reforms as important. - Staff argued that fiscal consolidation and structural reforms are complementary, urged restoring fiscal consolidation as a national priority, and cited evidence that contemporaneous consolidation and reforms can generate virtuous cycles of competitiveness, higher growth, and healthier public finances. *Italic: Source — _cr0875 - 13. The move to a more forceful reform stance raises several political economy* ### Box 3. Canada’s Experience: Combining Fiscal Consolidation and Structural Reform ### Box 3. Canada’s Experience: Combining Fiscal Consolidation and Structural Reform ### Background and objectives - Facing debilitating economic conditions in the 1980s and early 1990s, Canada experienced a marked deceleration in the growth of living standards and a chronic deterioration of public finances. - Slowing productivity and employment growth led to sub-par economic performance while lax public spending contributed to spiraling debt dynamics. - In 1994, the government launched a bold economic reform to strengthen macroeconomic performance by cutting government deficits, rebalancing the policy mix (with lesser reliance on monetary tightening), and establishing conditions to heighten competition and boost job creation. - A key priority was to eliminate the federal government deficit of over 5 percentage points of GDP. ### Fiscal governance and consolidation measures - Retooling of the budget process to incorporate a transparent budget forecasting framework, including a contingency reserve for debt reduction. - An expenditure review of all federal ministries to refocus the role of government and stress the cost effectiveness and efficiency of public services. - An ambitious state reform including: - a 20 percent cut in the federal civil service; - a reduced presence of the government in the economy through selective privatization, and contracting out; - broad deregulation. ### Structural reforms to raise flexibility and competitiveness - Reforms implemented to complement fiscal consolidation included: - reform of employment insurance and social assistance; - pension reform; - reduction of internal and external trade barriers; - deregulation of major network industries; - cutback of administrative burdens. ### Outcomes and key statistics - The federal government outperformed its fiscal targets every single year after 1994 and achieved fiscal surplus in 1998, a year earlier than planned. - Expenditure cuts allowed federal spending to fall from near 17 percent of GDP in 1994 to about 12 percent in 1998. - With the improvement of the fiscal situation, the government enacted one of the largest tax cuts in Canadian history in 2000. - Between 1997 and 2006, Canada enjoyed the highest job creation and output growth among G7 countries. *Source: Box 3. Canada’s Experience: Combining Fiscal Consolidation and Structural Reform* ### 36. Further goods and services market reforms could significantly boost potential ### 36. Further goods and services market reforms could significantly boost potential ### Competition policy and goods and services market reform - Place competition policy at center stage by replacing the current dual responsibilities for competition policy with a single, reinforced, and independent competition authority, as recommended by the OECD and the Attali Commission. - Vest this authority with a mandate to be a public advocate for competition. - Remove the prohibition of below-cost pricing as part of retail distribution reforms, allowing full contractual freedom between suppliers and retailers. - Fully seize the liberalizing opportunity offered by the EU Services Directive. ### Assessment of the 2008 budget and short-term fiscal stance - The 2008 budget contains several commendable initiatives but implies an inopportune pause in fiscal adjustment due to tax-cutting provisions. - Positive budgetary features include measures to contain spending, notably an unprecedented reduction in public employment. - The expenditure restraint is offset by tax cuts that focus largely on demand-side stimuli rather than on increasing productivity and flexibility on the supply side. ### Fiscal risks and recommended adjustment path - Fiscal policy should be vigilant to the risk of slippage in the fiscal deficit in 2008 and aim for a return to an ambitious fiscal adjustment path thereafter. - Risks in 2008 stem primarily from the prospect of lower-than-budgeted growth and continued spending pressures, most notably in social security. - If growth were to turn down, the deficit could move perilously toward its Maastricht limit, and early corrective action should be taken. - From 2009, adopt a structural adjustment path of ¾ percentage points of GDP per year, around which the stabilizers could