## Economic Developments (content unit: _cr09232) ## Source details **Canonical URL:** [Economic Developments (content unit: _cr09232)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09232.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09232.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09232.pdf.json) --- ### I. Executive summary and near-term outlook - Global context and impact: - The global financial crisis and contraction of world trade pulled the French economy into a severe recession and put its financial sector under strain. - Recession somewhat less pronounced than in the euro area as a whole due to structural features and early policy action. - Near-term projections and labour market: - Real GDP projected to drop by 3 percent in 2009. - Gradual recovery projected in 2010. - Unemployment rate likely to surpass 10 percent in 2010. - Inflation expected to remain below zero in the coming months but deflation is unlikely; inflation expected to rebound to about 1 percent in 2010. - Risks and medium term: - Risks mostly tilted to the downside, sensitive to a worse-than-foreseen contraction in the European Union and financial-sector tail risks. - Potential output growth projected to slow; output gap expected to narrow only gradually. - Key policy challenge: - Align crisis-countering actions with longer-term reforms to strengthen financial stability, safeguard fiscal sustainability, and deepen labor and product market reforms to boost competitiveness and growth. ### II. Recent developments and macroeconomic indicators - Output and demand: - Real GDP growth slowed to 0.4 percent in 2008. - Cumulative drop in real GDP of 2.7 percent over Q4 2008 and Q1 2009. - Euro area real GDP decreased by 4.2 percent over the same period. - For 2009 as a whole, authorities and staff expect real GDP to contract by 3 percent, with a tepid recovery starting in 2010. - Labour market: - Unemployment rate: low of 7.5 percent in February 2008; increased to 9.3 percent as of May 2009. - Prices and monetary conditions: - Headline inflation spiked to above 3½ percent by mid-2008; annual headline inflation fell below zero in May 2009. - Core inflation remained around 1½ percent. - Inflation expected to rebound to about 1 percent in 2010. - Monetary conditions index (MCI) declined sharply since mid-2008; bank lending rates (end-June) roughly 4 percent (medium/long-term) and around 3 percent (short-term). - Corporate spreads remain at 255 basis points. - Fiscal stance and Maastricht ceiling: - General government deficit: 2.7 percent of GDP in 2007; 3.4 percent in 2008 (triggered EDP reopening). - TEPA law entails annual budgetary costs of 0.3-0.5 percent of GDP in 2008. - Primary expenditures real growth rate: 0.3 percent in 2008 versus decade average of 2.2 percent. ### III. Financial sector: losses, measures, and vulnerabilities - Losses and global share: - Total losses and write-downs of French banks since onset of crisis account for about 3 percent of losses and write-downs around the globe. - French banks account for about 10 percent of world banking assets. - Banking sector actions and support (authorities’ measures): - Placed French subsidiary of Lehman Brothers under state administration. - Participated in €6.4 billion recapitalization of Dexia (government €1 billion; Caisse des Dépots et Consignations €2 billion); government guarantees on Dexia obligations to a maximum €55 billion. - Set up SFEF able to issue up to €265 billion (about 14 percent of GDP) of government-guaranteed obligations until end-December 2009; SFEF has issued €62 billion of government-guaranteed debt. - Established SPPE: fund of €40 billion (about 2 percent of GDP) financing itself on the market with debt guaranteed by the government. Six largest banks obtained first tranche of €10.5 billion in Tier 1 qualifying subordinated loans; a second tranche of same aggregate amount announced. - Supported merger GCE–GBP with SPPE capital injection of €5 billion (€3 billion taken by merged entity). - Conditions on banks receiving state support: increase credit to households, SMEs, and local authorities at least 3-4 percent per year; regular reporting; compliance with compensation rules (decree banning stock options and limiting bonuses for bank managers, non-retroactive through 2010, extendable). - Capital, leverage and asset exposures: - Average Tier 1 ratio rose from 7.7 in 2007 to 8.3 in 2008. - Leverage (total assets/total capital) stabilized at 24. - Remaining toxic assets of major French banks about €18 billion at end-2008. - Total exposure to LBOs and CLOs amounted to €37 billion (together estimated at less than one percent of total bank assets). - Banks’ exposure to emerging markets: 4 percent of total bank assets (14 percent of GDP); CEE represents about 37 percent of total exposure to emerging markets. - Foreign claims represent 33½ percent of bank assets and 125 percent of GDP. - Share of impaired loans in total loan portfolio increased slightly to 2.8 percent in 2008. - Credit and real economy: - Annual credit growth slowed from 13 percent in 2007 to less than 2 percent in April 2009. - Deceleration of credit to the private sector mostly related to slowing demand rather than tighter lending standards. - Capital injections through the SPPE: upfront fiscal costs thus far amounting to 0.7 percent of GDP. ### IV. Housing, household balance sheets, and mortgage market features - House prices and construction: - Nominal house prices: average annual growth ~10 percent over the last decade; more than doubled over the last decade; estimated overvalued by some 20 percent in 2007. - House prices declined by about 7 percent from their peak in beginning of 2008. - Construction decline contributed to economic contraction (less than manufacturing drop). - Housing finance metrics: - Housing-related debt amounted to 35 percent of GDP and 53 percent of gross disposable income in 2007. - IMF mortgage market index: France value 0.23 (Germany 0.28, U.K. 0.58, U.S. 0.98). - Typical mortgage characteristics: no mortgage equity withdrawal; no fee-free prepayment; typical loan-to-value ratio 75 percent; average term 15 years. - Covered bond issuance: 1.6 percent of residential loans outstanding; mortgage-backed securities issuance: 1 percent of residential loans outstanding. - Mortgage lending largely based on repayment capacity rather than house value; lack of instruments that promote consumer credit when household wealth increases helps prevent sharp consumption declines when housing prices fall. ### V. Macroeconomic outlook, potential growth, and risks - Staff growth projections: - GDP growth projected: ½ percent in 2010 and about 2 percent on average over 2011-14. - Baseline: export fall expected to slow; investment to gradually recover; private consumption and inventories to rebuild modestly; net exports supportive from 2011 onwards. - Potential growth and contributions (2009-14): - Potential growth projected to slow by 1 percentage point to about 1 percent in 2009-14. - Projected contribution changes (Cobb-Douglas calibration, capital-output ratio 0.4): - Labour force contribution projected to decline by 0.4 percent. - Capital stock contribution projected to decline by 0.3 percent. - TFP growth projected to suffer with a discount of ½ percent in 2008-09, converging back to long-term average rate of ½ percent by 2014. - Under baseline, annual potential growth declines from 2 percent (2000-08) to 1 percent (2009-14). - Risks to outlook: - Downside risks: persistent tightening of financing conditions; drop in foreign demand; worsening financial crisis hurting banks’ balance sheets; jump in unemployment weakening consumption; continued house-price correction (expected to continue in 2009 and first part of 2010). - Upside: international fiscal stimulus and recovery of global activity could speed confidence restoration. ### VI. Financial stability recommendations and supervisory coordination - Staff recommendations: - Carry out rigorous, preferably EU-wide coordinated stress tests focusing on quantity and quality of capital, followed by appropriate disclosure. - Based on stress tests, undertake follow-up recapitalization if needed to ensure sound bank balance sheets. - Prompt banks to improve capital quality by reducing hybrid capital share and increasing proportion of core capital. - Support confidence through continued adequate supervision and full transparency about financial standing of key institutions. - Prompt banks to strengthen internal controls, operational risk management, and restructure CIB activities. - Authorities’ stance and international coordination: - Authorities agreed on need for adequate capital and supervisory vigilance; expressed confidence in resilience of French banking sector. - Supervisory stress tests (end-2008 data) showed resilience; authorities confidentially shared aggregated results with staff. - Authorities supported EU-wide stress tests but emphasized need for agreed disclosure approach. - France proposed European regulatory reforms: strengthen supervision of EU-wide groups; harmonize regulatory frameworks; joint supervision of cross-border banks and insurers; enhance transparency of non-regulated markets and credit rating agencies; strengthen internal controls and governance. - Authorities emphasized strengthening cooperation on exit strategies (deposit guarantees and bank-asset guarantees) to avoid destabilizing financial flows. - French deposit insurance limit kept unchanged at €70,000. ### VII. Fiscal policy response, stimulus design, and impact - 2009 budget and initial measures: - Initial 2009 budget aimed to contain fiscal deficit at 2.7 percent of GDP, with consolidation to achieve fiscal balance by 2012. - Revenue measures: monthly VAT reimbursements; tax credits on R&D outlays. Total tax relief in initial budget: 0.4 percent of GDP (including TEPA third-year implementation). - Expenditure measure: introduction of RSA in July 2009—total cost 0.5 percent of GDP, net cost 0.1 percent of GDP after savings; net cost financed by additional social charge on investment income. - One-off allowance of €200 disbursed in April to people likely RSA eligible. - Additional stimulus and automatic stabilizers: - Discretionary fiscal stimulus amounts to above 1½ percent of GDP in 2009-10. - Automatic stabilizers estimated at some 3 percent of GDP per year. - Overall fiscal deficit projected to rise to almost 7½ percent of GDP in 2009. - Taking account of upfront fiscal cost of financial sector measures, public debt projected to increase to 77.5 