## _cr10240

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### Economic developments: from recession to recovery
- Real GDP contracted by "2½ percent in 2009"; France exited the recession in "2009:Q2".
- Contributing factors to resilience and recovery:
  - Low trade openness, resilient financial sector, large social safety net, timely government intervention.
  - Recovery drivers: private consumption, net exports, and inventory cycle reversal.
  - Fixed investment declined throughout 2009 and in "Q1 2010" despite public intervention.
  - Net exports supported recovery though imports strengthened toward end-2009 and early-2010.
- Labor market:
  - Unemployment rose from "7.2 percent in June 2008" to "9½ percent as of May 2010".
  - Rise in unemployment larger than expected given downturn depth; sectoral adjustments in financial services and construction were important.

### The car scrapping program — impact on consumption
- Design and magnitude:
  - Launched "January 2009"; bonus of "€1,000" off a new car with emissions under "160g CO2/km" if buyer scraps a car older than 10 years during 2009.
  - Scheme remained in place through end-2010; bonus dropped to "€700 in January" and set to diminish to "€500 in July".
  - Total program: "€620 million", about "0.03 percent of GDP".
  - Additional measures: state guarantee for car loans of "€6.5 million" and eco-friendly tax measures.
- Estimated effects:
  - Scheme accounted for the bulk of private consumption growth in 2009 per staff estimates.
  - Raised car consumption growth by about "5 percentage points" on average in 2009, strongest in Q4.
  - Contribution to total private consumption growth: "0.3 percentage points" on average quarter-on-quarter, "0.6 percentage points" year-on-year.
  - Actual private consumption in 2009: "0.4 percentage points" average q/q and "0.9 percentage points" y/y.
- Payback effect:
  - Auto sales plummeted in early 2010, lowering private consumption growth due to inter-temporal shifting.

### Financial sector and sovereign risk exposures
- Financial conditions:
  - Financial conditions improved but credit growth remained depressed.
  - French banks less affected than many peers due to conservative lending and supervisory coverage.
  - Asset quality worsened; additional writedowns on risky assets likely.
  - Depressed credit demand (particularly corporate) appears to drive loan developments more than supply constraints.
- Sovereign and cross-border exposures:
  - French banks’ exposures to GIIPS (Greece, Ireland, Italy, Portugal, Spain) account for "seven percent of bank assets and 30 percent of GDP".
  - Exposures dominated by private Italian and Spanish debt; sovereign debt positions in Greece are small.
  - Allocation to EA5: "15 percent are to Greece, Ireland, and Portugal, while 60 percent are to Italy and 25 percent to Spain."
  - Sectoral breakdown: about "half of the exposures" to corporates and "a third" to government securities.
  - Individual banks’ exposures to Greece, Portugal, and Spain range from "2 to 10 percent of equity".

### Crisis support measures and exit strategy
- Bank recapitalization:
  - "€40 billion (2 percent of GDP)" recapitalization fund (SPPE); about half injected into six largest banks as deeply subordinated debt and preference shares with buy-back incentives.
  - By fall 2009 banks began repaying state capital; all but one bank have repaid public capital injections.
- Bank refinancing:
  - SFEF refinancing scheme nominally "€265 billion (about 14 percent of GDP)"; actually raised "€77 billion (about 4 percent of GDP)"; about "37 percent" falls due in 2012.
  - On-lent to banks in proportion to market share; on-lending rate based on funding costs, CDS spreads, plus "20 basis points" fee.
  - Banks began issuing bonds without guarantees in summer 2009; scheme allowed to expire at "end-2009".
- Fiscal stimulus:
  - Stimulus amounted to "2¼ percent of GDP" over 2009–10.
  - Measures: tax credits on R&D, accelerated VAT credit reimbursements, accelerated depreciation, temporary reduction of personal income tax in 2009, social housing, additional unemployment benefits, public investment, and automobile sector support.
  - Government abolished the local business tax (taxe professionnelle).

### Outlook and near-term projections
- Real GDP projections: "1.4 percent in 2010" and "1.6 percent in 2011".
- Inflation forecast: "1.3 percent in 2010" and "1.6 percent in 2011".
- Recovery drivers and constraints:
  - Recovery mainly driven by domestic demand; net exports supportive in near term.
  - Private consumption expected to pick up somewhat in 2010–11 but resilience weakened by high unemployment—forecast at "around 10 percent over 2010–11".
  - Investment held back by excess capacity and uncertainty; residential investment projected to lag as house price correction continues.
  - Stockbuilding expected to buttress growth in 2010–11.
  - Medium-term export growth limited by moderate recovery in trading partners and competitiveness problems; euro depreciation likely to provide limited relief.
  - With imports boosted, net exports’ contribution would turn slightly negative in medium term.

### Risks to the outlook
- Staff views risks as slanted to the downside; authorities saw risks as more balanced.
- Downside channels:
  - Sovereign concerns in the Euro Area could dampen confidence, raise financing costs, and depress demand.
  - Slower-than-expected recovery in trading partners (about "half of French exports go to the Euro Area; about two-thirds to the European Union") would weaken exports.
  - Financial sector risks: asset quality deterioration and spillovers could depress credit growth.
  - Sharp housing price declines would weaken construction (construction is about "6½ percent of GDP" and is "still some 1 percent larger than its historical size").
- Upside possibilities:
  - Smaller-than-projected unemployment increase, further euro depreciation, and progress on reforms could strengthen demand and exports.
- Risk assessment based on IMF Working Paper "WP/09/178" by Selim Elekdag and Prakash Kannan.

### Potential growth, medium-term output, and level effects
- Potential growth path:
  - Expected to remain at "about 1 percent in 2010–11" and gradually return to "about 1½ percent" over the medium term.
  - Staff view: trend rate "some ½ percent lower than over the last decade" notably due to population aging.
- Drivers of drop in potential growth (2009–11): recession impact, contraction of investment, higher structural unemployment, and possible temporary reduction in allocative efficiency.
- Level effect:
  - Permanent loss of about "3½ percent in the level of potential output".
  - Adjustment to diminished productive capacity could result in persistently high unemployment.
- Authorities more optimistic on trend growth, citing higher estimates of total factor productivity growth.

### Fiscal sustainability: stimulus, outlook, and announced consolidation
- Stimulus details:
  - Stimulus measures of about "2¼ percent of GDP" in 2009–10; amended 2010 budget adds "0.6 percent of GDP" from abolition of tax TP and "0.1 percent of GDP" from new public investment program.
  - Bulk of stimulus measures set to end in 2010.
- Fiscal outlook under current policies:
  - Primary balance set to remain in deficit through 2014.
  - Debt ratio could climb more than "25 percentage points" above pre-crisis level, reaching "90 percent of GDP" over the medium term without significant consolidation.
  - About two-thirds of debt buildup between 2007 and 2015 estimated to come from automatic stabilizers, crisis-induced loss of potential output, crisis-related revenue loss, fiscal stimulus, and financial sector support.
  - Aging-related entitlements on health care and pensions threaten to raise public debt to unsustainable levels long term without adjustment.

### Local business tax (taxe professionnelle) reform
- TP abolished from "2010"; TP in "2007 amounted to 1.5 percent of GDP".
- Other local taxes in 2007: property tax (TF) "1.1 percent of GDP"; residence tax (TH) "0.8 percent of GDP".
- TP proceeds split: local governments "0.9 percent of GDP" (about "0.3 percent" came from central government substitution for TP exonerations), departments "0.45 percent of GDP", regions "0.1 percent of GDP".
- Central government pledged compensation to local governments in 2010; assignment of revenues from other taxes (CFE and CVAE) expected to offset loss.
- CVAE progressive rates range from "zero to 1.5 percent" depending on turnover; large energy, telecommunications, and railway companies to pay an additional lump-sum levy.