be allowed to play, to bring the fiscal accounts close-to-balance by 2010 and contribute to the credibility of the medium-term objective. ### Fiscal policy process and 2009–10 consolidation - Ongoing expenditure and tax policy reviews are welcome and likely to yield appreciable results, improving the fiscal position and the efficiency of public services. - Expectations of early results should be tempered. - In 2009-10, fiscal consolidation should be based on tight spending plans and the recognition that the present state of public finances allows no scope for further tax reductions or for continued recourse to tax expenditures to address distortions or sectoral requests. ### Financial sector resilience and reform priorities - The French financial system has weathered recent financial market turbulence comparatively well so far, supported by: - strong capitalization, - modest exposure to the U.S. subprime mortgage market, - a supervisory system that covers all credit-granting institutions. - Remaining risks arise because market conditions have yet to return to normal, which could: - further increase banks’ financing costs, - reduce their profitability, - induce credit tightening. - Continued vigilance is paramount. - Authorities’ readiness to include a European dimension in the statutes of national regulators and to give impetus to the Lamfalussy process is welcome. ### Role of financial sector modernization in growth - A modernized financial sector can be a driver of economic growth and deserves greater prominence. - The “Paris-Place Financière” initiative provides an opportunity to modernize France’s financial markets. - To improve banking sector efficiency: - phase out administered schemes, - reduce the state’s role in the financial sector. - Ending the monopoly on the distribution of Livret A provides opportunities, including allowing the Banque Postale the possibility to become a full-fledged bank and in due course privatized. *Source: IMF staff report excerpt (paragraphs 36–41).* ### 42. It is proposed that France remain on the standard 12-month consultation cycle. ### It is proposed that France remain on the standard 12-month consultation cycle. ### Proposal - It is proposed that France remain on the standard 12-month consultation cycle. ### Overview of staff update and outlook - Growth is forecast to dip in 2008 to 1.5 percent, slightly lower than anticipated in the staff report due to a further weakening of the global environment. - Headline inflation has continued to rise, given higher oil and food prices, but core inflation remains below 2 percent. - The banking system so far appears to be only moderately affected by the ongoing financial turmoil, though the full extent of necessary write-downs is still unknown. - A massive fraud case at Société Générale is noted as troubling. - The Commission for the Liberalization of Growth in France (Attali Commission) presented its report; the government has undertaken to implement most of its (over 300) specific recommendations. ### Economic developments and demand - Real GDP growth series (selected historical context shown in figures): weakness since 2002. - From Table 1 (Est.): Gross domestic product: 1.1 (2003), 2.5 (2004), 1.7 (2005), 2.0 (2006), 1.9 (2007), 1.6 (2008), 2.2 (2009), 2.5 (2010), 2.5 (2011), 2.5 (2012). - Private consumption (Table 1): 2.0 (2003), 2.5 (2004), 2.2 (2005), 2.0 (2006), 2.1 (2007), 1.9 (2008), 2.3 (2009), 2.5 (2010), 2.4 (2011), 2.3 (2012). - Gross fixed investment (Table 1): 2.2 (2003), 3.6 (2004), 4.0 (2005), 3.7 (2006), 3.9 (2007), 2.7 (2008), 3.7 (2009), 3.9 (2010), 3.7 (2011), 3.8 (2012). - Output gap (Table 1): -0.9 (2003), -0.5 (2004), -0.8 (2005), -0.9 (2006), -1.1 (2007), -1.6 (2008), -1.6 (2009), -1.3 (2010), -0.8 (2011), -0.4 (2012). ### External sector and competitiveness - Trade and current account deterioration highlighted: - Trade balance (in billions of euros, Table 1): 2.9 (2003), -3.8 (2004), -23.0 (2005), -30.0 (2006), -38.7 (2007), -58.0 (2008), -61.1 (2009), -63.6 (2010), -65.8 (2011), -68.9 (2012). - Trade balance (percent of GDP): 0.2 (2003), -0.2 (2004), -1.3 (2005), -1.7 (2006), -2.1 (2007), -3.0 (2008), -3.0 (2009), -3.0 (2010), -3.0 (2011), -3.0 (2012). - Current account (in billions of euros): 13.0 (2003), 8.5 (2004), -15.7 (2005), -22.5 (2006), -36.6 (2007), -58.6 (2008), -61.7 (2009), -63.7 (2010), -65.3 (2011), -67.7 (2012). - Current account (percent of GDP): 0.8 (2003), 0.5 (2004), -0.9 (2005), -1.3 (2006), -2.0 (2007), -3.0 (2008), -3.1 (2009), -3.0 (2010), -3.0 (2011), -3.0 (2012). - Export growth has lagged euro-area peers and Germany, contributing to a worsening trade balance (Figures 2 and 6). - Real Effective Exchange Rate and unit labor costs trends are shown (Figures 6 