percent of GDP in 2009 from 67.5 percent in 2008. - Box 4 summary (discretionary measures and impacts): - Discretionary stimulus measures to date: 1.2 percent of GDP in 2009 and 0.5 percent in 2010. - Government announced €26 billion (1.4 percent of GDP) stimulus plan for 2009-10 including: - Household tax breaks and social benefits: 0.1 percent of GDP. - VAT reduction for restaurants to 5.5 percent: 0.1 percent of GDP. - Loans to car industry: 0.3 percent of GDP. - Phasing-out of taxe professionnelle: 0.6 percent of GDP (not fully in headline because expected to be offset). - Stimulus design: immediate corporate cash-flow support; public investment boost; household support (temporary PIT reduction in 2009, social housing, additional unemployment benefits, RSA extension). - Estimated impact: stimulus estimated to raise real GDP by about 1 percent cumulatively in 2009-10. - Staff tax multipliers: 0.2-0.4; expenditure multipliers: 0.9-1.1. - Assuming full compensation of local business tax in 2010: discretionary stimulus net real GDP impact 0.7 percent in 2009 and 0.2 percent in 2010. - Fiscal space and Box 5: - If downturn deeper/protracted, additional stimulus might be needed in 2010 but fiscal space is limited. - Staff estimates France could afford only a modest additional fiscal effort. - Authorities indicated any additional stimulus would focus on measures with largest fiscal multipliers (public investment, targeted transfers). - SGP criteria: all key fiscal indicators indicate France has no additional fiscal space. ### VIII. Medium-term fiscal outlook and scenarios (selected figures) - Baseline scenario (assumes real growth rate of primary structural expenditures of 1.4 percent): - Fiscal balance (percent of GDP): 2008 -3.4; 2009 -7.4; 2010 -7.5; 2011 -7.1; 2012 -6.6; 2013 -5.9; 2014 -5.2. - Structural balance: 2008 -3.3; 2009 -4.0; 2010 -4.0; 2011 -4.2; 2012 -4.5; 2013 -4.5; 2014 -4.6. - Debt (percent of GDP): 2008 67.5; 2009 77.5; 2010 83.9; 2011 88.3; 2012 91.7; 2013 94.1; 2014 95.6. - Consolidation scenario (assumes real growth of structural primary expenditures of 0.4 percent from 2010 onwards): - Fiscal balance (percent of GDP): 2008 -3.4; 2009 -7.4; 2010 -7.0; 2011 -6.1; 2012 -5.1; 2013 -3.9; 2014 -2.7. - Structural balance: 2008 -3.3; 2009 -4.0; 2010 -3.5; 2011 -3.2; 2012 -3.0; 2013 -2.5; 2014 -2.0. - Debt (percent of GDP): 2008 67.5; 2009 77.5; 2010 83.4; 2011 86.8; 2012 88.8; 2013 89.2; 2014 88.3. - Staff conclusion: strictly containing real expenditure growth starting in 2010 required to initiate reduction in public debt ratio and bring deficit below 3 percent ceiling; consolidation should be credible and accompanied by institutional reforms. ### IX. Fiscal policy recommendations and tax/expenditure reforms - Recommendations on stimulus measures: - Ensure discretionary stimulus measures include sunset clauses or are automatically reversible. - Avoid permanent measures that erode medium-term fiscal sustainability (example: VAT reduction for restaurants). - Tax system and tax expenditures: - Revenue losses from tax expenditures estimated at about €70 billion per year (some 3½ percent of GDP). - Complete RGPO and embed annual reviews in budget to evaluate tax expenditures’ relevance, effectiveness, and cost-efficiency. - Broaden tax base and move toward more unified VAT rates; consider greater use of environmental taxation. - Avoid further recourse to very large tax expenditures and social contribution exemptions. - Local government fiscal responsibility: - Extend non-replacement of every second retiring civil servant to local governments to capture savings. - Act on Balladur Committee recommendations to improve local government effectiveness. - Social security, pensions, health: - Reform pension structure to limit fiscal cost for new entrants. - Intensify discussion on raising pension age with social partners as part of “Rendez-vous 2010.” - Prepare policy responses for rising long-term health expenditures from technical progress. ### X. Structural reforms to boost competitiveness and employment - Competitiveness and REER: - Since 2002, REER appreciated by 10 percent; REER (CPI-based) is 1 percent higher than 30-year average; CGER indicates a small overvaluation in 2008 partly corrected by end-March 2009. - Rise in unit labor costs vis-à-vis Germany contributed to loss of competitiveness. - Labour market: - Employment rate: 65.2 percent of labour force (current) versus euro area average 67.3 percent. - Lifting employment rate to euro-area average could boost potential growth by up to ½ percent and reduce unemployment-related government expenditures by up to 1 percent of GDP. - Share of workers paid at minimum wage: 15 percent (about double OECD average). - Recommended measures: - Strengthen Pôle emploi and activation policies (job training, placement). - Continue moderation of SMIC; independent expert commission for SMIC review established. - Promote senior labour: combine pension and salary possibilities; increase pension for later retirement; raise legal retirement age through social dialogue. - Product markets and services: - Use EU Services Directive opportunity to liberalize professional services and health-related services. - Strengthen Competition Authority and implement LME reforms. - Deregulate opening hours and sales periods; end price regulations on key products (e.g., OTC drugs). ### XI. Key projections and selected indicators (staff tables and projections) - Real GDP (change in percent): 2007 2.3; 2008 0.4; 2009 -3.0; 2010 0.4; 2011 1.7; 2012 1.9; 2013 2.2; 2014 2.3. - Unemployment rate (percent): 2007 8.3; 2008 7.8; 2009 9.5; 2010 10.2; 2011 10.0; 2012 9.6; 2013 8.9; 2014 8.1. - General government balance (percent of GDP): 2007 -2.7; 2008 -3.4; 2009 -7.4; 2010 -7.5; 2011 -7.1; 2012 -6.6; 2013 -5.9; 2014 -5.2. - General government gross debt (percent of GDP): 2007 63.9; 2008 67.5; 2009 77.5; 2010 83.9; 2011 88.3; 2012 91.7; 2013 94.1; 2014 95.6. - CPI (year average): 2007 1.6; 2008 3.2; 2009 0.3; 2010 1.1. - Potential output (percent growth): 2007 2.1; 2008 1.3; 2009 0.9; 2010 0.8; 2011 0.9; 2012 1.0. - Output gap: 2007 0.9; 2008 -0.1; 2009 -3.9; 2010 -4.3. ### XII. Statistics, fund relations, and data transparency - Fund relations (as of May 31, 2009): - Quota: 10,738.50 SDR Million (100.00 percent of Quota). - Fund holdings of currency: 8,580.49 SDR Million (79.9 percent of Quota). - Reserve position in Fund: 2,158.12 SDR Million (20.1 percent of Quota). - SDR allocation: Net cumulative allocation 1,079.87 SDR Million (100.00 percent); holdings 628.57 SDR Million (58.21 percent). - Statistical system assessment: - France observes the Fund’s SDDS; data provision to the Fund adequate for surveillance. - INSEE and Banque de France roles defined; national accounts rebased to 2000 prices in 2005. - Data ROSC recommendations include improved consolidation of fiscal data, better reconciliation of current account and national accounts, and enhanced data sharing. - Key data frequency and timeliness (as of June 30, 2009): examples include Exchange Rates (latest observation 05/09; monthly), Reserve/Base Money (05/09; weekly), Broad Money (05/09; monthly), GDP/GNP (Q1:2009; quarterly). ### XIII. Authorities’ views and commitments - Authorities broadly agree with staff’s assessment and cited: - Ad hoc policies: fiscal stimulus about 1½ percent of GDP, banking-sector measures (médiateur du crédit, SFEF, SPPE), support for specific banks. - Sizeable automatic stabilizers amounting to 3 percent of GDP. - Structural features and sound behaviour in households and banks helped resilience. - Commitments: - Sound public debt strategy and objective of zero growth of real expenditures at central government level. - Non-replacement of every second retiring civil servant in central government. - Continue RGPP and extend reviews to other levels of government and state-owned firms. - Consider carbon tax and pursue competition and labour market reforms. *Source: IMF staff report excerpt (content unit: _cr09232).* ### 1. Economic Developments ................................................................................... ### 1. Economic Developments ### I. Executive Summary and Staff Appraisal - The global financial crisis and contraction of world trade have pulled the French economy into a severe recession and put its financial sector under strain. - Structural features combined with early policy action have helped soften the downturn, which is somewhat less pronounced than in the euro area as a whole. - Unemployment has risen steeply since mid-2008; consumer price inflation has come down rapidly. - With the fiscal stance easing in 2008, the budget deficit exceeded the Maastricht ceiling. - French banks faced the need to write down toxic assets; government recapitalization and liquidity measures were required to support the sector. Financial sector losses remained below those in peer countries. - Near-term outlook and projections: - Real GDP projected to drop by 3 percent in 2009. - Gradual recovery projected in 2010. - Unemployment rate likely to surpass 10 percent in 2010. - Inflation expected to remain below zero in the coming months but deflation is unlikely; inflation expected to rebound to about 1 percent in 2010. - Risks: mostly tilted to the downside given sensitivity to a worse-than-foreseen contraction in the European Union and underlying tail risks, particularly in the financial sector. - Medium-term: potential output growth projected to slow; output gap expected to narrow only gradually. - Key policy challenge: align crisis-countering actions with longer-term reforms to strengthen financial stability, safeguard fiscal sustainability, and deepen labor and product market reforms to boost competitiveness and growth. - Financial sector recommendations: - Further actions to uncover and, if needed, address underlying banking sector vulnerabilities. - Undertake rigorous, EU-wide coordinated stress tests to determine banks’ capital and liquidity needs and appropriate disclosure of results. - Assess follow-up recapitalization needs and measures to ensure soundness of bank balance sheets. - Role in international reform: France supportive of coordinated European and international regulatory and supervisory reforms; strengthen cooperation on financial sector exit strategies (deposit guarantees and bank-asset guarantees) to avoid destabilizing financial flows. - Fiscal policy assessment: - Fiscal response to cushion the downturn judged appropriate. - Fiscal stimulus measures in 2009-10 amount to above 1½ percent