### Announced fiscal consolidation measures (2011–13) — quantified impacts
- Announced measures (in billion euros; in percent of 2010 GDP):
  - Withdrawal of fiscal stimulus: "9.6 billion euros"; "0.5 percent".
  - Reduced compensation to local governments for TP reform: "6.0 billion euros"; "0.3 percent".
  - Announced freezes and cuts: "10.0 billion euros"; "0.5 percent".
  - Reduction of tax expenditures: "6.0 billion euros"; "0.3 percent".
  - Reducing healthcare spending norm: "2.4 billion euros"; "0.1 percent".
  - Pension reform (measures yet to be legislated): "20.8 billion euros"; "1.1 percent".
  - Reduction of exemptions on social security contributions: "3.0 billion euros"; "0.2 percent".
  - Total announced measures: "54.8 billion euros"; "2.8 percent of 2010 GDP".
- Key elements: spending freezes and cuts at central government level, pension reform package, freeze on central government transfers to local governments.

### Fiscal scenarios and selected indicators (2009–15)
- Baseline scenario (general government balance; primary balance; structural balance; gross debt; Real GDP growth for 2009–15):
  - General government balance: "-7.5, -8.0, -6.1, -4.8, -3.9, -3.2, -2.4".
  - Primary balance: "-5.2, -5.4, -3.3, -1.9, -1.0, -0.1, 0.7".
  - Structural balance: "-5.0, -4.9, -3.7, -3.0, -2.6, -2.4, -2.0".
  - General government gross debt (percent of GDP): "78.1, 84.3, 87.8, 89.7, 90.3, 90.1, 89.1".
  - Real GDP growth: "-2.5, 1.4, 1.6, 1.8, 2.0, 2.1, 2.1".
- Consolidation scenario (2009–15):
  - General government balance: "-7.5, -8.0, -6.0, -4.4, -3.0, -2.1, -1.1".
  - Primary balance: "-5.1, -5.4, -3.2, -1.5, -0.1, 0.9, 1.9".
  - Structural balance: "-5.0, -4.9, -3.5, -2.4, -1.4, -0.9, -0.3".
  - General government gross debt (percent of GDP): "78.1, 84.3, 87.8, 89.4, 89.4, 88.2, 86.0".
  - Real GDP growth: "-2.5, 1.4, 1.6, 1.6, 1.7, 2.0, 2.0".
- Assessment:
  - Baseline shows overall deficit declining to about "6 percent of GDP in 2011" but remaining about "4 percent of GDP by 2013".
  - Debt ratio would remain well above Maastricht threshold and could exceed "110 percent of GDP" under adverse shocks.
  - Further efforts required to reach "3 percent of GDP deficit target by 2013"; recommended measures include implementing announced pension reform, spending ceilings in health care, containment of local government spending, broadening VAT and CIT bases, and introducing a carbon tax coordinated at European level.

### Pension system, demographics, and public transfers
- Worker-to-retiree ratio projected: "1.8 workers per retiree in 2010 to 1.2 by 2050".
- Pension system fragmented across "over 30 different schemes"; public employees enjoy higher pension benefits than private sector counterparts.
- Past reforms and parameters:
  - "1985–91": contribution rates raised from "4.7 to 6.55 percent".
  - "1993 reform": base wage for private sector pensions from "top 10 years to top 25 years".
  - "2003 reform": minimum contribution period increased from "37.5 to 40 years" and to "41 years by 2012" and "41.5 years by 2020".
  - "2007 reform": extended contribution period increases to special regimes.
- Public transfers to elderly (OECD, 2009, percent):
  - France: "85.4"; Belgium: "81.0"; Austria: "79.5"; Luxembourg: "79.3"; Germany: "61.2"; Italy: "67.6"; Spain: "70.4"; Sweden: "68.7"; United Kingdom: "49.4"; Japan: "48.3"; Canada: "40.7"; United States: "36.1".
- Pension reform (announced June 16) aims to achieve financial equilibrium by "2018" from current deficit of "almost 1.5 percent of GDP".
  - Main measures: raise legal retirement age from "60 to 62 years"; raise legal minimum age of full pension entitlement from "65 to 67 years"; raise high-income pension contributions; align civil servants’ pensions with private sector; lengthen contribution period to reach "41 years in 2012".

### Labor market findings and recommendations
- Employment rate low relative to OECD peers, especially among seniors, low-skilled, and young workers.
- Staff estimates: labor and product market reforms bringing France to best practices could raise growth by "about ¾ percent per year over the medium term".
- Policy recommendations — demand-side:
  - Consider temporary hiring incentives targeted at vulnerable worker categories.
- Supply-side and activation:
  - Strengthen Pôle emploi, improve training, reduce skill mismatches, strictly enforce job-search requirements.
- Specific measures:
  - Moderate SMIC increases and eliminate the coup de pouce to reestablish motivating pay scale.
  - Reduce the tax wedge and employment protection.
  - Use Working Solidarity Benefit (RSA) and self-employed status to expand opportunities.
  - For seniors: remove financial obstacles to combining earned income with a pension after age 60 and abolish forced retirement before age 70; combine pension age increases with incentives for continued work.

### Product market competition and services sector
- France making progress but gaps remain in retail trade and services.
- Recommendations:
  - Further liberalize retail entry (deregulate opening hours and sales periods).
  - End price regulations on key products (e.g., over-the-counter drugs) if followed by market liberalization.
  - Fully implement EU Services Directive and increase competition in health-related and professional services.

### Financial stability, transparency, and regulatory reform
- Bank performance and prudential metrics:
  - Gross operating profits of major banks rose from "€25 billion in 2008 to about €45 billion in 2009".
  - Return on equity rose "by two percentage points to above 6 percent in 2009".
  - Tier 1 capital ratios increased from "8.7 in 2008 to 10.2 in 2009", above Euro Area average "9.1".
  - Nonperforming loans increased to "3.8 percent of the total loan portfolio in 2010:Q1".
- Risks:
  - Additional writedowns likely on commercial real estate, legacy illiquid securities, and LBOs.
  - Funding pressures from high rollover needs, sovereign issuances, withdrawal of ECB liquidity support, and new liquidity requirements.
- Policy options if funding pressures intensify:
  - Renew funding, extend maturities, issue more long-term debt, build stronger liquidity buffers, deleverage, reactivate government-supported refinancing, and continue recapitalization if needed.
- Transparency and stress tests:
  - Staff recommends publishing stress tests and greater transparency on country exposures; coordinated European disclosure suggested.
  - EU-wide stress test (July 23) reduced average Tier 1 ratio of French banks by "165 basis points" relative to benchmark "9.3 percent" at end-2011; sovereign exposures shock impact only "16 basis points" on average.
  - Stressed individual bank Tier 1 ratios ranged from "8.5 to 10 percent", above the "6 percent" threshold used in the test.
- Supervisory reforms:
  - Creation of Autorité de Contrôle Prudentiel (ACP) merging banking and insurance supervision (introduced "in early 2010").
  - AMF responsibilities expanded; plan to create a national systemic risk board linked to the European Systemic Risk Board.
  - One-time taxes on bonuses in 2009 and implementation of G20 compensation recommendations; planning a financial levy.

### Strengthening fiscal frameworks and forecasting
- Observed bias: multiyear macro forecasts by budget-preparers tend to be "systematically biased upwards" for outer years.
- Remedies:
  - Independent forecasting bodies (examples: Netherlands CPB, Canada, US CBO) and independent validation councils (Sweden, Hungary, Germany, Japan).
  - Staff recommends adopting a fiscal rule on the "structural government balance, preferably with a built-in debt-brake mechanism", enshrined in high-level legislation.
- Working group (chair Mr. Camdessus) proposals:
  - Constitutional multi-year budgetary framework with binding trajectory to a zero structural deficit, revenue floor and expenditure ceiling, limits on transfers to local governments, and creation of an independent fiscal council; staff supports these recommendations.

### Executive Board / Directors’ assessment and recommendations
- Directors’ view:
  - France weathered the crisis better than most peers; policy focus should shift to fiscal consolidation, financial system recovery, regulatory improvements, and structural reforms.
- Priority recommendations:
  - Implement vigorous structural reforms to boost competitiveness, job creation, and innovation.
  - Ensure credible fiscal consolidation anchored by realistic macro assumptions and strengthened institutions (independent council, fiscal rule).
  - Continue central government spending restraint and nominal freeze of transfers to local governments.
  - Implement pension reform to increase retirement age and achieve equilibrium by "2018".
  - Strengthen control of healthcare spending.
  - Maintain strong financial supervision, complete regulatory reforms (systemic risk board), and remain prepared to support banks if needed.
  - Enhance transparency domestically and coordinate disclosure Europe-wide.