and 7), with nominal unit labour cost, total economy and REER indicators reported in charts. ### Labor market and competitiveness factors - Employment protection legislation index: higher in 2006 relative to the late 1980s (Figure 3). - Minimum wage as percent of median wage: upward trend (Figure 3). - Unemployment rates (Table 1 and Figure 3): Unemployment (percent of labor force, harmonized): 9.5 (2003), 9.6 (2004), 9.7 (2005), 9.5 (2006), 8.7 (2007), 8.2 (2008), 7.9 (2009), 7.7 (2010), 7.4 (2011), 7.1 (2012). - Youth unemployment remains particularly high (Figure 3). - Labor taxation is among the highest (Figure 3). ### Monetary conditions and financial markets - Monetary Conditions Index: Monetary conditions have tightened (Figure 4). - Yield curves and real interest rates show upward shifts (Figure 4). - Financial market indicators (Figure 5, Table 3): - High-frequency financial indicators (changes since dates) include: BNP Paribas equity price changes and Credit Agricole, Societe Generale series; CDS and spread metrics reported (Table 3). - Selected market indicators (Table 4): Public sector debt (Maastricht definition): 56.9 (2001), 58.8 (2002), 62.9 (2003), 64.9 (2004), 66.7 (2005), 64.2 (2006), 65.3 (2007). - 3-month T-bill yield (end-of-period, Table 4): 3.3 (2001), 2.9 (2002), 2.1 (2003), 2.2 (2004), 2.5 (2005), 4.2 (2006), 4.7 (2007, October). - Real estate prices and credit growth indicators highlighted in vulnerability indicators (Table 4). ### Public finances and fiscal indicators - General government balance (Maastricht definition, Table 1): -4.1 (2003), -3.6 (2004), -2.9 (2005), -2.5 (2006), -2.4 (2007), -2.7 (2008), -2.6 (2009), -2.3 (2010), -1.9 (2011), -1.4 (2012). - Structural balance (Table 1, Maastricht definition, where provided): -3.4 (2003), -3.1 (2004), -2.7 (2005), -1.9 (2006), -1.6 (2007), -1.7 (2008), -1.6 (2009), -1.5 (2010), -1.4 (2011), -1.2 (2012). - Gross debt (percent of GDP, Table 1): 62.9 (2003), 64.9 (2004), 66.7 (2005), 64.2 (2006), 64.1 (2007), 64.6 (2008), 64.8 (2009), 64.4 (2010), 63.6 (2011), 62.5 (2012). - Table 5 (2000–07) shows revenue and expenditure patterns; 2006 revenue 50.7 percent of GDP, expenditure 53.1 percent of GDP; balance and primary balance series reported. ### Financial sector soundness and FSAP findings - FSAP concluded France’s financial sector is strong and well supervised; no weaknesses identified that could cause systemic risks. - Issues identified include: - Banking concentration may be high enough to raise concerns about collusion and "too big to fail". - Large and growing portfolios of fixed-rate residential housing loans could pose longer-term risks if funding costs rise or real estate prices fall. - Administered savings schemes and certain policy measures may impede financial market innovation and are not well targeted. - Rapid accumulation of bank capital could encourage expansion through expensive takeovers and risky ventures. - Coordination among specialized supervisory segments needs further adaptation as cross-sectoral groups grow. - Clearing and settlement infrastructure is generally sound but retail payments and securities multilateral netting systems could strengthen safeguards. ### Fund relations, data, and standards - Membership status: Joined December 27, 1945; Article VIII. - France subscribes to the Fund’s Special Data Dissemination Standard; comprehensive economic data are available on a timely basis. - Article IV Consultation: The last Article IV consultation was concluded on October 25, 2006. France is on the standard 12-month consultation cycle. - Appendix II notes the economic database is comprehensive and of high quality; France follows ESA95; monetary and banking statistics conform with ECB framework. - Data ROSC, Fiscal Transparency, and Transparency in Monetary and Financial Policies ROSC updates and FSAP assessments are summarized with specific improvements and remaining recommendations. *Source: IMF staff report and supplementary material for the 2007 Article IV Consultation with France (staff estimates, figures, and tables as presented in the provided content).