of GDP and are estimated to raise real GDP by about 1 percent cumulatively. - Measures are mostly front-loaded, diversified, emphasize temporary investment expenditures and various tax breaks. - Additional temporary effort for 2010 might be needed if downturn is deeper and more protracted; fiscal space is limited so only modest additional effort feasible; ensure discretionary measures are temporary. - Fiscal sustainability concerns: - Recession will lead to high fiscal deficits and further debt build-up in 2009 and beyond. - Rising expenditures related to population aging will put pressure on public finances. - Staff welcomes multi-year budget framework law adopted in January 2009 but calls for: - More realistic growth assumptions. - Specific measures to contain spending at all levels of government. - Streamlining tax expenditures and social contribution exemptions. - Strengthening fiscal responsibility of local governments. - Continued efforts to preserve social security sustainability. - Structural reform recommendations: - Focus on job creation, improving market efficiency, and productivity. - Strengthen labor market activation and training policies. - Continued minimum wage moderation to support youth and low-skilled employment and improve labor-cost competitiveness. - Raise legal retirement age to promote senior employment. - Single Competition Authority expected to strengthen competition policies. - EU Services Directive provides opportunity for deregulating professional services. - Administrative note: Next Article IV consultation proposed on the regular 12-month cycle. ### II. Context: Into the Storm - 2008 developments and the recession: - Real GDP growth slowed to 0.4 percent in 2008. - Cumulative drop in real GDP of 2.7 percent over the last quarter of 2008 and the first quarter of 2009. - Euro area real GDP decreased by 4.2 percent over the same period. - For 2009 as a whole, authorities and staff expect real GDP to contract by 3 percent, with a tepid recovery starting in 2010. - Labor market: - Unemployment rate: low of 7.5 percent in February 2008 (about ¾ percentage point below the previous cyclical trough in June 2001). - Unemployment increased to 9.3 percent as of May 2009. - Likely further deterioration in labor market to weigh on consumer confidence and spending. - Inflation and prices: - Headline inflation spiked to above 3½ percent by mid-2008 due to energy and commodity prices. - Annual headline inflation fell below zero in May 2009. - Core inflation remained around 1½ percent. - Consumer prices expected to decline on an annual basis during remainder of the year because of base effects; entrenched nominal wage and price rigidities would prevent deflation. - Inflation expected to rebound to about 1 percent in 2010. - Monetary and credit conditions: - Monetary conditions index (MCI) declined sharply since mid-2008 due to ECB easing and unconventional measures. - Money market activity fell sharply and credit decelerated further. - As of end-June, bank lending rates had declined from their end-2008 heights by more than 100 basis points to around 4 percent for medium- and long-term loans and by about 200 basis points to around 3 percent for short-term loans. - Corporate spreads remain at a high level of 255 basis points. - Fiscal stance and Maastricht ceiling: - General government deficit increased from 2.7 percent of GDP in 2007 to 3.4 percent in 2008, triggering reopening of the European Commission excessive deficit procedure (EDP). - TEPA law (Loi de Travail, Emploi et Pouvoir d’Achat) entails annual budgetary costs of 0.3-0.5 percent of GDP in 2008. - Primary expenditures real growth rate of 0.3 percent in 2008 versus a decade average of 2.2 percent. ### B. Financial Sector: Weathering the Crisis Comparatively Well - Losses and write-downs: - Total losses and write-downs of French banks since onset of crisis account for about 3 percent of losses and write-downs around the globe. - French banks account for about 10 percent of world banking assets. - Resilience factors: relatively conservative lending practices and consistent supervisory coverage by the Commission bancaire. - Earnings and valuations: - Sharp drop in earnings and rise in costs, but most French banks continued to register net profits in 2008. - Valuations of French financial stocks declined steeply since end-2006, but deterioration was somewhat less than in the U.S. and other Western European countries. - CDS spreads of French banks increased considerably but on average somewhat less than for other European banks. - Authorities’ measures to support banking system (Box 1 summary): - Placed the French subsidiary of Lehman Brothers under state administration after Lehman’s bankruptcy. - Participated in €6.4 billion recapitalization of Dexia group; government contributed €1 billion and Caisse des Dépots et Consignations injected €2 billion; government issued guarantees on Dexia obligations to a maximum €55 billion. - Set up Société de Financement de l’Économie Française (SFEF): able to issue up to €265 billion (about 14 percent of GDP) of government-guaranteed obligations until end-December 2009 to boost bank lending; French banks meeting prudential regulations can borrow from SFEF against collateral. - Established Société de Prise de Participations de l’État (SPPE) for bank recapitalization: a fund of €40 billion (about 2 percent of GDP) financing itself on the market with its debt guaranteed by the government. Six largest French banks obtained first tranche of €10.5 billion in Tier 1 qualifying subordinated loans; a second tranche of same aggregate amount announced. - Supported merger between Groupe Caisse d’Épargne (GCE) and Groupe Banque Populaire (GBP) with SPPE capital injection of €5 billion (€3 billion to be taken by the merged entity). - Conditions on banks receiving state support: commit to increase credit to households, SMEs, and local authorities at least 3-4 percent per year; regular reporting to government; compliance with compensation rules including decree banning stock options and limiting bonuses for bank managers (non-retroactive through 2010, extendable). - Capital raising and credit dynamics: - Total new capital raised by French banks accounts for about 4 percent of aggregate bank capital raised around the globe since mid-2007. - Annual credit growth slowed from 13 percent in 2007 to less than 2 percent in April 2009. - Credit squeeze is ongoing and effects on the real economy are still unfolding. *Source: IMF staff report content (chapter “Economic Developments”).* ### 17. The deceleration of credit to the economy thus far was mostly related to waning ### _cr09232 - 17. The deceleration of credit to the economy thus far was mostly related to waning ### Financial sector, credit deceleration, and contagion risks - The deceleration of credit to the private sector was more related to slowing demand than to the tightening in lending standards (lending surveys). - The relative size of the financial sector has been stable since 2000 and its contribution to growth is smaller than in some other large economies. - Links between the financial sector and the real economy, including wealth effects, are estimated to be weaker in France than in the U.S. or the U.K. - The economic downturn may lead to an increase in counterparty risks for the financial sector and adverse feedback loops. - Household confidence is sensitive to developments in equity markets; deterioration of the financial environment could induce households to increase precautionary savings. - Capital injections through the SPPE have had upfront fiscal costs amounting thus far to 0.7 percent of GDP. - The SFEF has issued €62 billion of government-guaranteed debt to help banks expand lending capacity at low funding costs. - Numerical credit targets attached to government support of banks are prone to creating distortions; authorities indicated targets would be implemented judiciously, taking declining demand into account. - The average Tier 1 ratio rose from 7.7 in 2007 to 8.3 in 2008. - Leverage, measured as the ratio of total assets to total capital, stabilized at 24. - Remaining toxic assets of major French banks stood at about €18 billion at end-2008; total exposure to LBOs and CLOs amounted to €37 billion (together estimated at less than one percent of total bank assets). ### House prices, household balance sheets, and housing finance - Nominal house prices had an average annual growth rate of about 10 percent over the last decade, above the euro area average; nominal house prices more than doubled over the last decade and were estimated to have been overvalued by some 20 percent compared to fundamentals in 2007. - House prices declined by about 7 percent from their peak in the beginning of 2008. - The decline in construction activities contributed to the economic contraction, although less than the drop in manufacturing output. - Housing-related debt amounted to 35 percent of GDP and 53 percent of gross disposable income in 2007, both below the euro area average. - The French mortgage market index in the IMF World Economic Outlook (April 2008) lies between 0 and 1; the French index has the lowest value of 0.23 (Germany 0.28, U.K. 0.58, U.S. 0.98). - Typical mortgage characteristics in France (as presented): no mortgage equity withdrawal; no fee-free prepayment; typical loan-to-value ratio is 75 percent; average term is 15 years. - Covered bond issuance accounts for only 1.6 percent of residential loans outstanding; mortgage-backed securities issuance amounts to 1 percent of residential loans outstanding. - French households have relatively difficult access to mortgage financing; home mortgages are granted largely on the basis of repayment capacity rather than the (potential) value of the house. - The lack of financial instruments that promote consumer credit when households’ wealth increases would prevent a sharp deterioration of consumption when housing prices decline. ### Macroeconomic outlook and recovery profile - Staff projects GDP growth at ½ percent in 2010 and at about 2 percent on average over 2011-14. - Baseline narrative: fall in exports expected to slow as partner countries bottom out; growth to suffer from some further decline in net exports in 2010; investment to gradually recover; resumption of private consumption and gradual re-building of inventories expected to be modest; net exports supportive from 2011 onwards; gradual increases in investment and consumption should bring GDP growth above potential; an output gap is expected to remain by 