### Key macro and fiscal indicators (selected values and trajectories)
- Real GDP growth (2007–15): "2.3; 0.1; -2.5; 1.4; 1.6; 1.8; 2.0; 2.1; 2.1".
- Unemployment rate (2007–15): "8.4; 7.8; 9.5; 10.0; 10.1; 9.7; 9.2; 8.7; 8.4".
- Inflation (CPI, year average, 2007–15): "1.6; 3.2; 0.1; 1.3; 1.6; 1.8; 1.9; 1.9; 1.9".
- General government balance (percent of GDP, 2007–15): "-2.7; -3.3; -7.5; -8.0; -6.1; -4.8; -3.9; -3.2; -2.4".
- General government gross debt (percent of GDP, 2007–15): "63.8; 67.5; 78.1; 84.3; 87.8; 89.7; 90.3; 90.1; 89.1".
- Worker-to-retiree ratio: "1.8 workers per retiree in 2010 to 1.2 by 2050".
- Gross operating profits of major banks: "€25 billion in 2008 to about €45 billion in 2009".
- Tier 1 capital ratios: "8.7 in 2008 to 10.2 in 2009"; Euro Area average "9.1".
- Nonperforming loans: "3.8 percent of the total loan portfolio in 2010:Q1".
- Memorandum—Nominal GDP (billion euros, 2007–15 sample): "1,895; 1,949; 1,907; 1,951; 2,013; 2,084; 2,163; 2,249; 2,338".

*Source: IMF staff report — "1. Economic Developments" and related excerpts from country report _cr10240 (2010).*

### 1. Economic Developments ...............................................................................................

### 1. Economic Developments

### Context: From Recession to Recovery
- France experienced a less severe recession than most other advanced economies:
  - Real GDP contracted by 2½ percent in 2009, compared with downturns of 5 percent in both Germany and Italy and about 4 percent in the Euro Area as a whole.
  - The French economy exited the recession in 2009:Q2.
- Factors cushioning France during the downturn:
  - Comparatively low trade openness, a fairly resilient financial sector, the large social safety net, and timely and decisive government intervention.
- Drivers of the recovery:
  - Private consumption, net exports, and a turn in the inventory cycle.
  - Household spending received a significant boost from government stimulus measures, notably the car scrapping scheme.
  - Fixed investment declined throughout 2009 and in the first quarter of 2010 despite substantial public intervention.
  - Net exports supported the recovery as foreign demand picked up, although imports strengthened toward the end of 2009 and in early 2010.
- Labor market developments:
  - Unemployment rose from a low of 7.2 percent in June 2008 to 9½ percent as of May 2010.
  - The rise in unemployment is larger than expected given the depth of the downturn, partly reflecting sectoral adjustments in financial services and construction.

### The Car Scrapping Program (Box 1) — Impact on Consumption
- Program design and magnitude:
  - Launched January 2009 as part of the fiscal stimulus.
  - Bonus of €1,000 off a new car with emissions under 160g CO2/km if the buyer scraps a car more than 10 years old during 2009.
  - Scheme remains in place through end-2010; bonus dropped to €700 in January and set to diminish to €500 in July.
  - Total amount of the program: €620 million, or about 0.03 percent of GDP.
  - Additional measures: state guarantee for car loans of €6.5 million and several eco-friendly tax measures.
- Estimated effects:
  - Staff estimates suggest the scheme can account for the bulk of private consumption growth in 2009.
  - Dummy variables for the four quarters of 2009 suggest the scheme raised car consumption growth by about 5 percentage points, on average, with the strongest effect in Q4.
  - Translating to total private consumption growth: contribution of 0.3 percentage points on average in quarter-on-quarter terms and 0.6 percentage points in year-on-year terms.
  - Actual private consumption in 2009 grew by 0.4 percentage points on average quarter-on-quarter and 0.9 percentage points year-on-year.
- Payback effects:
  - Following the success in 2009, auto sales plummeted and lowered private consumption growth in early 2010 due to inter-temporal shifting of vehicle purchases.

### Financial Sector and Sovereign Risk Exposure
- Financial conditions:
  - Financial conditions have improved, but credit growth remains depressed.
  - French banks were less negatively impacted than many European peers due to conservative lending practices and consistent supervisory coverage.
  - Asset quality has worsened and additional writedowns on risky assets are likely.
  - Evidence suggests depressed credit demand, especially in the corporate sector, has driven loan developments more than credit supply constraints.
- Sovereign spreads and bank exposures:
  - Sovereign spreads remain moderate, but concerns over sovereign risks in the Euro Area linger.
  - French banks’ exposures to Greece, Ireland, Italy, Portugal, and Spain (GIIPS) account for seven percent of bank assets and 30 percent of GDP.
  - These exposures are dominated by holdings of private Italian and Spanish debt; sovereign debt positions in Greece are small.

### Policy Focus: From Crisis Management to Foundations for Recovery
- Shift in policy priorities:
  - Moving from crisis management to fiscal consolidation, better financial regulation, and structural reforms to raise potential growth and strengthen competitiveness.
  - Authorities must remain ready to support the banking sector if sovereign near-crisis conditions worsen.
- Fiscal outcomes and medium-term risks:
  - General government deficit rose from 3.3 percent of GDP in 2008 to 7.5 percent in 2009.
  - For 2010, a deficit of 8 percent of GDP is expected.
  - France has been under the excessive deficit procedure (EDP) of the European Commission since February 2009.
  - General government gross debt reached 78.1 percent of GDP in 2009.
  - Without substantial fiscal consolidation, debt is bound to increase over the medium term (including from population aging), threatening sustainability.

### Crisis Support Measures and Exit Strategy (Box 2)
- Financial sector support:
  - Recapitalization handled by a €40 billion (2 percent of GDP) bank recapitalization fund (Société de Prise de Participations de l’État, SPPE).
    - About half of this amount was injected into the six largest French banks as deeply subordinated debt securities and preference shares with built-in buy-back incentives.
    - In fall 2009 banks began repaying state capital; all but one bank have repaid public capital injections.
  - Refinancing operations via a €265 billion (about 14 percent of GDP) bank refinancing scheme (Société de Financement de l’Économie Française, SFEF).
    - SFEF actually raised the equivalent of €77 billion (about 4 percent of GDP), about 37 percent of which will fall due in 2012.
    - SFEF on-lent to banks in proportion to market share; on-lending rate was a function of funding costs, CDS spreads, and a fee of 20 basis points.
    - French banks started issuing bonds without government guarantees in summer 2009; the bank refinancing scheme was allowed to expire at end-2009.
- Fiscal stimulus:
  - Fiscal stimulus amounted to 2¼ percent of GDP over 2009–10.
  - Measures included cash-flow support for corporates (tax credits on R&D, accelerated reimbursement of VAT credits, accelerated depreciation of investment); household support (temporary reduction of the personal income tax in 2009, public expenditures on social housing, additional unemployment benefits); and public investment by central government, local authorities, and public enterprises.
  - Measures to support the automobile sector, including the car scrapping scheme, were very effective in stimulating consumption.
  - The government abolished the local business tax (taxe professionnelle).

### Outlook and Risks: A Gradual Rebound and Challenges Ahead
- Growth projections:
  - Staff projects real GDP to grow by 1.4 percent in 2010 and 1.6 percent in 2011.
  - These projections are in line with Germany and somewhat faster than the Euro Area as a whole.
  - Authorities expected a stronger rebound in 2011, assuming a more vigorous recovery in domestic demand.
- Reasons for a cautiously slow recovery:
  - Recovery likely to be weaker than after previous recessions due to the global nature of the downturn and damage to financial markets.
  - Features that shielded France during the recession—large automatic stabilizers, high social protection, and long-standing rigidities in labor and product markets—are also likely to slow the pace of the recovery.
- Historical context (Box 3):
  - Output loss in France between pre-recession peak and trough in early 2009 was about 3½ percent, compared to over 5 percent in the Euro Area.
  - Staff forecasts that by early 2011 France will recoup about three quarters of this loss, while the Euro Area as a whole will regain less than a half.
  - The current recovery is expected to be slower than recoveries following comparable past recessions (mid-1970s, early 1980s, early 1990s), especially because the recent downturn was highly synchronized and global.
- Confidence and sectoral indicators:
  - Business confidence is improving, but household confidence is less upbeat.
  - Consumption growth is sensitive to changes in the unemployment rate.
  - External demand is a key factor for export performance; export-weighted import growth of trade partners affects exports.
  - The construction sector is undergoing adjustment.
  - House prices are declining from their peak.