* ### 1. Staff projects a deceleration of GDP growth to 1½ percent in 2008 (Table 1). The ### _cr0875 - 1. Staff projects a deceleration of GDP growth to 1½ percent in 2008 (Table 1). The ### Growth outlook and macroeconomic context - Staff projects a deceleration of GDP growth to 1½ percent in 2008 (Table 1). - Revision driven by slower growth in the U.S. and Europe and the effects of higher inflation on consumer spending. - The projection is consistent with the mark-down of ½ percentage point in euro area growth in the interim WEO published on January 29. - Lending flows to the private sector have continued to be strong, but global financial market turmoil has led to appreciably tighter bank lending standards for firms. - Consumer confidence dropped in January to its lowest level in 12 years. - Tax cuts approved in July 2007 and in the 2008 budget (½ percent of GDP) became fully effective in January and will mitigate somewhat the negative external effects on demand. - Fiscal stance and constraints: - Fiscal deficit projected by staff to widen to 2.8 percent of GDP in 2008 (versus 2.7 percent of GDP in the staff report). - This 2.8 percent of GDP is noted as near the Maastricht limit. - Relatively high debt/GDP ratio leaves no room for additional discretionary fiscal stimulus. - On February 12, 2008 the ECOFIN Council invited France to “strengthen the pace of budgetary consolidation and debt reduction.” - Risks to the forecast are broadly balanced: - Downside: international environment. - Upside: possibly stronger rebound in the aeronautics and automobile industries; relatively strong industrial production in December 2007 may support this. ### Financial sector: Société Générale episode and system-wide effects - Société Générale (SG) events: - On January 24, SG communicated that a massive rogue dealing fraud has cost the bank €4.9 billion. - SG reported the fraud in addition to €2.1 billion in U.S. residential mortgage and monoline related write-downs; the latter were revised to €2.6 billion on February 11. - SG has launched a rights issue to raise €5.5 billion in fresh capital in the market. - In a report issued on February 4, the authorities concluded that the fraud was an isolated event but pointed to failures in the bank’s internal controls of derivatives trading. - Minister Lagarde asked for clarification of communication requirements between regulatory agencies and the government in crisis management. - Authorities indicated aversion to possible hostile takeover bids of SG. - System-wide assessment: - French banking system appears only moderately affected by the ongoing financial turbulence. - Most large French banks have disclosed manageable exposure to the U.S. subprime market. - Two large banks preliminary results: BNP reported an increase in net income over last year; excluding the fraud-related write-downs, SG reported stable results despite losses related to the turbulence. - Banks’ exposure and risk may increase if the situation of monoline bond insurers worsens and the turmoil persists. - BNP and SG are among the eight banks that have joined to aid Ambac Financial Group, a large bond insurer hit by the global turmoil. - Policy responses and recommendations: - Government asked financial institutions and regulators to join efforts nationally and internationally to strengthen internal control of market operations. - Requests include improved internal control systems, better regulation of operational risk management, full involvement of banks’ management in risk control and fraud identification, and potential raising of monetary sanctions by supervisors against violations. - France called for homogeneous international standards on management and transparency of operational and reputational risk within the framework of Basel II. - Credit conditions: - Credit standards have tightened appreciably in corporate lending, but not in household lending. - Banque de France lending survey: sharp tightening of banks’ credit standards to firms in Q4 and expectations of further tightening in 2008. - French firms have relatively strong balance sheets and are less reliant on bank lending than some other euro area countries; continued tightening would compound downside growth risks. - Lending standards to households have remained little changed. ### Structural reforms and policy agenda - Attali Commission and government actions: - President Sarkozy undertook to implement most of the Attali Commission’s proposals to generate growth. - In mid-January, the Commission presented 316 specific measures (décisions) covering education, future technologies, competitiveness of SMEs, labor markets, rents and privileges, taxation, and public spending. - Objectives: raise potential growth by 1 percentage point, reduce unemployment to 5 percent, cut poverty, and improve living conditions in problem neighborhoods by 2012. - Prime Minister Fillon announced presentation of a draft law on the “modernization of the economy” in spring 2008, including proposals on deregulation of retail trade, strengthened competition policies, and measures in support of SMEs. - Consultations initiated with social partners and economic agents to formulate reform plans in other areas, including regulated professions. - Protests by taxi drivers have induced the government to distance itself from specifics of the Attali report’s recommendations. - Other proposals to be