2014. - Recent business indicators show some encouraging signs of stabilization, albeit at very depressed levels. ### Risks to the outlook - Risks are tilted mostly to the downside, linked to spillovers from France’s high commercial and financial integration in the world economy (two-thirds of France’s exports destined to the European Union). - Specific downside risks outlined in the growth forecast chart: persistent tightening of financing conditions; drop in foreign demand; earlier recovery of business confidence; progress in reform agenda. (These risks are weighted by staff's subjective probability assessment.) - A worsening of the financial crisis would hurt banks’ balance sheets and could further depress credit growth. - The jump in unemployment this year and next could further shake confidence and weaken private consumption. - A sharp housing price correction could dampen construction activity and, to a limited extent, household consumption; house price correction expected to continue in 2009 and the first part of 2010. - On the upside: international fiscal stimulus and a recovery of global activity could speed up restoration of confidence. ### Impact on potential growth (2009-14) and longer-term considerations - Staff expects potential growth to slow by 1 percentage point to about 1 percent in 2009-14, due to demographic changes and the crisis. - Official projections foresee a decline in labor force growth by more than ½ percent in the next five years compared to the last decade (under more favorable macro conditions than current). - Projected reductions to contributions to potential growth (Box 3, Cobb-Douglas calibration with capital-output ratio set at 0.4): - Growth contribution of the labor force projected to decline by 0.4 percent (in line with 2006 INSEE labor force projections). - Growth contribution of the capital stock projected to decline by 0.3 percent, reflecting broad standstill of investment in 2008 followed by expected sharp contraction in 2009 and gradual recovery thereafter. - TFP growth projected to suffer from the crisis but converge back to long-term average rate of ½ percent; projections incorporate a discount of ½ percent in 2008-09, which gradually disappears by 2014. - Under the baseline, annual potential growth expected to decline from 2 percent in 2000-08 to 1 percent in 2009-14. - Long-term impact risks: discouraged worker effect may dominate (reference to A. Jacquot (1997) indicating discouraged worker effect); higher unemployment could discourage inflows of migrant workers; crisis-driven restructuring may render obsolete a substantial fraction of existing capital stock. - Chart note: France. Contribution to potential growth, 1981-2014 (components: Capital, Labor force, TFP, Potential). ### Policy challenges and measures to preserve financial stability - Short-term policies need to focus on financial sector stabilization and an appropriately supportive fiscal stance, while medium-term priorities include fiscal sustainability and increasing structural flexibility to support growth. - Authorities’ actions: - Capital injections through SPPE (upfront fiscal costs thus far 0.7 percent of GDP). - SFEF issuance of €62 billion of government-guaranteed debt. - Creation of an independent médiateur de crédit to ensure fair lending practices. - Government support for the merger between GCE and GBP with capital injections and conditions for further government intervention to resolve problems in a subsidiary (Natixis). - Implementation of some Paris-Place Financière initiative measures and generalized distribution of the Livret A to increase competition and efficiency in the financial sector. - Despite improved capital adequacy ratios, some deleveraging may still be needed to reduce relatively high leverage. - Exposure profile and vulnerabilities: - Banks’ exposure to emerging markets represents 4 percent of total bank assets (14 percent of GDP). - Exposure to emerging markets is geographically diversified; CEE represents about 37 percent of total exposure to emerging markets. - Exposure to the Czech Republic, Poland, and Russia accounts for half of banks’ total exposure to CEE; among three major French banks exposed to CEE only one bank has a sizable involvement. - Foreign claims represent 33½ percent of bank assets and 125 percent of GDP. - Exposure to mature markets represents 85 percent of total foreign claims in 2008; Germany, Italy, the U.S., and the U.K. account for half of total exposure to mature markets. - Earnings and profitability pressures: - Share of impaired loans in the total loan portfolio increased slightly to 2.8 percent in 2008. - Earnings risks arise from decelerating lending, trading book volatility and valuation uncertainty, reduced appetite for complex CIB products, and potential additional losses from remaining toxic assets and other risky assets. *Source: Extract from the provided IMF PDF content.* ### 30. Additional measures, some of which are already in train, may be necessary to ### Additional measures, some of which are already in train, may be necessary to strengthen financial stability ### Financial stability: staff recommendations - Carry out rigorous, preferably EU-wide coordinated stress tests, focusing on the quantity and quality of capital needed, followed up with appropriate disclosure. - On the basis of such stress tests, if needed, follow-up action should be taken to further recapitalize banks and ensure sound balance sheets. - Continue to prompt banks to improve the quality of their capital by reducing the proportion of hybrid capital and increase the proportion of core capital given investors’ focus on capital quality. - Support confidence in the financial system through continued adequate supervision and full transparency about the financial standing of key institutions. - Continue to prompt banks to implement fully measures to strengthen internal controls and operational risk management, and restructure CIB activities. ### Authorities’ assessment and international coordination - The French authorities: - Agreed that maintaining adequate capital and continued supervisory vigilance are needed. - Were confident about the resilience of the French banking sector and the adequacy of the banks’ capital level. - Noted improvement in corporate governance of mutual banks. - Acknowledged ongoing deterioration in bank profitability and increase in counterparty risk; agreed additional write-downs may be needed and further losses from certain risky assets and banking activities are a concern. - Considered that the leverage ratio should be interpreted with caution in view of possible differences in accounting practices. - Supervisory stress tests based on end-2008 data showed banks’ continued resilience under different scenarios; authorities confidentially shared aggregated results with staff. - Authorities supported further EU-wide stress tests but emphasized the need for an agreed approach among participating member countries to disclosure of results. - France proposed steps to strengthen European regulatory reform, including: - (i) strengthening supervision of EU-wide financial groups; - (ii) harmonizing regulatory frameworks; - (iii) undertaking joint supervision of cross-border banks and insurance companies; - (iv) enhancing transparency and surveillance of non-regulated markets, credit rating agencies, and compensation; - (v) strengthening internal controls and governance. - France is instrumental in promoting hedge fund regulations and could play an important role in supporting recommendations of the de Larosière group. - Authorities expressed strong support for international harmonization of regulations and supervisory practices and preference for a simple and clearly defined capital adequacy measure. - Authorities agreed on importance of strengthening international cooperation on financial sector exit strategies, particularly on maximum coverage of deposit insurance and bank-asset guarantees across the European Union, to avoid destabilizing financial flows. - The French deposit insurance limit has been kept unchanged at €70,000. --- ### Providing economic stimulus while safeguarding fiscal sustainability ### 2009 budget and initial measures - Initial 2009 budget aimed to contain the fiscal deficit at 2.7 percent of GDP, followed by gradual consolidation to achieve fiscal balance by 2012. - Revenue-side measures: - Cash-flow support through monthly rather than quarterly VAT reimbursements. - Tax credits on R&D outlays. - Combined with third-year implementation of the TEPA law, total tax relief in the initial budget represented 0.4 percent of GDP. - Expenditure-side measure: - Introduction in July 2009 of a new earned-income supplement (Revenu de solidarité active, RSA) that would increase social benefits by about 0.1 percent of GDP (total cost of the RSA is estimated at 0.5 percent of GDP, net cost 0.1 percent of GDP after savings; net cost financed by an additional social charge on investment income). - A one-off allowance (€200) was disbursed in April to people likely to be RSA eligible. ### Additional stimulus and automatic stabilizers - As outlook deteriorated, authorities adopted additional stimulus and let automatic stabilizers operate fully. - Discretionary fiscal stimulus amounts to above 1½ percent of GDP in 2009-10. - Automatic stabilizers are estimated to amount to some 3 percent of GDP per year. - The size of discretionary stimulus is suitable in light of automatic stabilizers and is in line with the EU European Economic Recovery Plan. - Counter-cyclical fiscal stance, together with drop in tax revenues, would increase the overall fiscal deficit to almost 7½ percent of GDP in 2009. - Taking account of the upfront fiscal cost of financial sector measures, public debt is projected to increase to 77.5 percent of GDP in 2009 from 67.5 percent in 2008. - Authorities noted that a continued accommodative monetary policy stance of the ECB would support effectiveness of fiscal stimulus. ### Box 4 — Discretionary fiscal stimulus and impact (summarized) - Discretionary fiscal stimulus measures to date amount to 1.2 percent of GDP in 2009 and 0.5 percent in 2010. - Government announced a €26 billion (1.4 percent of GDP) fiscal stimulus plan (Plan de relance) for 2009-10, followed by: - Package of household tax breaks and social benefits (0.1 percent of GDP); - Reduction of the VAT rate for restaurants to 5.5 percent (0.1 percent of GDP); - Loans to the car industry (0.3 percent of GDP); - Phasing-out of the taxe professionnelle (0.6 percent of GDP). - The