*Source: IMF staff report — "1. Economic Developments" (excerpt).*

### 10.      The recovery is expected to be driven mainly by domestic demand, with net

### The recovery is expected to be driven mainly by domestic demand, with net

### Recovery outlook and near-term projections
- Recovery driven mainly by domestic demand; net exports supportive in the near term.
- Private consumption:
  - Expected to pick up somewhat in 2010–11.
  - Resilience weakened by high unemployment—forecast at around 10 percent over 2010–11.
  - Withdrawal of stimulus measures and prospects of fiscal consolidation add to household caution.
- Investment:
  - Held back by excess capacity and uncertainty, including about continued credit availability.
  - Residential investment projected to lag business investment as the house price correction continues.
- Stockbuilding expected to buttress growth in 2010–11.
- Exports:
  - Export rebound in the first part of 2010 will contribute to output expansion.
  - Medium-term export growth limited by moderate recovery in main trading partners and competitiveness problems; depreciation of the euro likely to provide only limited relief.
  - With imports boosted by rising demand, the growth contribution of net exports would turn slightly negative in the medium term.
- Inflation forecast:
  - 1.3 percent in 2010.
  - 1.6 percent in 2011.
  - Broadly in line with that in the Euro Area.

### Risks to the outlook
- Staff views risks as slanted to the downside; authorities saw risks as more balanced.
- Key downside channels:
  - Lingering sovereign concerns in the Euro Area could dampen confidence, increase financing costs, and depress demand.
  - Slower-than-expected recovery in trading partners (about half of French exports go to the Euro Area; about two-thirds to the European Union) would weaken exports.
  - Financial sector risks: recession impact on asset quality and potential spillovers from mature markets could depress credit growth.
  - Sharp decline in housing prices would further weaken construction (construction is about 6½ percent of GDP and is still some 1 percent larger than its historical size).
- Limited transmission from housing correction to household consumption owing to relatively low level of household indebtedness and difficult access to mortgage financing.
- Upside possibilities:
  - A smaller-than-projected increase in unemployment could strengthen consumption and bolster confidence.
  - Further depreciation of the euro could support exports.
  - Progress on reforms—fiscal consolidation, financial regulation, structural measures—could inspire confidence and boost demand.
- Risk chart methodology note: risk assessment based on IMF Working Paper WP/09/178 by Selim Elekdag and Prakash Kannan.

### Potential growth and medium-term output
- Potential growth path:
  - Expected to remain at about 1 percent in 2010–11.
  - Gradually return to trend rate of about 1½ percent over the medium term.
  - Staff view: trend rate would be some ½ percent lower than over the last decade owing notably to population aging.
- Drivers of the drop in potential growth over 2009–11:
  - Impact of the recession and financial stress.
  - Sharp contraction of investment and slowdown in capital accumulation.
  - Rise in structural unemployment.
  - Possible temporary reduction in allocative efficiency lowering total factor productivity growth.
- Level effects:
  - French economy has suffered a permanent loss of about 3½ percent in the level of potential output.
  - Adjustment to diminished productive capacity could result in persistently high unemployment.
- Authorities more optimistic on trend growth and recession impact, reflecting higher estimates of total factor productivity growth.

### Policy challenges: safeguarding fiscal sustainability, ensuring financial stability, increasing growth
- Main policy challenges: fiscal consolidation, better financial regulation, structural reforms.
- Authorities have taken actions that helped reestablish financial stability and mitigate the downturn’s impact, but significant challenges remain.

### Fiscal sustainability: stimulus, fiscal outlook, and announced consolidation
- Stimulus:
  - Stimulus measures of about 2¼ percent of GDP enacted in 2009–10, mostly front-loaded, diversified, and well-targeted.
  - Amended budget law for 2010 includes additional stimulus:
    - 0.6 percent of GDP from abolition of the local business tax (taxe professionnelle).
    - 0.1 percent of GDP from new public investment program (investissements d’avenir).
  - Bulk of stimulus measures set to automatically end in 2010.
- Fiscal outlook under current policies:
  - Primary balance set to remain in deficit through 2014.
  - Debt ratio could climb more than 25 percentage points above its pre-crisis level, reaching 90 percent of GDP over the medium term.
  - About two-thirds of the debt buildup between 2007 and 2015 estimated to come from automatic stabilizers and crisis-induced loss of potential output, crisis-related revenue loss, cost of fiscal stimulus, and financial sector support; remainder from interest payments and structural deterioration not related to crisis.
  - Without significant policy adjustment, aging-related entitlements on health care and pensions threaten to raise public debt to unsustainable levels over the long term.

### Local business tax (taxe professionnelle) reform (Box 4) — facts and impacts
- From 2010, TP abolished as part of stimulus to boost competitiveness and growth, especially for SMEs.
- TP had been levied on fixed asset base (property and capital equipment); abolition removed taxation of capital equipment.
- TP in 2007 amounted to 1.5 percent of GDP.
- Other local taxes in 2007: property tax (taxe foncière, TF) 1.1 percent of GDP; residence tax (taxe d’habitation, TH) 0.8 percent of GDP.
- TP proceeds split: local governments 0.9 percent of GDP (of which about 0.3 percent came from central government substitution for TP exonerations), departments 0.45 percent of GDP, regions 0.1 percent of GDP.
- Central government pledged to shelter local governments from TP revenue loss; compensation in 2010, then assignment of revenues from other taxes (CFE and CVAE) expected to offset loss.
- CVAE progressive rates will range from zero to 1.5 percent, depending on turnover; large energy, telecommunications, and railway companies to pay additional lump-sum levy.

### Announced fiscal consolidation measures (2011–13) — quantified impacts
- Announced measures (in billion euros; in percent of 2010 GDP):
  - Withdrawal of fiscal stimulus: 9.6 billion euros; 0.5 percent.
  - Reduced compensation to local governments for the 2010 local business tax reform: 6.0 billion euros; 0.3 percent.
  - Announced freezes and cuts: 10.0 billion euros; 0.5 percent.
  - Reduction of tax expenditures: 6.0 billion euros; 0.3 percent.
  - Reducing healthcare spending norm: 2.4 billion euros; 0.1 percent.
  - Pension reform (measures yet to be legislated): 20.8 billion euros; 1.1 percent.
  - Reduction of exemptions on social security contributions: 3.0 billion euros; 0.2 percent.
  - Total announced measures: 54.8 billion euros; 2.8 percent of 2010 GDP.
- Key elements: spending freezes and cuts at central government level, pension reform package, freeze on central government transfers to local governments to improve spending discipline.

### Fiscal scenarios and assessment (2009–15) — selected indicators
- Baseline scenario (general government balance, primary balance, structural balance, gross debt, Real GDP growth):
  - General government balance: -7.5, -8.0, -6.1, -4.8, -3.9, -3.2, -2.4 (2009–15).
  - Primary balance: -5.2, -5.4, -3.3, -1.9, -1.0, -0.1, 0.7 (2009–15).
  - Structural balance: -5.0, -4.9, -3.7, -3.0, -2.6, -2.4, -2.0 (2009–15).
  - General government gross debt: 78.1, 84.3, 87.8, 89.7, 90.3, 90.1, 89.1 (percent of GDP, 2009–15).
  - Real GDP growth: -2.5, 1.4, 1.6, 1.8, 2.0, 2.1, 2.1 (2009–15).
- Consolidation scenario:
  - General government balance: -7.5, -8.0, -6.0, -4.4, -3.0, -2.1, -1.1 (2009–15).
  - Primary balance: -5.1, -5.4, -3.2, -1.5, -0.1, 0.9, 1.9 (2009–15).
  - Structural balance: -5.0, -4.9, -3.5, -2.4, -1.4, -0.9, -0.3 (2009–15).
  - General government gross debt: 78.1, 84.3, 87.8, 89.4, 89.4, 88.2, 86.0 (percent of GDP, 2009–15).
  - Real GDP growth: -2.5, 1.4, 1.6, 1.6, 1.7, 2.0, 2.0 (2009–15).
- Assessment:
  - Baseline (staff macro projections, excluding measures yet to be legislated) shows overall deficit declining to about 6 percent of GDP in 2011 but remaining at about 4 percent of GDP by 2013.
  - Debt ratio would remain well above the Maastricht threshold even in good times and could reach over 110 percent of GDP in case of adverse shocks.
  - Further efforts required to reach 3 percent of GDP deficit target by 2013; recommended actions include implementing announced pension reform, effective spending ceilings in health care, strict containment of local government spending, broadening VAT and CIT bases, and introduction of a carbon tax coordinated at European level.