covered by existing processes such as the general expenditure review (RGPP) and negotiations on pension reform due later in the year. - Government announced a multi-year increase in the minimum pension (minimum vieillese), with a first installment already in 2008. ### Staff assessment and recommendations - Société Générale assessment: - Events at SG reveal serious shortcomings in internal controls but are not judged such as to affect the overall stability of the French financial system. - If SG successfully concludes its announced recapitalization of €5.5 billion or is merged with a stronger partner, systemic repercussions are unlikely. - Contestability, including by potentially interested foreign parties, should be fully assured. - Efforts to enhance operational risk management are welcome; effective enforcement of existing regulations is the priority. - Incentives to undue risk-taking in proprietary trading should be re-examined; regulatory changes might be needed but should be weighed against cost implications. - Structural reform assessment: - Many measures in the Attali report could help lift growth and raise consumer welfare. - Removal of barriers in the retail sector (including hotels and restaurants) and strengthening competition policies would raise supply, improve market efficiency, and lower consumer prices; these measures are specifically endorsed in the staff report. - Inclusion of these measures in a broader liberalizing draft law in spring is welcome. - Important that consultations with social partners and professionals do not result in undue delays or weak agreements to maximize long-term benefits to consumers. - Given the state of public finances, budgetary costs of some proposals should be offset by redeployment of resources. ### Key statistics and projections (selected entries from Table 1: France: Main Economic Indicators, 2004-13) - GDP growth (annual percentage change): 2004: 2.5; 2005: 1.7; 2006: 2.0; 2007: 1.9; 2008: 1.5; 2009: 1.9; 2010: 2.6; 2011: 2.6; 2012: 2.5; 2013: 2.5 - Private consumption (annual percentage change): 2004: 2.5; 2005: 2.2; 2006: 2.0; 2007: 2.1; 2008: 1.8; 2009: 1.9; 2010: 2.6; 2011: 2.5; 2012: 2.4; 2013: 2.4 - Consumer prices (average, Harmonized CPI): 2004: 2.3; 2005: 1.9; 2006: 1.9; 2007: 1.6; 2008: 2.3; 2009: 1.8; 2010: 1.7; 2011: 1.7; 2012: 1.7; 2013: 1.7 - Unemployment (percent of labor force; harmonized index): 2004: 9.6; 2005: 9.7; 2006: 9.5; 2007: 8.7; 2008: 8.2; 2009: 7.9; 2010: 7.7; 2011: 7.4; 2012: 7.1; 2013: 7.0 - General government balance (Maastricht definition, percent of GDP): 2004: -3.6; 2005: -2.9; 2006: -2.5; 2007: -2.4; 2008: -2.8; 2009: -2.8; 2010: -2.4; 2011: -2.0; 2012: -1.5; 2013: -1.1 - Gross debt (percent of GDP): 2004: 64.9; 2005: 66.7; 2006: 64.2; 2007: 64.1; 2008: 64.7; 2009: 65.2; 2010: 64.9; 2011: 64.1; 2012: 63.0; 2013: 61.5 - Trade balance (in billions of euros): 2004: -3.8; 2005: -23.0; 2006: -30.0; 2007: -38.1; 2008: -58.2; 2009: -61.1; 2010: -62.2; 2011: -63.0; 2012: -65.5; 2013: -69.3 - Current account (in percent of GDP): 2004: 0.5; 2005: -0.9; 2006: -1.3; 2007: -1.3; 2008: -3.0; 2009: -3.1; 2010: -3.0; 2011: -2.8; 2012: -2.8; 2013: -2.8 *Public Information Notice (PIN) No. 08/23 — IMF Executive Board Concludes 2007 Article IV Consultation with France; February 20, 2008 (Article IV mission concluded February 15, 2008).* ### 2.8 percent in December 2007 with the surge in food and energy prices. Unit labor costs have ### _cr0875 - 2.8 percent in December 2007 with the surge in food and energy prices. Unit labor costs have ### Macroeconomic outlook and near-term forecast - GDP growth projection for 2008: 1.5 percent. - Near-term growth prospects have weakened with the onset of the global financial turmoil and the slowdown in advanced economies; a recovery is expected in 2009-10. - Growth in recent years has been sustained by domestic demand; the external sector has contributed negatively. - Risks to the staff’s 2008 forecast are described as broadly balanced: - Downside risks: international environment (including spillovers from global financial turbulence), spike in oil prices, rise in the euro, weakening economic prospects in partner countries. - Upside risks: a possibly stronger rebound in the aeronautics and automobile industries. ### Inflation, labor costs, and monetary conditions - CPI and inflation context referenced by the document: a headline 2.8 percent in December 2007 amid a surge in food and energy prices. - Unit labor costs have risen as productivity gains have lagged wage inflation. - Monetary conditions have tightened noticeably since 2006, reflecting: - ECB rate increases, - euro appreciation, - increase in risk premia due to the fallout from the financial turbulence. ### Financial sector assessment