loans to the auto sector and phasing-out of taxe professionnelle are not included in the headline fiscal stimulus because loans are registered below the line and the reduction of the local business tax is expected to be offset by other tax increases. - Stimulus design: - Immediate corporate cash-flow support: tax credits on R&D outlays, accelerated reimbursement of VAT credits, accelerated depreciation of investment. - Public investment boost: direct infrastructure investment at central government level; matching revenues to local authorities; infrastructure projects by public enterprises. - Household support: temporary reduction of personal income tax in 2009, public expenditures on social housing, additional unemployment benefits, extension of social safety net through RSA. - Estimated impact: - Stimulus estimated to raise real GDP by about 1 percent cumulatively in 2009-10. - Staff estimates tax multipliers in the range of 0.2-0.4 and expenditure multipliers in the range of 0.9-1.1. - Assuming full compensation of the local business tax in 2010, discretionary fiscal stimulus expected net real GDP impact of 0.7 percent in 2009 and 0.2 percent in 2010. - France: Fiscal stimulus, 2009-10 (in percent of GDP) - Measures in 2009 budget: - Cash flow measures 2009: 0.3; 2010: <0.1 - TEPA law 2009: 0.1; 2010: 0.1 - Other 2009: <0.1; 2010: 0.1 - New measures: - Public investment 2009: 0.3; 2010: 0.2 - Social safety net 2009: 0.1; 2010: <0.1 - Other expenditures 2009: 0.2; 2010: <0.1 - Personal income tax 2009: 0.1; 2010: 0.0 - Corporate income tax 1/ 2009: 0.0; 2010: <0.1 - VAT 2009: 0.1; 2010: 0.1 - Total general government 2009: 1.2; 2010: 0.5 - Memorandum: - Investment of public enterprises 2009: 0.2; 2010: 0.1 - Credit support to the auto. sector 2009: 0.3; 2010: 0.0 - Note: 1/ Excluding the phasing out of the taxe professionnelle. ### Fiscal space and need for limited additional stimulus (Box 5 summary) - If downturn is deeper and more protracted, some additional fiscal stimulus might be needed in 2010 but fiscal space is limited. - Staff estimates France could afford only a modest additional fiscal effort, taking into account trade-off between costs of additional debt and benefits of further stimulus. - Authorities indicated any additional stimulus would focus on measures with largest fiscal multipliers, e.g., public investment and targeted transfers. - Factors determining fiscal space: - Financing constraints: sovereign default risk measures have risen since early 2008; France enjoys a relatively favorable position compared to EU partners. - Sustainability constraints and institutional factors: According to the SGP criteria, all key fiscal indicators indicate France has no additional fiscal space. - Credibility factors: Historical deficit bias in French fiscal policy; multi-year fiscal framework law is an important step to raise credibility. ### Medium-term fiscal outlook and scenarios - Under current policies and taking account of downturn, staff projects structural fiscal deficits over the medium-term to remain broadly flat at almost 4½ percent of GDP. - With expected persistence of negative output gap, overall deficit will remain largely above 3 percent Maastricht threshold and public debt ratio would surpass 90 percent by 2012. - Public debt service obligations will aggravate fiscal costs related to population aging; decisive implementation of a clear consolidation strategy needed. - Two scenarios illustrated (France: Selected Fiscal Indicators, 2008-14; in percent of GDP): - Baseline scenario (assumes real growth rate of primary structural expenditures of 1.4 percent): - Fiscal balance: 2008 -3.4; 2009 -7.4; 2010 -7.5; 2011 -7.1; 2012 -6.6; 2013 -5.9; 2014 -5.2 - Structural balance: 2008 -3.3; 2009 -4.0; 2010 -4.0; 2011 -4.2; 2012 -4.5; 2013 -4.5; 2014 -4.6 - Cyclical balance: 2008 0.1; 2009 -3.4; 2010 -3.5; 2011 -2.9; 2012 -2.1; 2013 -1.3; 2014 -0.7 - Primary fiscal impulse1/: 2008 0.0; 2009 -1.2; 2010 0.4; 2011 0.2; 2012 -0.1; 2013 0.0; 2014 0.1 - Debt: 2008 67.5; 2009 77.5; 2010 83.9; 2011 88.3; 2012 91.7; 2013 94.1; 2014 95.6 - Consolidation scenario (assumes real growth of structural primary expenditures of 0.4 percent from 2010 onwards): - Fiscal balance: 2008 -3.4; 2009 -7.4; 2010 -7.0; 2011 -6.1; 2012 -5.1; 2013 -3.9; 2014 -2.7 - Structural balance: 2008 -3.3; 2009 -4.0; 2010 -3.5; 2011 -3.2; 2012 -3.0; 2013 -2.5; 2014 -2.0 - Cyclical balance: 2008 0.1; 2009 -3.4; 2010 -3.5; 2011 -2.9; 2012 -2.1; 2013 -1.3; 2014 -0.7 - Primary fiscal impulse1/: 2008 0.0; 2009 -1.2; 2010 0.9; 2011 0.6; 2012 0.4; 2013 0.5; 2014 0.5 - Debt: 2008 67.5; 2009 77.5; 2010 83.4; 2011 86.8; 2012 88.8; 2013 89.2; 2014 88.3 - Source: IMF staff estimates. - Note: 1/ Primary fiscal impulse: increment of the primary structural balance (not reported). ### Policy recommendations for medium-term consolidation and institutions - Fiscal stimulus measures should include sunset clauses or be automatically reversible, particularly the VAT reduction for restaurants which introduces an additional distortion without broader economic benefits. - Elimination of the part of the local business tax (taxe professionnelle) that hurts business investment is an important step toward streamlining the tax system; authorities indicated implementation guided by principle of revenue neutrality while seeking not to add to high tax burden on enterprises. - Starting in 2010, strictly containing real expenditure growth is required to initiate reduction in public debt ratio and bring deficit below 3 percent of GDP ceiling. - While preparing contingency stimulus measures, government should adopt credible medium-term consolidation plans to anchor expectations. - Fiscal consolidation would benefit from institutional reforms in the budget process: - Strengthen credibility of the budget: reinforce multi-year budgeting by clearly articulating specific measures to achieve announced fiscal targets; adopt contingency spending reduction plans; increase ownership of consolidation goals at all levels of government. - Base budget projections on more realistic macroeconomic assumptions; government’s assumption of real GDP growth of 2½ percent in 2011-12 appears too optimistic. - The general review of public policies (Révision Générale des Politiques Publiques, RGPP) launched in 2008 is commendable but identified budgetary savings so far (½ percent of GDP) are insufficient; measures need to be complemented by similar reviews for other levels of government. - Consolidation progress by central government is encouraging; objective of zero growth of real expenditures by central government should be maintained even when rising debt service forces offsets elsewhere. - Authorities intend to continue focusing on reducing public sector employment (non-replacement of every second retiring civil servant). *Source: IMF staff report excerpt (content unit: _cr09232).* ### 42. Caution should be given not to erode the benefits of improved spending ### 42. Caution should be given not to erode the benefits of improved spending ### Tax expenditures and tax system review - Revenue losses are estimated at about €70 billion per year (some 3½ percent of GDP). - Completion of the general review of the tax system (RGPO) would help streamline tax expenditures. - Observations and findings: - Some countries (e.g., Canada) have succeeded in reducing tax expenditures, which tend to be nontransparent and distortive. - A key element is to incorporate the ongoing annual reviews in the government budget; these reviews should assess these policies on their relevance, effectiveness, and cost-efficiency. - A thorough tax review would also help to streamline the tax code, broaden the tax base, and move to more unified VAT rates, in order to increase tax productivity and reduce incentives to shift activities to the informal sector. - An increased use of environmental taxation would match recent initiatives proposed by several European countries. - Policy recommendations: - Avoid further recourse to already very large tax expenditures and social contribution exemptions (niches fiscales et sociales). - Complete the RGPO and embed annual reviews in the budget process to evaluate relevance, effectiveness, and cost-efficiency of tax expenditures. - Broaden the tax base and move toward more unified VAT rates. - Consider greater use of environmental taxation. ### Local government fiscal responsibility - Findings: - Greater fiscal responsibility at the local government level is vital to healthy public finances. - Increased devolution of responsibilities to local governments has so far failed to deliver more fiscal discipline through a clearer connection between the cost and the benefits of public services. - The civil service reduction implemented at the central level was broadly balanced by hiring at the local government level. - Spending drift by overlapping regional and local government structures needs reassessment. - Policy recommendations: - Use the arrival of large cohorts of local civil servants at retirement age after 2010 as an opportunity for savings by extending the policy of non-replacement of every second retiring civil servant to local governments. - Act on recommendations of the Balladur Committee which focus on improving local government effectiveness. ### Social security, pensions, and health spending - Findings: - With an aging population, continued efforts are necessary to ensure the sustainability of the social security system. - The reform of special pension regimes in 2007 and the gradual increase of the contribution period needed for entitlement to a full pension will slightly reduce the significant projected financing gaps in the period ahead. - The legal pension age of 60 years remains considerably below that in other euro area countries. - Expenditure control has helped to reduce spending slippages in health, but further action is needed. - It is important to adequately take account of rising long-term health expenditures resulting from technical progress in health services and to start preparing an appropriate policy response. - Policy recommendations: - Reform the structure of the pension system to limit fiscal cost for new entrants in the labor market. - Intensify discussion on raising the pension age with social partners as part of the planned social dialogue “Rendez-vous 2010.” - Prepare policy responses for rising long-term health expenditures from technical progress. ### Competitiveness and structural reforms — overview - Findings: - France needs to boost its potential output; pursuing the