### Pension reform and social spending containment
- Major pension reform announced June 16 aims to achieve financial equilibrium in the pension system by 2018 from a current deficit of almost 1.5 percent of GDP.
- Main elements of proposed reform:
  - Gradually increase effective retirement age by raising legal retirement age from 60 to 62 years.
  - Raise legal minimum age of full pension entitlement from 65 to 67 years.
  - Raise high-income pension contributions.
  - Gradually align civil servants’ pension system with private sector.
  - Contribution period being lengthened to reach 41 years in 2012 (resulting from previous reforms).
- Rationale:
  - Increase effective retirement age (currently among the lowest in OECD) to better synchronize retirement policies with life expectancy at retirement (28 years for women and 24 for men, the longest among advanced countries).
- Healthcare:
  - Significant reforms needed to contain spending and reduce persistent deficits.
  - Proposed measures aim to limit hospital and drugs costs and better enforce reduction of the existing spending norm (ONDAM), but more action is required.

*IMF staff estimates and projections.*

### 1.8 workers per retiree in 2010 to 1.2 by

### _cr10240 - 1.8 workers per retiree in 2010 to 1.2 by

### Demographics and Pension System
- Worker-to-retiree ratio projected to move from "1.8 workers per retiree in 2010 to 1.2 by 2050".
- Pension system characteristics:
  - Fragmented across "over 30 different schemes".
  - "Public employees in particular enjoying higher pension benefits than their counterparts in the private sector"; government aims to alter this.
- Previous pension reforms and adjustments:
  - 1985–91: employees’ contribution rates raised from "4.7 to 6.55 percent".
  - 1993 reform: increased base wage for calculating private sector pensions from "the top 10 years to the top 25 years".
  - 2003 reform: linked contribution years for a full pension to life expectancy; minimum contribution period increased from "37.5 to 40 years" and, gradually, to "41 years by 2012 and 41.5 years by 2020".
  - 2007 reform: extended the increase in contribution period to pensions under special regimes.
- Ongoing work:
  - A working group has outlined a number of detailed recommendations; reforms from prior measures "will continue under the current reform effort".

### Public Transfers and Elderly Income (OECD comparison)
- "Percentage of Public Transfers in the Income of Persons Aged 65 and Over" (selected values from OECD, 2009):
  - France: "85.4"
  - Belgium: "81.0"
  - Austria: "79.5"
  - Luxembourg: "79.3"
  - Germany: "61.2"
  - Italy: "67.6"
  - Spain: "70.4"
  - Sweden: "68.7"
  - United Kingdom: "49.4"
  - Japan: "48.3"
  - Canada: "40.7"
  - United States: "36.1"

### Local Government Spending and Medium-Term Fiscal Control
- Recent trends and policy steps:
  - Decentralization between 1990 and 2004 led to rapid local government spending growth, averaging "above 8 percent per year in real terms" during the past decade.
  - Authorities plan to freeze central government transfers to local governments in nominal terms over "2011–13" to encourage efficiency gains.
  - Policy measures to reduce duplication across the four layers of local government include "not replacing some retiring civil servants at the departmental and regional levels".
  - Local business tax reform and steps to increase transparency and accountability—e.g., "tying future increases in the local tax burden on firms to those on households"—are noted as welcome.

### Medium-Term Consolidation and Fiscal Framework
- Key requirements for successful consolidation:
  - Strengthen credibility and full national ownership of medium-term consolidation objectives.
  - Extend formal fiscal framework beyond the central government to encompass local governments and social security systems.
  - Multiyear budgets should rely on "realistic independent macroeconomic forecasts".
  - Authorities considering setting up a council to validate macroeconomic assumptions for the multiyear budget.
- Fiscal rule development:
  - A high-level working group is examining modalities of a possible fiscal rule and "will present its recommendations by end-June".
  - Staff recommendation: adopt a fiscal rule on the "structural government balance, preferably with a built-in debt-brake mechanism", enshrined in high-level legislation (e.g., "either the Constitution or a loi organique").

### Strengthening Macroeconomic Assumptions for Multiyear Budgets (Box 6)
- Observed bias:
  - "Multiyear macroeconomic forecasts done by the budget-preparing entities tend to be systematically biased upwards for the outer years."
  - A European Commission study found "substantial positive forecast errors in growth assumptions underlying fiscal projections one year ahead in a number of countries".
- Remedies and country examples:
  - Fully independent forecasting bodies: Netherlands (CPB), Belgium, Austria, Canada, the US (CBO), and recently the UK.
  - Independent validation councils: Sweden, Hungary, Germany, Japan.
  - Canada: budgets based on macroeconomic assumptions "averaged across the lower bound of the private forecasters’ consensus".
  - Chile: projection inputs for estimating trend GDP and "trend" copper prices delegated to two independent expert panels.
- Benefit:
  - Existence of an independent agency of either type "helps make the forecasts of the relevant macroeconomic variables more realistic."

### Financial Stability: Bank Performance and Systemic Issues
- Post-crisis banking performance:
  - Gross operating profits of major French banks rose from "€25 billion in 2008 to about €45 billion in 2009".
  - Rate of return on equity rose "by two percentage points to above 6 percent in 2009".
  - Tier 1 capital ratios increased from "8.7 in 2008 to 10.2 in 2009", above the Euro Area average of "9.1".
  - The refinancing scheme expired at "end-2009"; BPCE is "the only bank still retaining some state capital".
- Market structure and systemic importance:
  - Crisis-related mergers (e.g., BNP Paribas acquisition of Fortis Banque; merger of GCE and GBP to create BPCE) increased concentration and systemic importance of SIFIs.
- Supervision and remuneration:
  - New Autorité de Contrôle Prudentiel (ACP) merges banking and insurance supervision, licensing, and consumer protection (introduced "in early 2010").
  - Autorité des Marchés Financiers (AMF) responsibilities expanded to include all markets and products plus consumer protection; a risk committee added.
  - Planned creation of a systemic risk board (Conseil de Régulation Financière et du Risque Systémique) linked to the European Systemic Risk Board.
  - One-time taxes on bonuses granted in 2009 and implementation of G20 compensation recommendations; planning of a financial levy.

### Risks: Asset Quality, Spillovers, and Funding Pressures
- Asset quality and provisioning:
  - "Nonperforming loans increased to 3.8 percent of the total loan portfolio in 2010:Q1."
  - Staff cautioned that fragile recovery may lead to further pressures on loan quality and require additional provisions.
  - Additional writedowns on risky asset portfolios (commercial real estate, legacy troubled and illiquid securities, LBOs) likely to continue.
- Exposures to Southern Europe and spillovers (Box 7):
  - French bank exposures to EA5 (Greece, Ireland, Italy, Portugal, Spain) account for "about 7 percent of bank assets and 30 percent of nominal GDP" (BIS data).
  - Allocation of exposures to EA5: "15 percent are to Greece, Ireland, and Portugal, while 60 percent are to Italy and 25 percent to Spain."
  - Sectoral breakdown: about "half of the exposures" are to "claims on corporates" and "a third are accounted for by holdings of government securities".
  - Individual French banks’ exposures to Greece, Portugal, and Spain range from "2 to 10 percent of equity", compared with about "70 percent of large European banks having exposures above 10 percent of equity".
  - Overall foreign exposures of French banks were tilted toward mature markets: "83 percent of total foreign claims in 2009" dominated by Belgium, Germany, the U.S., and the U.K.
- Funding environment and potential policy responses:
  - European banks face high rollover needs, competition from sovereign issuances, expected withdrawal of ECB liquidity support, and competition for deposits to meet new liquidity requirements.
  - French banks rely considerably on wholesale funding and increased reliance on ECB longer-term funding, though their share remained lower than their weight in the Euro Area banking sector.
  - Policy options if funding pressures intensify: renew funding, extend maturities, issue more long-term debt, build stronger liquidity buffers, deleverage, reactivate government-supported bank refinancing scheme, and continue bank recapitalization scheme if needed.