and vulnerabilities - Financial turbulence to date: limited impact on the domestic economy; banking sector performance remains solid. - French banks’ exposure to the U.S. subprime market: appears fairly limited. - Credit default swap spreads: have risen less than for some other major European banks. - Noted vulnerabilities: - Off-balance sheet exposures remain a concern. - Profitability risks from rising corporate credit risk, cooling real estate prices, and tighter credit conditions. - Recent events at Société Générale revealed shortcomings in internal control. - Directors’ recommendations/actions: - Authorities should address internal control shortcomings revealed by Société Générale. - Remain vigilant to the possibility of further spillovers from other countries and market segments. - Move forward with modernization of France’s financial market away from its administered past. - Continue to reinforce risk management controls in banks. - Support the Lamfalussy process impulse intended by the authorities. ### Fiscal policy and public finances - 2008 budget: described as a pause in fiscal consolidation. - Maintains spending restraint (including an unprecedented reduction in public employment) but offset by the cost of the August 2007 tax package, leaving little deficit improvement. - Government medium-term aim: annual structural adjustment of ½ percentage point of GDP consistent with objective of reaching fiscal balance by 2012 under its central scenario. - Directors’ views: - Most Directors stressed fiscal consolidation should proceed in tandem with structural reforms and urged vigilance to the risk of slippage in the fiscal deficit target in 2008. - With lower growth forecast in 2008, the deficit risked moving toward its Maastricht limit; these Directors saw no room for additional discretionary fiscal stimulus. - Several other Directors considered it appropriate for fiscal policy to play an active countercyclical role given the weakening global environment. - From 2009 Directors urged return to an ambitious adjustment path for the fiscal deficit to strengthen credibility of medium-term objective of budget balance. - Directors welcomed the government’s ongoing expenditure and tax policy reviews but noted that improvements take time and that fiscal consolidation in 2009-10 should be based on tight spending plans. ### Structural reform program and labor market policy - Authorities pursuing an ambitious structural reform program across a wide range of areas; central focus: increase flexibility in labor markets. - Measures taken / planned: - Introduction of measures to make the 35-hour workweek restriction less binding; reform of overtime rules adopted in August (effective uptake: by November 2007, 50 percent of firms with more than 10 employees reported using the new system). - Social partners reached agreement on key labor market reforms; government intends to act on these agreements. - Review of the mechanism for setting the minimum wage (SMIC); decision to forego any hike in the SMIC in July 2007. - Merger of the unemployment and job placement agencies (UNEDIC and ANPE) to improve matching and labor market flexibility. - Agreement between 8 out of 9 employers’ and workers’ unions on January 11, 2008 to increase labor market flexibility; negotiations in other areas expected to reach agreement by March 31, 2008 (including strengthening vocational training and working hours). - Goods and services market reforms: - Reforming the retail distribution sector is a priority; law adopted last December frees wholesale margins and is forecast to decrease the CPI by 1½ to 2 points. - Liberalization measures beginning in early 2008: ports and rail freight; over-the-counter sale of pharmaceutical products. - Draft law expected in the Spring to take up recommendations of the Attali Commission. - R&D and innovation: - London protocol ratified to reduce patent costs and increase international comprehensibility. - Research tax credit implemented on January 1, 2008; GDP increment associated with this reform projected to be in the range of 0.3 and 0.5 point of GDP after 10 years. - Universities reformed in August 2007. - Government objective stated by authorities: raise France’s potential growth by 1 percent over time through a comprehensive strategy (scope, method, speed). ### IMF Executive Board assessment and Directors’ key messages - Directors commended authorities’ intention to accelerate and pursue simultaneous reforms across different areas to exploit complementarities. - Emphasis that sources of France’s growth difficulties lie in rigidities that impede supply and impair export performance rather than deficient consumer demand. - Directors stressed eliminating rigidities would raise productivity and