reform agenda started in 2007 is crucial. - Structural rigidities negatively affect the expected pace of the recovery. - Lack of competitiveness remains the main issue behind the current account deficit; structural rigidities hamper labor and product markets. - Despite a modest improvement since end-2007, a competitiveness gap, in particular with Germany, remains. - Since 2002, the REER has appreciated by 10 percent (both based on consumer prices and on unit labor costs), reflecting in part the 40 percent appreciation of the euro/U.S. dollar exchange rate over the same period. - The REER, based on consumer prices, is only 1 percent higher than its average level over the past 30 years. - Assessments based on the CGER methodologies point on average to a small overvaluation in 2008, partly corrected by end-March 2009. - The evolution of the REER cannot fully explain France’s disappointing export performance; the rise in unit labor costs vis-à-vis Germany has resulted in a loss of competitiveness, and supply rigidities in responding to changing global demand have hampered export performance. - CGER estimates (as presented): - Current Previous estimate Article IV (Apr. '09)(Dec. 07) - Current account norm (macro balance)-615018 - Equilibrium exchange rate (EREER)411769 - NFA stabilizing (External sustainability)990-1316 - Average247-214 - 1/ Positive number indicates that REER is above equilibrium. ### Employment, labor market reforms, and potential output - Key statistics and findings: - France has one of the lowest employment rates among OECD countries—especially among seniors, low-skilled, and young workers. - Current employment rate: 65.2 percent of the labor force. - Euro area average employment rate: 67.3 percent. - Lifting the French employment rate gradually to the average level in the euro area would: - Boost the potential growth rate by up to ½ percent over the medium term. - Reduce unemployment-related government expenditures by up to 1 percent of GDP. - Recent reforms and concerns: - The labor market modernization law (Loi de Modernisation du Marché de Travail, MMT) adopted in June 2008 has somewhat eased labor contract regulations and lifted some restrictions of the 35-hour work week. - Tax and social contribution exemptions of overtime work weigh heavily on the public purse. - Recommended policy actions: - Fully equip the unified job placement agency (Pôle emploi) to effectively boost support to unemployed workers and strictly enforce job-search requirements; focus on job training, placement services, and cooperation with private agencies to strengthen activation policies. - Help low-skilled workers enter the job market: - The recently introduced RSA is a step in the right direction to remove inactivity traps keeping potential low-skilled workers out of the labor force. - Pursue moderation of the relatively high minimum wage (SMIC) to help low-skilled workers find a job and reinforce the trend decline in the share of workers paid at the SMIC. - The creation of the independent expert commission for SMIC review is a welcome step. - Address lack of competition in several service sectors that prevents innovation and job creation. - Promote “senior labor”: - Reforms include gradual withdrawal of the waiver on job-search requirements for older unemployed workers and gradual increase in the contribution period for a full pension. - Government and social partners should find an understanding on the need to raise the legal retirement age. - Implement effective vocational training and activation policies to help senior workers rejoin the labor market. ### Product market reforms and retail sector liberalization - Findings: - Further product market reforms are essential for energizing economic growth, creating jobs, and increasing consumer welfare. - Inflation dynamics in early 2008 raised concerns about price-setting in food and retail markets. - Promoting competition would raise purchasing power, support productivity growth, and enhance competitiveness. - Retail sector observations: - Retail trade has been partially liberalized but important steps remain. - The establishment of a single and reinforced Competition Authority is welcomed and should help implement stronger competition policies. - The economic modernization law (Loi de Modernisation de l’Economie, LME) has eased some restrictions on new retail establishments but discounters continue to face administrative limitations to entry into the French market. - Policy recommendations: - Deregulate opening hours and sales periods of stores to promote a more competitive environment and lower prices for consumers. - End price regulations on key products (for example over-the-counter drugs) and follow with market liberalization to enhance consumer benefits. *IMF staff analysis as contained in the source content unit.* ### 51. The EU Services Directive provides an opportunity for further liberalization ### The EU Services Directive provides an opportunity for further liberalization ### Major finding - The EU Services Directive provides an opportunity for further liberalization that should be fully seized. - The OECD has identified that in France entry barriers and restrictions on professional services go beyond what is needed for consumer protection. ### Policy recommendations - Introduce greater competition in health-related services. - Introduce greater competition in professional services to businesses and individuals (notaries, accountants). ### Labor market and wage considerations - The share of workers paid at the minimum wage in France is 15 percent, about double the average in OECD countries. - SMIC moderation will be required for some time to reestablish a motivating wage scale. ### Fiscal outlook and public finances (selected projections from Table 1 and Table 5) - Real GDP (change in percent): 2007 2.3; 2008 0.4; 2009 -3.0; 2010 0.4; 2011 1.7; 2012 1.9; 2013 2.2; 2014 2.3. - Unemployment rate (in percent): 2007 8.3; 2008 7.8; 2009 9.5; 2010 10.2; 2011 10.0; 2012 9.6; 2013 8.9; 2014 8.1. - General government balance (percent of GDP): 2007 -2.7; 2008 -3.4; 2009 -7.4; 2010 -7.5; 2011 -7.1; 2012 -6.6; 2013 -5.9; 2014 -5.2. - Central government balance (percent of GDP): 2007 -2.1; 2008 -2.8; 2009 -5.7; 2010 -6.0; 2011 -5.7; 2012 -5.3; 2013 -4.8; 2014 -4.3. - Structural balance (percent of potential GDP): 2007 -3.0; 2008 -3.3; 2009 -3.9; 2010 -3.9; 2011 -4.1; 2012 -4.4; 2013 -4.5; 2014 -4.5. - Primary balance (percent of GDP): 2007 0.0; 2008 -0.6; 2009 -5.0; 2010 -4.8; 2011 -4.0; 2012 -3.3; 2013 -2.5; 2014 -1.7. - General government gross debt (percent of GDP): 2007 63.9; 2008 67.5; 2009 77.5; 2010 83.9; 2011 88.3; 2012 91.7; 2013 94.1; 2014 95.6. ### Key statistics and other indicators (selected) - Gross national savings (percent of GDP): 2007 21.2; 2008 19.9; 2009 18.8; 2010 18.2; 2011 18.2; 2012 19.5; 2013 18.8; 2014 19.3. - Gross domestic investment (percent of GDP): 2007 22.2; 2008 22.2; 2009 20.4; 2010 20.3; 2011 20.4; 2012 20.4; 2013 20.6; 2014 20.7. - Exports of goods (percent of GDP): 2007 21.1; 2008 21.1; 2009 15.4; 2010 15.4; 2011 15.9; 2012 16.3; 2013 16.8; 2014 17.3. - Imports of goods (percent of GDP): 2007 23.2; 2008 24.1; 2009 17.8; 2010 18.4; 2011 19.0; 2012 19.4; 2013 19.6; 2014 19.9. - Trade balance (percent of GDP): 2007 -2.1; 2008 -3.0; 2009 -2.4; 2010 -3.0; 2011 -3.1; 2012 -3.0; 2013 -2.8; 2014 -2.6. - Current account (percent of GDP): 2007 -1.0; 2008 -2.3; 2009 -1.6; 2010 -2.1; 2011 -2.2; 2012 -2.1; 2013 -1.8; 2014 -1.4. - Potential output (percent growth): 2007 2.1; 2008 1.3; 2009 0.9; 2010 0.8; 2011 0.9; 2012 1.0; 2013 1.3; 2014 1.3. - Output gap: 2007 0.9; 2008 -0.1; 2009 -3.9; 2010 -4.3; 2011 -3.6; 2012 -2.7; 2013 -1.9; 2014 -1.0. *Source: IMF Staff Report for the 2009 Article IV Consultation (Informational Annexes), July 13, 2009.* ### ANNEX I. FRANCE: FUND RELATIONS ### ANNEX I. FRANCE: FUND RELATIONS (As of May 31, 2009) ### I. Membership Status - Joined December 27, 1945 - Article VIII ### II. General Resources Account - Quota: 10,738.50 SDR Million (100.00 percent of Quota) - Fund holdings of currency: 8,580.49 SDR Million (79.9 percent of Quota) - Reserve position in Fund: 2,158.12 SDR Million (20.1 percent of Quota) ### III. SDR Department - Net cumulative allocation: 1,079.87 SDR Million (100.00 percent of Allocation) - Holdings: 628.57 SDR Million (58.21 percent of Allocation) ### IV. Outstanding Purchases and Loans - None ### V. Latest Financial Arrangements - None ### VI. Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs) - Charges/interest: - 2009: 1.03 - 2010: 2.16 - 2011: 2.16 - 2012: 2.16 - 2013: 2.16 - Total: - 2009: 1.03 - 2010: 2.16 - 2011: 2.16 - 2012: 2.16 - 2013: 2.16 ### VII. Implementation of HIPC Initiative - Not applicable ### VIII. Safeguards Assessments - Not applicable ### IX. Exchange Rate Arrangements - France’s currency is the euro, which floats freely and independently against other currencies. - Restrictions maintained (in accordance with EU regulations and relevant UN Security Council resolutions): - Certain restrictions on making payments and transfers for current international transactions with respect to: - the former government of Iraq - the former government of Liberia - Myanmar - certain individuals associated with the previous government of the former Republic of Yugoslavia - Zimbabwe - Financing of, and financial assistance related to, military activities prohibited for: - Democratic Republic of the Congo (from October 1, 2003) - Somalia (effective January 27, 2003) - Sudan (from January 26, 2004) - Restrictions also apply on transfers with respect to the Taliban and individuals and organizations associated with terrorism. - The restriction with respect to the Socialist People’s Libyan Arab Jamahiriya has been notified to the Fund under Decision No. 144-(52/51). - Measures taken to freeze accounts of listed persons and entities linked to terrorists pursuant to relevant EU regulations and UN Security Council resolutions. ### X. Article IV Consultation - Last Article IV consultation concluded on February 15, 2008. - France is on the standard 12-month consultation cycle. ### XI. FSAP Participation and ROSC - France – Report on the Observance of Standards and Codes (ROSC): Module I – Fiscal Transparency - Reports and updates referenced (titles and dates preserved in source). - Summary findings: - France has achieved a high level of fiscal transparency and introduced improvements in coverage and presentation of fiscal information. - Progress includes: - Final accounts publication now includes more