### Transparency, Stress Tests, and International Regulation
- Transparency and market communication:
  - Staff recommended publication of stress tests and greater transparency on country exposures to enhance market confidence.
  - Authorities expressed concern that some stress tests, especially those testing resilience to sovereign risk, "could put in question the credibility of the European response to the ongoing crisis."
  - Staff suggested coordinated disclosure of key exposures at the European level and more frequent publication of supervisory data on financial soundness, including developments in nonperforming loans.
- International regulatory reform engagement:
  - France participates in BCBS and CEBS discussions on enhanced capital and liquidity requirements and on OTC derivatives regulation.
  - Authorities concerned that "Basel III might require substantial additional capital for integrated financial systems such as those in France" and that, "if implemented without further adaptations, it could lower lending and depress growth."
  - Staff urged active participation in macroeconomic impact studies and follow-up work to refine reform proposals.

### Increasing Growth and Competitiveness
- Export performance and external position:
  - "Marked deterioration in export performance over the last decade" with current account balance deterioration and foreign market share losses.
  - REER assessment: overall CGER does not suggest disequilibrium, but overvaluation of the REER (driven partly by euro dynamics) indicates a lack of competitiveness in global markets.
  - Recent euro depreciation would help competitiveness vis-à-vis outside the Euro Area; within the Euro Area, a widening competitiveness gap exists related to diverging unit labor costs.
- Labour costs, productivity, and policy directions:
  - Restoring competitiveness requires policies to:
    - Encourage wage moderation.
    - Foster research and development.
    - Promote innovation.
    - Improve competition.
    - Create favorable conditions for businesses to grow.

*Italic: Source: IMF country report content provided in the supplied PDF excerpt.*

### 31.      The authorities agreed that with the ongoing sluggish recovery, structural

### 31. The authorities agreed that with the ongoing sluggish recovery, structural reforms are urgent

### Structural reform imperative and macroeconomic context
- The recession "has done substantial harm to the productive capacity of the French economy and has further increased the already high unemployment rate."
- Measures introduced under the Plan de Relance to shield workers and specific sectors (car industry and construction) "need to be phased out in order to avoid lasting damage to incentives and economic efficiency."
- Staff estimates suggest that "further labor and product market reforms that would bring France in line with best practices could raise growth by about ¾ percent per year over the medium term."
- The mission emphasized that higher growth in France "would help to reduce global imbalances."
- Recovery outlook: "Growth is expected to pick up only slightly during 2010–11." Inflation is expected to "remain moderate." Potential growth is expected to "remain subdued, and the output gap would narrow only gradually."
- Key policy challenge: implement "a credible multiyear fiscal consolidation strategy underpinned by pension reform, supporting the full recovery of the financial system and increasing financial stability, and accelerating progress on structural reforms in order to boost competitiveness, create jobs, and increase economic growth."

### Labor market: findings and priorities
- Main objectives: facilitate re-absorption of the unemployed and increase the employment rate.
- The recent recession caused "a substantial increase in the unemployment rate."
- French employment rate "remains one of the lowest among OECD countries, especially among seniors, low-skilled, and young workers."
- Authorities attach "great importance to lifting the employment rate to boost potential growth and help restore fiscal sustainability, in part through reducing unemployment-related public expenditures."

Policy recommendations (labor market)
- Demand-side:
  - Consider temporary hiring incentives (credits for new hires or lower payroll contributions) targeted at vulnerable worker categories to encourage employers to take on new employees.
- Supply-side and activation:
  - Pôle emploi (unified job placement agency) is "poised to better support unemployed workers in their job search."
  - Continue efforts to improve training opportunities and reduce skill mismatches to facilitate labor mobility.
  - "Job-search requirements need to be strictly enforced."
- Specific measures to raise employment:
  - "Eliminating inactivity traps." Contributing elements:
    - The high minimum wage (SMIC) "keeps potential employees, especially low-skilled and young workers, out of the labor force."
    - "Moderation of SMIC increases and the elimination of the coup de pouce should be pursued, in order to gradually reestablish a motivating pay scale."
    - "Further steps should also be taken to reduce the relatively high tax wedge and employment protection."
    - The Working Solidarity Benefit (RSA) is "a welcome step toward removing inactivity traps."
    - The recently created self-employed status "should expand the set of job opportunities."
  - Integrating senior workers:
    - "Removal of financial obstacles to combining earned income with a pension after age 60 and the abolishment of forced retirement before age 70 are steps in the right direction."
    - "Increasing the minimum age for pension eligibility, part of the announced pension reform, is a critical step toward raising senior employment and should be combined with improved incentives for continued work, including effective implementation of job-search requirements."

### Unemployment dynamics (Box 8 findings)
- Despite a "relatively mild recession in France, the unemployment rate has increased on par with many other advanced economies."
- France's unemployment rise "has gone up considerably more in France than in Germany and Italy, both of which have experienced much deeper recessions than France."
- Okun’s law framework:
  - "Staff estimates suggest that in normal times the sensitivity of unemployment to real output growth in France is similar to its peers, in particular Germany and Italy."
  - During the recent recession, "the unemployment response in France was stronger than usual, while it was weaker than usual in Germany, Italy, and a few other countries."
  - "In France, nearly half of the total unemployment increase during the recession cannot be explained by its depth."
- Sectoral adjustment and policy differences:
  - Part of the gap is attributed to adjustment in specific sectors (financial services and construction) where employment reduction likely exceeded the decline in value added.
  - Generous partial unemployment programs in countries such as Germany and Italy "have likely reduced the effect of the recession on unemployment."
  - Staff estimates: "in the absence of these programs unemployment would have increased about ½ percent more in Germany and 1½ percent more in Italy."

### Product market competition and services sector
- "Further enhancing domestic competition would increase economic efficiency."
- Progress and remaining gaps:
  - France is "gradually catching up with best practices in product market competition reform," but "more needs to be done, particularly in retail trade and services."
- Retail trade recommendations:
  - The Economic Modernization Law (Loi de Modernisation de l’Economie, LME) introduced measures to strengthen competition and eased some restrictions, but discounters "continue to face administrative limitations to entry."
  - "Deregulating opening hours and sales periods of stores would promote a more competitive environment leading to lower prices for consumers."
  - Ending price regulations on key products (for example over-the-counter drugs) would provide consumer benefits if followed by market liberalization.
- Services sector recommendations:
  - "The EU Services Directive should be followed to achieve further liberalization."
  - Introduce greater competition in health-related services and professional services to businesses and individuals (notaries, accountants).