stimulate growth, and yield greater improvements in purchasing power over time than short-term income-boosting measures. - Labor market reform priorities highlighted by Directors: - Reduce wage compression by limiting future discretionary adjustments in the minimum wage. - Further relax the 35-hour workweek. - Make more fundamental improvements in the flexibility of permanent employment contracts. - Address core problems directly rather than using fiscal costs to alleviate labor market rigidities. - Goods and services market reforms welcomed, including liberalization of retail distribution and planned move to a unified competition authority; seize EU Services Directive liberalizing opportunity. - Directors welcomed expenditure and tax policy reviews as a basis for lasting fiscal improvement but noted timing and the need for tight spending plans in 2009-10. ### Selected economic indicators (as presented) - Real economy (change in percent): - Real GDP: 2003 1.1; 2004 2.5; 2005 1.7; 2006 2.0; 2007 1.9. - CPI (year average): 2003 2.2; 2004 2.3; 2005 1.9; 2006 1.9; 2007 1.5. - Unemployment rate (in percent): 2003 9.5; 2004 9.6; 2005 9.7; 2006 9.5; 2007 8.7. - Gross national savings (percent of GDP): 2003 19.7; 2004 19.7; 2005 19.1; 2006 19.8; 2007 19.9. - Gross domestic investment (percent of GDP): 2003 18.8; 2004 19.3; 2005 19.8; 2006 20.5; 2007 20.8. - Public finance (percent of GDP): - Central government balance: 2003 -3.9; 2004 -3.2; 2005 -3.0; 2006 -2.6; 2007 -2.0. - General government balance: 2003 -4.1; 2004 -3.6; 2005 -2.9; 2006 -2.5; 2007 -2.4. - General government gross debt: 2003 62.9; 2004 64.9; 2005 66.7; 2006 64.2; 2007 64.0. - Money and interest rates: - Money market rate (in percent): 2003 2.3; 2004 2.1; 2005 2.2; 2006 3.1; 2007 4.2. - Government bond yield (in percent): 2003 4.2; 2004 4.2; 2005 3.5; 2006 3.9; 2007 4.3. - Balance of payments (percent of GDP): - Trade balance: 2003 0.2; 2004 -0.4; 2005 -1.5; 2006 -1.4; 2007 -2.0. - Current account: 2003 0.8; 2004 0.1; 2005 -1.1; 2006 -1.2; 2007 -1.3. - Official reserves (US$ billion, excluding gold, end-of-period; eurosystem definition): 2003 30.2; 2004 35.3; 2005 27.8; 2006 42.7; 2007 51.8. - Fund position (as of December 31, 2007): - Holdings of currency (percent of quota): 93.4 - Holdings of SDRs (percent of allocation): 58.3 - Quota (SDRs million): 10,738.5 - Exchange rates: - Exchange rate regime: Participant in EMU. - Euro per U.S. dollar (February 14, 2008): 1.46 - Nominal effective rate (2000=100): 2003 106.1; 2004 107.6; 2005 107.7; 2006 108.1; 2007 110.3 - Real effective exchange rate (2000=100) (based on relative normalized unit labor costs in manufacturing): 2003 100.9; 2004 103.3; 2005 101.5; 2006 101.2; 2007 102.3 *Excerpted from IMF staff report and Executive Board assessment for the 2007 Article IV Consultation with France.* ### annex and the box on the Canadian experience could be amended in that regard. ### _cr0875 - annex and the box on the Canadian experience could be amended in that regard. ### Recent policy actions and commitments - The authorities recently adopted two decisions long recommended by the IMF: - Last December, the Prime Minister announced the ending of the monopoly on the distribution of livret A accounts, which should take effect by January 1, 2009 at the latest (paragraph 41). - On January 23, 2008 the President of the Republic announced his support for the Attali Commission’s proposal to establish a unified competition authority, in accordance with IMF recommendations (paragraph 19). - The government has made a commitment to parliament to identify a tax expenditure supervision tool, as a complement to the expenditure framework. - The 2008 budget will be rigorously implemented. ### Economic environment and outlook - Short-term outlook: - France’s growth forecast for 2008 will be around 2 percent. - The most recent INSEE economic outlook survey, published in mid-December 2007, projected a growth carry-over of 1.7 percent by mid-2008. - 2007 performance and labor market: - More than 230,000 new jobs appeared in the business sector during the first three quarters of 2007, in contrast to 190,000 for all of 2006. - The unemployment rate at the end of the third quarter was 8.3 percent (down from 9.8 percent at end 2005). - Demand and financial conditions: - Despite an increase in inflation through end-2007, household consumption is expected to remain strong in early 2008. - Consumer credit remained dynamic at end-2007 despite tighter interest rates. - Household indebtedness: 68 percent of gross disposable income. - Selected Issues analysis: French firms continue to perform favorably, but conclusions are relevant solely to listed companies due to selection bias. - Comparative resilience: - France’s