complete information on government assets and liabilities and disclosure of contingent liabilities. - Accounting standards changed to reflect accruals principles in a number of areas, with clear explanations. - Staff suggestions: - Further steps to identify and report quasi-fiscal activities in the budget presentation. - Provide a more consolidated picture of fiscal activity outside the appropriation process. - Improve reconciliation of stated policies with outcomes at the general government level. - Developments: - Issues addressed in the Loi organique aux lois de finance (LOLF), fully effective on January 1, 2006. - First multi-annual fiscal framework law adopted in January 2009, containing fiscal objectives for the period 2009-12. - Budget organized along missions with details on appropriations and performance indicators. - State Audit Office assigned certification of public accounts; implementation of accruals-basis accounting confirmed. - Parliamentary oversight powers strengthened. - France – ROSC: Module II – Transparency in Monetary and Financial Policies - Reports and updates referenced (titles and dates preserved in source). - Summary findings: - Transparency of financial policies accorded high priority; major agencies disclose objectives, legal and institutional frameworks, and have open policymaking and regulatory processes. - Principles of transparency observed in dissemination of relevant information and arrangements for internal conduct, integrity, and accountability. - Staff noted that the framework for supervision and regulation applicable to mutual insurance firms was not as well defined and suggested improving its transparency. - Monetary policy transparency not assessed by the Fund team because the Banque de France is a member of the European System of Central Banks and no longer conducts independent monetary policy. - Developments: - In August 2003, legislation created the Commission de Contrôle des Assurances, Mutuelles et Institutions de Prévoyance (CCAMIP) by merging CCA and CCMIP. - Coordination with banking sector supervisors strengthened and powers of supervisory authorities extended. - France – ROSC: Data Module - Reports and updates referenced (titles and dates preserved in source). - Summary findings: - France is in observance of the Fund’s Special Data Dissemination Standard (SDDS). - Mandates of INSEE and the Banque de France for production of the six macroeconomic datasets are clearly defined, with attention to reporting burden and confidentiality via CNIS. - Professionalism central to statistical operations; internationally and/or European accepted methodologies generally followed. - Degree of accuracy and reliability of the six datasets is remarkable; statistics are relevant, timely, and accessible to the public. - Recommendations made: - Clarify responsibility of INSEE as producer of government finance statistics. - Improve data sharing between the Banque de France and the rest of the French statistical system. - Review classification and valuation methods in balance-of-payments statistics. - Improve consistency between the current account of the balance of payments and the goods and services account in the national accounts. - Align timing of revisions in the quarterly and annual national accounts. - Facilitate identification of data production units of INSEE. - Follow-up: - France continues to implement several 2003 ROSC Data Module recommendations, including promoting broader understanding of statistical data revisions, greater use of firm-level data to improve measurement of changes in stocks, and intensifying work on portfolio investment income with the objective of starting to record those transactions on an accrual basis. - France – Financial System Stability Assessment (FSSA) and FSAP - Reports and assessments referenced (titles and dates preserved in source). - Summary findings: - France’s financial sector is strong and well supervised. - No weaknesses identified that could cause systemic risks. - Strengths supported by financial soundness indicators and strong conformity to supervisory and regulatory standards approved by the Basel Committee, IAIS, IOSCO, FATF, and CPSS. - High degree of observance of the transparency code in relevant areas. - French banking sector modernized and restructured over two decades and is well capitalized. - Systemic vulnerabilities in the insurance sector are well contained. - Securities markets are large and sophisticated. - Issues identified: - (i) Concentration in banking may have reached a point where further consolidation could intensify concerns over the scope for collusion and long-term stability where many banks could be considered “too big to fail.” - (ii) Banks’ large and growing portfolios of fixed-rate residential housing loans could represent a longer-term risk in the event of large increases in funding costs and/or a significant fall in real estate prices. - (iii) Some administered savings schemes and other policy measures give rise to costs and impede financial market innovation; these schemes are not well targeted to achieve intended social goals and are not well aligned with current priorities, such as strengthening the pension system. - (iv) Banking system’s rapid accumulation of capital strengthens resilience but is harder to control for mutual banks due to legal restrictions on remuneration of their members; for all banks, accumulation could encourage expansion through expensive takeovers and risky new ventures. - (v) Supervisory system composed of specialized segments; coordination mechanisms need further adaptation as cross-sectoral financial groups become more prevalent. - (vi) Consolidation of French stock and futures markets with others in Europe increases importance of effective cooperation across national jurisdictions; authorities face challenge of adjusting to and implementing the significant regulatory overhaul of late 2003. - (vii) Infrastructure for clearing and settlement of payments and securities is generally sound and modern, but improvements possible in clearing and settlement of retail payments and securities where multilateral netting systems lack fully adequate safeguards to ensure timely settlement in case of default. *IMF staff report annex: ANNEX I. FRANCE: FUND RELATIONS (As of May 31, 2009).* ### ANNEX II. FRANCE: STATISTICAL ISSUES ### ANNEX II. FRANCE: STATISTICAL ISSUES ### Statistical system assessment and data dissemination - The economic database is comprehensive and of high quality, and data provision to the Fund is adequate for surveillance. - Authorities regularly publish a full range of economic and financial data, and calendar dates of main statistical releases are provided. - France subscribes to the Fund’s Special Data Dissemination Standard. - Transmission of data in electronic form from INSEE and wide data provision from Banque de France, INSEE, ministry of finance, ministry of labor and solidarity support an infrastructure in which all data can be easily accessed through the Economic Data Sharing System. - A data ROSC mission assessed the statistical system in March 2003; the report was published in October 2003 with a factual update published in November 2004. ### Monetary, banking, and fiscal statistics frameworks - Monetary and banking statistics methodology conforms with the European Central Bank framework, providing comparable details as the Standardized Report Forms developed by STA. - Statistics for International Financial Statistics on banking institutions and monetary aggregates are prepared on a monthly basis and are timely. Monetary data are also disseminated in the quarterly IFS Supplement on monetary and financial statistics. - France follows the European System of Integrated Economic Accounts 1995 (ESA95). Data for GDP and its expenditure components are available from 1978 onwards. - Annual and quarterly national accounts provide reliable information; estimates from the two accounts differ slightly before quarterly accounts are revised to align with annual ones. - In 2005, national accounts estimates were rebased to 2000 prices. - Government finance statistics have been strengthened recently. INSEE is principally responsible for compilation and dissemination of fiscal data in a framework consistent with ESA95. - INSEE’s website enhancements include expenditure tables and government revenues by subsector (central government, miscellaneous central government agencies, local governments, and social security administration). - Government finance source data are collected by the Ministry of Economy and Finance, but presentation of both central and general government data is now more comprehensive and reflects impacts of recent budgetary reform (noted for 2006 and 2007). ### Balance of payments and external statistics issues - Balance-of-payments statistics should be interpreted with caution, given large errors and omissions. - Greater coherence between the external current account and the rest of the world account in the national accounts is needed. - Work on the transportation account has been undertaken with promising early results. ### Frequency and timeliness of key macroeconomic indicators (As of June 30, 2009) - Exchange Rates: Date of Latest Observation 05/09; Date Received 06/09; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 05/09; Date Received 06/09; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly. (Note: Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.) - Reserve/Base Money: 05/09; 06/09; Weekly; Weekly; Weekly. - Broad Money: 05/09; 06/09; Monthly; Monthly; Monthly. - Central Bank Balance Sheet: 05/09; 06/09; Monthly; Monthly; Monthly. - Consolidated Balance Sheet of the Banking System: 05/09; 06/09; Monthly; Monthly; Monthly. - Interest Rates: 05/09; 06/09; Monthly; Monthly; Monthly. (Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.) - Consumer Price Index: 05/09; 06/09; Monthly; Monthly; Monthly. - Revenue, Expenditure, Balance and Composition of Financing — General Government: Q1:2009; 06/09; Quarterly; Quarterly; Quarterly. (Financing includes foreign, domestic bank, and domestic nonbank financing.) - Revenue, Expenditure, Balance and Composition of Financing — Central Government: 05/09; 06/09; Monthly; Monthly; Monthly. (Presented on a budget-accounting basis, not on a national accounts basis.) - Stock of Central Government Debt: 05/09; 06/09; Monthly; Monthly; Monthly. - Stock of Central Government-Guaranteed Debt: Q1:2009; 06/09; Quarterly; Quarterly; Quarterly. - External Current Account Balance: Q1:2009; 