### Staff appraisal: fiscal, financial, and structural policy guidance
- Fiscal consolidation:
  - The recession and financial crisis "have exerted a significant toll on public finances."
  - "The sharply increased public debt and the turbulence in European financial markets call for significant and credible fiscal consolidation."
  - Authorities must focus on achieving their objective under the Stability and Growth Pact of "reducing the overall fiscal deficit to 3 percent of GDP by 2013."
  - The adjustment should concentrate on measures "that have the least detrimental impact on economic activity," notably entitlement reforms in the pension and health care systems and limiting growth of local government spending.
  - The announced measures would produce "an appropriate deficit reduction in 2011, but further measures need to be prepared to achieve the medium-term fiscal objectives."
  - Recommended fiscal measures:
    - Expenditure constraint of the central government, including continued personnel reductions and a nominal freeze of transfers to local governments.
    - Pension reform emphasizing "an increase in the effective retirement age."
    - Control local government spending decisively over the medium term.
    - Ban on off-budget introduction of new tax expenditures and exemptions from social security contributions.
  - Fiscal governance recommendations:
    - Multiyear budget should rely on "an independent council to validate the underlying macroeconomic forecasts."
    - Encourage adoption of "a fiscal rule on the structural general government balance that is enshrined in the highest legislation."
- Financial sector stability:
  - French banks "have significantly shored up capital adequacy ratios and are gradually exiting from state support."
  - Risks:
    - Nonperforming loans have risen and low growth "may put further pressure on loan quality and require additional provisions."
    - Counterparty risk and funding risk vis-à-vis Southern Europe "has increased."
  - Policy stance:
    - If needed, authorities should be ready to support banks with "public refinancing and recapitalization schemes."
    - More transparency and better communication of key exposures, and publication of EU-wide stress test results, "may help the market’s assessment of the French financial system."
- Supervision and international engagement:
  - "Reform of supervisory arrangements has progressed well" including unification of banking and insurance supervision.
  - Important to "set up the national systemic risk board to enable close cooperation with the envisage European Systemic Risk Board."
  - Staff encourages France to remain engaged in international regulatory reform processes and participate in macroeconomic impact studies and follow-up work.
- Growth and competitiveness:
  - To recoup lost output, policies needed include "wage moderation, promoting competition, and promoting innovation."
  - Urgent focus on job creation and market efficiency:
    - Continue minimum wage moderation "to gradually establish a motivating pay scale for young and low-skilled workers."
    - For senior workers, pursue "efforts to improve incentives for continued work, including effective job-search requirements."
    - Further deregulation of product markets and full implementation of "the EU Services Directive" to achieve liberalization, including in professional services.

*Source: IMF staff report excerpt (content unit: _cr10240 - 31).*

### 45.      It is proposed that the next Article IV consultation be held on the regular

### _cr10240 - 45.      It is proposed that the next Article IV consultation be held on the regular

### Article IV consultation timing
- It is proposed that the next Article IV consultation be held on the regular 12-month cycle.
- The last Article IV consultation was concluded on July 31, 2009.
- France is on the standard 12-month consultation cycle.

### Macroeconomic projections and key real economy indicators (Table 1; 2007–15)
- Real GDP (change in percent): 2.3; 0.1; -2.5; 1.4; 1.6; 1.8; 2.0; 2.1; 2.1
- Domestic demand (change in percent): 3.3; 0.4; -2.4; 1.1; 1.5; 1.7; 1.9; 2.1; 2.1
- CPI (year average): 1.6; 3.2; 0.1; 1.3; 1.6; 1.8; 1.9; 1.9; 1.9
- Unemployment rate (in percent): 8.4; 7.8; 9.5; 10.0; 10.1; 9.7; 9.2; 8.7; 8.4
- Gross national savings (percent of GDP): 21.2; 19.8; 16.7; 17.9; 18.5; 18.7; 18.9; 19.1; 19.3
- Gross domestic investment (percent of GDP): 22.2; 22.0; 19.0; 19.5; 19.9; 20.1; 20.2; 20.4; 20.6

### Public finance (percent of GDP) (Table 1 and Table 3; 2007–15)
- Central government balance: -2.1; -2.8; -6.2; -5.6; -3.6; -2.3; -1.4; -0.6; 0.2
- General government balance: -2.7; -3.3; -7.5; -8.0; -6.1; -4.8; -3.9; -3.2; -2.4
- Structural balance (percent of potential GDP): -3.2; -3.1; -5.0; -4.9; -3.7; -3.0; -2.6; -2.4; -2.0
- Primary balance: 0.0; -0.5; -5.2; -5.4; -3.3; -1.9; -1.0; -0.1; 0.7
- General government gross debt 1/: 63.8; 67.5; 78.1; 84.3; 87.8; 89.7; 90.3; 90.1; 89.1
- Interest payments / Debt service (percent of GDP): 2.7; 2.9; 2.4; 2.6; 2.8; 2.9; 3.0; 3.1; 3.1
- Memorandum—Nominal GDP (in billion of Euros): 1,895; 1,949; 1,907; 1,951; 2,013; 2,084; 2,163; 2,249; 2,338
- General government revenue: 49.6; 49.5; 48.4; 48.3; 49.5; 50.0; 50.1; 50.1; 50.1
- General government expenditures: 52.3; 52.8; 56.0; 56.3; 55.6; 54.9; 54.1; 53.3; 52.5

Notes and definitions from tables:
- 1/ Maastricht definition. The debt figure does not include guarantees on nongeneral government debt.
- 2/ Structural balance is in percent of potential GDP.

### Balance of payments (Table 1 and Table 2; 2007–15; percent of GDP)
- Current account: -1.0; -2.3; -2.2; -1.6; -1.5; -1.4; -1.4; -1.3; -1.3
- Trade balance (f.o.b., c.i.f.): -2.1; -3.0; -2.5; -1.9; -1.8; -1.7; -1.7; -1.6; -1.6
- Exports of goods (percent of GDP): 21.1; 21.1; 17.8; 20.7; 20.8; 20.9; 21.0; 21.1; 21.1
- Imports of goods (percent of GDP): 23.2; 24.1; 20.2; 22.7; 22.7; 22.6; 22.6; 22.7; 22.8
- Exports volume growth (in percent): 2.5; -0.8; -12.2; 6.8; 3.3; 3.5; 3.6; 3.7; 3.8
- Imports volume growth (in percent): 5.7; 0.3; -10.6; 5.1; 2.6; 2.9; 3.3; 3.6; 3.8
- FDI (net): -2.5; -3.6; -3.8; -2.3; -2.2; -2.1; -2.0; -1.9; -1.8
- Balance on financial account: 2.0; 4.0; 1.3; 1.7; 1.5; 1.4; 1.4; 1.3; 1.3
- Official reserves (US$ billion): 45.7; 33.6; 46.6 (Table 1 footnote: values listed as presented)

### Exchange rates and effective exchange rate indices (Table 1)
- Euro per U.S. dollar (period averages noted): 0.73; 0.68; 0.72; 0.76 (2010 average for January–March specified)
- Nominal effective rate (2000=100): 102.4; 104.9; 104.3
- Real effective exchange rate (2000=100): 103.2; 105.3; 101.0

### Potential output and output gap (Table 1)
- Potential output (percent): 2.1; 1.6; 1.1; 1.1; 1.1; 1.2; 1.2; 1.3; 1.4
- Output gap: 1.1; -0.4; -3.9; -3.6; -3.0; -2.4; -1.7; -0.9; -0.2

### Social indicators (Table 1)
- 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

### Financial sector and market indicators (Tables 4–8; high-frequency and vulnerability indicators)
- Selected high-frequency changes (as of April 27, 2010):  
  - BNP Paribas equity price change: 50.7; -13.6; 72.6; -15.6; -29.7; -36.8 (table shows series of changes)  
  - Credit Agricole equity price change: 11.4; -12.1; 43.0; -20.0; -46.3; -60.4
  - Societe Generale equity price change: 41.0; -12.9; 20.3; -34.4; -53.2; -64.0
  - Money market rate 2/: 4.0; 3.8; 1.0; 0.7 (2010 average January–March note)
  - Government bond yield 2/: 4.3; 4.2; 3.6; 3.5
- High-frequency market indicators (Table 4; change since dates shown):  
  - CAC 40: 3,844.6; -3.6; 19.5; -14.0; -31.5; -30.6 (series of changes)
  - 3-month T-bill yield (percent, end-of-period, March): 0.4; 0.3 (series)
  - 10-year government bond (United States, March): 3.6; 3.7 (series)
  - Money market risk spread (basis points): 40.2; 38.0; 123.5; 64.1; 89.4; 29.2
- Vulnerability and prudential indicators (Tables 5–7): select items for most recent years:
  - Regulatory capital to risk-weighted assets (deposit-taking institutions): 11.9; 11.5; 11.3; 10.9; 10.2; 10.5; 12.4
  - Nonperforming loans to total gross loans: 4.8; 4.2; 3.5; 3.0; 2.7; 2.8; 3.6
  - Return on assets (aggregated data, parent-company basis): 0.4; 0.5; 0.6; 0.6; 0.4; 0.0; 0.4
  - Return on equity (aggregated data): 8.5; 10.6; 11.8; 14.0; 9.8; -1.0; 8.2
  - Household debt to GDP (Table 7): 36.4; 37.8; 40.0; 43.0; 45.5; 48.0; 49.9; 52.4
  - Real estate prices (annual percent change, Table 7): 10.1; 12.4; 16.0; 14.8; 9.9; 5.7; -3.0; -4.4