economy is described as more resilient to a global slowdown than other comparable economies, given the manner in which its growth is structured. - The staff’s analytical method requires further verifications and additional econometric support before being fully convincing. ### Economic policy: fiscal consolidation and structural reform - Fiscal strategy: - The authorities intend to pursue their fiscal consolidation effort through 2010, cyclical conditions permitting. - The timetable and arrangements are consistent with the government’s economic strategy to achieve sustainable improvements in government finance. - Two key focus areas: - Structural reforms to boost potential growth: Available research (IMF studies in particular) shows that current and proposed reforms will raise potential growth by 1 percent over time. - Unprecedented drive to control public expenditure: framework broadened to include withholdings from revenue (in favor of regional governments and the European Union); stabilization in volume terms. - Specific measures and commitments: - Decision not to replace one out of every two civil servants will represent a key component of expenditure control, as adopted in the 2008 budget law (except for national education, where the ratio will be one out of three). - A broad review of public policy (RGPP) is under way; staff reductions should be accompanied by organizational changes and streamlining. - Main RGPP decisions will be taken in the Spring. - In 2009, a three-year government budget will be adopted to supplement the RGPP and align reforms with the budget process. - Multi-year approach intended to strengthen reforms introduced by the budget framework law (LOLF). - Tax system observations: - Broad agreement with the main message in the Selected Issues regarding the French tax system, while noting reforms already in place: - The maximum marginal rate of the income tax in France is now one of the most competitive. - France is at the forefront of efforts to achieve tax neutrality, e.g., through the phase-out of double taxation on equity securities for businesses. - Corporate income tax nominal rate remains high, but recent focus has been on reform of the taxe professionelle, as acknowledged in Box 4. ### Financial system resilience and supervisory framework - Overall assessment: - France’s financial markets have weathered recent financial turbulence well. - The overall solvency of the French banking system remains satisfactory. - Impact of crisis and exposures: - Impact on banks varied by operational structure; softened by solid performance in first half of 2007, diversification of services/products, and limited direct and indirect exposure of major French banks to the subprime market. - With regard to mutual funds (paragraph 29), amounts associated with funds that have undergone closure or temporary trading suspension account for less than 0.5 percent of total assets under management. - Supervisory model and crisis management: - The existing supervision model, relatively straightforward, has proven its worth. - Close cooperation between supervisory authorities and central banks enhanced effectiveness and credibility of government policy. - The supervisory authority can give the Bank of France prompt notification of factors influencing bank behavior; market information, payment system data, and Bank of France statistics assist policymakers’ crisis assessment. - Close links between supervisory authority and Bank of France improve understanding of vulnerability to credit and liquidity risks and help assess indirect risks, e.g., contagion effects. - Société générale fraud case: - Four comments by the authorities: - Depositors and savers were protected; there was no panic. - The bank’s capital will be restored to levels higher than those preceding the fraud. - The stability and integrity of financial markets have been preserved. - There has been no recourse to government money. - Authorities seek to strengthen internal controls of financial institutions, toughen regulations governing internal oversight of operational risk, focus on detection of internal fraud as a key component of internal supervision, and ensure wholehearted involvement of senior and middle management of banks in risk control. - Competitiveness of Paris as an international financial center: - Even before the financial crisis, the French authorities were committed to improving the competitiveness of Paris. - They have pursued vigorous and coordinated action with professionals to bolster France as a firmly established, strong and well-structured financial center. *Source: _cr0875 - annex and the box on the Canadian experience could be amended in that regard.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0875.pdf_