06/09; Quarterly; Quarterly; Quarterly. - Exports and Imports of Goods and Services: Q1:2009; 06/09; Quarterly; Quarterly; Quarterly. - GDP/GNP: Q1:2009; 06/09; Quarterly; Quarterly; Quarterly. - Gross External Debt: 05/09; 06/09; Monthly; Monthly; Monthly. ### Executive Board assessment: macro outlook, fiscal stance, and financial sector - Near-term outlook: real GDP projected to drop by 3 percent in 2009, followed by a gradual recovery in 2010. - Risks are mostly tilted to the downside due to sensitivity to a worse-than-foreseen contraction in the European Union and financial-sector tail risks; steep increase in unemployment could further weaken private consumption; worsening of the financial crisis would hurt banks’ balance sheets and could depress credit growth. - France is somewhat less affected than the euro area due to relatively low trade openness and large social safety net; early policy response and structural features have helped soften the downturn. - Directors commended the size and composition of the fiscal stimulus measures—with full play of France’s sizable automatic stabilizers—and noted measures to recapitalize banks and support liquidity. - Fiscal policy challenge: provide short-term stimulus without derailing medium-term fiscal consolidation. Some Directors saw scope for modest additional temporary, investment-based fiscal action if downside risks materialize; others saw no scope given sizable stimulus already and pressing consolidation needs. - Directors emphasized safeguarding medium-term fiscal sustainability and avoiding unsustainable debt dynamics. They welcomed adoption of a multi-year budgeting framework, zero-growth expenditure at the central government level, and ongoing reduction in public sector employment. - Recommended fiscal strategy elements: realistic growth assumptions, articulation of specific expenditure savings at all levels of government, and streamlining of tax expenditures; institutional steps to ensure central government efforts accompanied by enhanced fiscal responsibility at the local level. - Financial sector: high supervision standards and cautious lending practices helped banks weather the crisis relatively well; government interventions were well-handled but further intervention should not be ruled out. Directors urged close monitoring, EU-wide coordinated stress tests, and coordination on exit strategies from financial sector support. - Structural reform recommendations: continue labor and product market reforms to boost competitiveness and growth and safeguard fiscal sustainability; foster job creation especially for young, low-skilled, and senior workers; measures cited include moderation in minimum wage setting, activation policies such as job training, and raising the legal retirement age to promote senior employment; utilize the EU services directive to deregulate certain professional services. ### Key macroeconomic projections and indicators (France: Selected Economic and Social Indicators, 2007-14) Projections - Real GDP (change in percent): 2007 2.3; 2008 0.4; 2009 -3.0; 2010 0.4; 2011 1.7; 2012 1.9; 2013 2.2; 2014 2.3. - Domestic demand (change in percent): 2007 3.2; 2008 0.6; 2009 -2.0; 2010 0.5; 2011 1.7; 2012 1.7; 2013 1.8; 2014 1.8. - CPI (year average): 2007 1.6; 2008 3.2; 2009 0.3; 2010 1.1; 2011 1.4; 2012 1.8; 2013 1.8; 2014 1.8. - Unemployment rate (in percent): 2007 8.3; 2008 7.8; 2009 9.5; 2010 10.2; 2011 10.0; 2012 9.6; 2013 8.9; 2014 8.1. - Gross national savings (percent of GDP): 2007 21.2; 2008 19.9; 2009 18.8; 2010 18.2; 2011 18.2; 2012 19.5; 2013 18.8; 2014 19.3. - Gross domestic investment (percent of GDP): 2007 22.2; 2008 22.2; 2009 20.4; 2010 20.3; 2011 20.4; 2012 20.4; 2013 20.6; 2014 20.7. Public finance (percent of GDP) - Central government balance: 2007 -2.1; 2008 -2.8; 2009 -5.7; 2010 -6.0; 2011 -5.7; 2012 -5.3; 2013 -4.8; 2014 -4.3. - General government balance: 2007 -2.7; 2008 -3.4; 2009 -7.4; 2010 -7.5; 2011 -7.1; 2012 -6.6; 2013 -5.9; 2014 -5.2. - Structural balance (percent of potential GDP): 2007 -3.0; 2008 -3.3; 2009 -3.9; 2010 -3.9; 2011 -4.1; 2012 -4.4; 2013 -4.5; 2014 -4.5. - Primary balance: 2007 0.0; 2008 -0.6; 2009 -5.0; 2010 -4.8; 2011 -4.0; 2012 -3.3; 2013 -2.5; 2014 -1.7. - General government gross debt 1/: 2007 63.9; 2008 67.5; 2009 77.5; 2010 83.9; 2011 88.3; 2012 91.7; 2013 94.1; 2014 95.6. - Note 1/: The debt figure does not include guarantees on non-general government debt. Money and interest rates (in percent) - Money market rate 2/: 2007 4.0; 2008 3.8; 2009 1.1. - Government bond yield 2/: 2007 4.3; 2008 4.2; 2009 3.6. - Note 2/: For 2009, average for January-April. Both market-based and officially-determined rates are included. Balance of payments (in percent of GDP) - Exports of goods: 2007 21.1; 2008 21.1; 2009 15.4; 2010 15.4; 2011 15.9; 2012 16.3; 2013 16.8; 2014 17.3. - Volume growth (in percent): 2007 2.5; 2008 -0.5; 2009 -14.5; 2010 -0.9; 2011 3.8; 2012 4.3; 2013 4.8; 2014 5.4. - Imports of goods: 2007 23.2; 2008 24.1; 2009 17.8; 2010 18.4; 2011 19.0; 2012 19.4; 2013 19.6; 2014 19.9. - Volume growth (in percent): 2007 5.4; 2008 0.6; 2009 -10.6; 2010 -0.4; 2011 3.3; 2012 3.3; 2013 3.3; 2014 3.6. - Trade balance: 2007 -2.1; 2008 -3.0; 2009 -2.4; 2010 -3.0; 2011 -3.1; 2012 -3.0; 2013 -2.8; 2014 -2.6. - Current account: 2007 -1.0; 2008 -2.3; 2009 -1.6; 2010 -2.1; 2011 -2.2; 2012 -2.1; 2013 -1.8; 2014 -1.4. - FDI (net): 2007 -2.5; 2008 -3.6; 2009 -2.5; 2010 -1.0; 2011 -1.0; 2012 -0.9; 2013 -0.9; 2014 -0.8. - Official reserves (US$ billion) 2/: 2007 45.7; 2008 33.6; 2009 24.7. Fund position (as of December 31, 2008) - Holdings of currency (percent of quota): 86.3. - Holdings of SDRs (percent of allocation): 58.1. - Quota (SDRs million): 10,739. Exchange rates - Euro per U.S. dollar 2/: 2007 0.73; 2008 0.68; 2009 0.75. - Nominal effective rate (2000=100) 2/: 2007 102.4; 2008 104.9; 2009 103.6. - Real effective exchange rate (2000=100) 2/: 2007 103.6; 2008 106.0; 2009 102.1. Potential output and output gap - Potential output (percent): 2007 2.1; 2008 1.3; 2009 0.9; 2010 0.8; 2011 0.9; 2012 1.0; 2013 1.3; 2014 1.3. - Output gap: 2007 0.9; 2008 -0.1; 2009 -3.9; 2010 -4.3; 2011 -3.6; 2012 -2.7; 2013 -1.9; 2014 -1.0. Social indicators - Per capita GDP (2006): US$35,471. - Life expectancy at birth (2006): 77.2 (male) and 84.1 (female). - Poverty rate (2005): 12.1 percent (60 percent line), 6.3 percent (50 percent line). - Income distribution (ratio of income received by top and bottom quintiles, 2004): 4.2. ### Authorities’ views and policy actions (Statement by Ambroise Fayolle, July 29, 2009) - French authorities broadly agree with staff’s assessment and value the surveillance exercise. - They emphasized three features that helped smooth the crisis impact: - Appropriate ad hoc policies: fiscal stimulus of about 1 ½ percent of GDP (per staff), diversified and front-loaded with emphasis on temporary investment expenditures and tax breaks; banking-sector measures including creation of a médiateur du crédit, indicative credit targets for banks, creation of SFEF (bank refinancing agency), creation of SPPE (bank recapitalization agency) available on voluntary basis, and support for specific banks (Dexia group; Groupe Caisse d’Epargne and Groupe Banque populaire). - Sizeable automatic stabilizers amounting to 3 percent of GDP. - Structural features: private consumption role, high level of social welfare including unemployment benefits, comprehensive regulation framework, sound household and banks’ behavior. - On the financial sector: French banks’ universal banking model, diversified activities, large deposit base, conservative lending practices (mortgage lending based on households’ ability to service debt), and sound supervision contributed to resilience. Authorities remain vigilant and committed to implementing agreed G-20 financial regulation reforms. - Fiscal policy actions: commitment to a sound public debt strategy, objective of zero growth of real expenditures of the central government, non-replacement of every second retiring civil servant in the central government, emphasis on controlling health costs and local authorities’ expenditures. - Institutional and structural reform commitments: consideration of measures from a bipartisan report chaired by former Prime Minister Balladur (including adoption of an annual target for local expenditure growth); extension of the general review of public policies (RGPP) to other levels of government and state-owned firms; multi-year fiscal framework law (January 2009) adopting principle of strict neutrality for tax expenditures and social contribution exemptions; consideration of a carbon tax via a bipartisan mission chaired by former Prime Minister Rocard; ongoing reforms to promote competition, raise employment rate, and increase labor market flexibility, including unique Competition Authority (since March), liberalization of retail trade, generalization of Livret A distribution, flexibilization of working hours and easing of the 35-hour week, broadening authorization of work on Sunday, unification of the job placement agency, and no government boost to the minimum wage for the third year in a row. *Source: ANNEX II. FRANCE: STATISTICAL ISSUES (IMF staff report and Public Information Notice, July 2009).* ### introduction of a new earned income supplement, the revenu de solidarité active (RSA) ### introduction of a new earned income supplement, the revenu de solidarité active (RSA) ### Labor market measures and pension policy - Introduction of a new earned income supplement, the revenu de solidarité active (RSA), that smoothes the effect of benefit thresholds to increase low-skilled employment. - Promoting “senior labor”: - Possibility to combine pension and salary. - Increase in pension for those who retire later. - Broader determination to tackle challenges of an aging population: - 2007 reform of special pension regimes. - Gradual increase of the contribution period. - In 2010 the authorities will hold a public and nation-wide debate on the legal retirement age. ### International support and IMF engagement - France remains committed to provide financial support dedicated to mitigating the impact of the crisis on countries hit hard. - As for the IMF, France assumes its full responsibilities as a shareholder: - Entered into a bilateral loan agreement of $15 billion with the Fund. - Provided $1 billion to the PRGF-ESF trust fund. *Source: _cr09232 - introduction of a new earned income supplement, the revenu de solidarité active (RSA)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09232.pdf_