### Fund relations, data, and transparency
- Membership: Joined December 27, 1945; Article VIII.
- Quota (SDR million): 10,738.50; Fund holdings of currency: 8,185.34 (76.22 percent of quota)
- SDR net cumulative allocation (SDR million): 10,134.20 (100.00 percent of allocation); Holdings: 9,719.09 (95.90 percent)
- Outstanding Purchases and Loans: None; Latest Financial Arrangements: None
- Projected payments to Fund (SDR million; forthcoming): Charges/interest: 0.53 (2010); 1.12 (2011); 1.21 (2012); 1.21 (2013); 1.21 (2014). Total row mirrored: 0.53; 1.12; 1.21; 1.21; 1.21
- Exchange rate arrangements: France’s currency is the euro, which floats freely and independently; certain restrictions maintained in accordance with EU regulations and UN Security Council resolutions for security reasons; measures to freeze accounts of listed persons and entities linked to terrorists pursuant to EU regulations and UN Security Council resolutions.
- Data: France subscribes to the Fund’s Special Data Dissemination Standard; comprehensive economic data are available on a timely basis. INSEE and Banque de France provide extensive statistical datasets; national accounts follow ESA95.

### Institutional and mission information
- Staff team for the 2010 Article IV consultation: Ms. Gulde-Wolf (head), Mr. De Vrijer, Mr. Cheng, Ms. Tytell, Ms. Xiao (all EUR), and Ms. Yakadina (FAD).
- Country interlocutors included: Mrs. Lagarde; Mr. Baroin; Mr. Woerth; Mr. Redouin, Deputy Governor of the Banque de France; deputy secretary general of the presidency; director general of the treasury; directors of the budget, taxation, labor and social affairs; deputy chief of staff in the cabinet of the Prime Minister; members of the finance commissions of the National Assembly and the Senate; INSEE; ACP; AMF; FBF; Competition Authority; COR; labor unions; employer organizations; and the financial sector.
- The discussions for the 2010 Article IV consultation were held in Paris during June 2–14, 2010. The concluding statement of the mission is available at the URL reported in the source document.

*Prepared by the European Department; Staff Report for the 2010 Article IV Consultation—Informational Annexes (July 13, 2010) and Staff Report—Supplementary Information (Approved July 27, 2010).*

### 1.      This supplement provides an update of economic and policy developments since the

### _cr10240 - 1.      This supplement provides an update of economic and policy developments since the

### Economic developments and outlook
- Recent data confirm a continuing gradual recovery:
  - Industrial production in May increased by 1.7 percent (more-than-expected).
  - Exports expanded further, but new orders declined.
  - In June, household consumption of manufactured goods fell; durable goods consumption shrank by 1.8 percent (month-on-month and seasonally adjusted).
  - Business confidence improved in July, reaching its highest level since a year ago; consumer confidence moved sideways amid concerns about the high unemployment rate.
- House prices appear to have broadly stabilized in recent months as demand for new dwellings has increased.
- IMF staff projections for France:
  - Real GDP growth: 1.4 percent in 2010 and 1.6 percent in 2011.
  - Staff baseline in the text: Real GDP projected to grow by 1.4 percent in 2010 and 1.6 percent in 2011, somewhat faster than the Euro Area as a whole.
- Executive Board assessment on outlook and risks:
  - Growth expected to pick up only gradually.
  - Unemployment and public debt are relatively high.
  - Imminent fiscal consolidation in France and most European countries will weigh on demand.
  - Lingering concerns about sovereign risks call for continued vigilance.
  - Risks to the outlook are slanted to the downside; sovereign risks in the Euro Area could dampen confidence, increase financing costs, and depress demand.

### Fiscal policy, pension reform, and fiscal rules
- Pension reform:
  - Draft law on pension reform passed the Social Affairs Committee of the National Assembly on July 21; debate in the full National Assembly slated immediately after the summer recess in early September.
  - Committee made no material changes to the government’s reform proposals, including the gradual raise of the retirement age.
  - Reform aims to re-establish financial equilibrium in the pension system by 2018.
- Fiscal consolidation commitment:
  - Authorities committed to strong fiscal adjustment beginning in 2011 to reduce the overall fiscal deficit to 3 percent of gross domestic product (GDP) by 2013.
  - The fiscal stimulus is set to expire by end-2010.
  - Announced revenue and expenditure measures would reduce the deficit by some 2 percentage points in 2011.
  - Further measures at all levels of government needed to achieve envisaged medium-term consolidation.
- Working group on fiscal rules (chair: Mr. Camdessus; final report presented on June 21, 2010):
  - Proposed a new, strengthened multi-year budgetary framework enshrined in the constitution.
  - Budget framework law would include a binding trajectory towards a zero structural deficit and define both a revenue floor and an expenditure ceiling for the central government and the social security administrations, encompassing some currently off-budget general-government entities.
  - Revenue and spending rules would be enforced by the Constitutional Council and binding for annual budget laws.
  - A system of notional accounts, as in Germany, would help adjustment over two subsequent budget years in case of deviation.
  - Limits would be set on resources transferred to constitutionally independent local governments (already subject to a golden rule).
  - Constitutional amendment to prohibit revenue-reducing initiatives outside respective budget laws for the central government and social security administration.
  - Proposal calls for creation of an independent fiscal council to increase realism of macroeconomic assumptions and strengthen government accountability.
  - IMF staff supports the recommendations of the working group as instrumental in restoring balance in public finances.
- Executive Directors’ views on fiscal stance:
  - The 2009–10 fiscal stimulus was considered well designed, including abolition of the local business tax.
  - Given sharply increased public debt, focus should be on significant and credible fiscal consolidation.
  - Directors welcomed measures including continued spending restraint in the central government and a nominal freeze of transfers to local governments.
  - Pension reform is a key component and rightly emphasizes increase in the retirement age.
  - Efforts to better control healthcare spending should be pursued.
  - Beyond measures to meet the 2011 fiscal target, further steps including contingency measures will be needed for medium-term objectives.
  - To enhance credibility, multiyear budget framework should be based on realistic macroeconomic assumptions; merit seen in establishment of independent council and adoption of a fiscal rule.

### Financial sector stability and stress test results
- EU-wide stress test (results released July 23) findings for French banks:
  - The four major banking groups participating represent about 80 percent of the French banking system.
  - French benchmark macroeconomic scenario assumes real GDP growth of 1.2 percent in 2010 and 1.5 percent in 2011 (both below staff’s baseline scenario).
  - Adverse macroeconomic scenario assumes real GDP growth of 0.7 percent in 2010 and -0.1 percent in 2011.
  - In addition to the adverse scenario, a shock was applied to sovereign exposures in banks' trading books and loans to the private sector in their banking books.
  - The stress scenario (adverse macroeconomic scenario coupled with the sovereign shock) reduces the average Tier 1 ratio of French banks by 165 basis points relative to the benchmark level of 9.3 percent at end-2011.
  - The stressed average Tier 1 ratio is only 60 basis points below the actual end-2009 level.
  - Impact on Tier 1 capital of the sovereign exposures shock is only 16 basis points on average with small variation among banks.
  - The Tier 1 ratio of individual banks under the stress scenario ranges from 8.5 to 10 percent, well above the 6 percent threshold used in the test.
- Transparency and supervision:
  - Publication of stress test results and full disclosure of sovereign holdings of French banks are helpful steps toward better transparency.
  - Staff recommends continued appropriate national efforts, in addition to Europe-wide coordinated efforts.
  - French supervisory reforms:
    - New supervisory structure merges banking and insurance supervision to respond to need for systemic supervision.
    - Measures to control financial sector remuneration aim to reduce incentives for excessive risk-taking.
    - Regulatory reform planned to be completed by creation of a systemic risk board with participation of all relevant supervisors and government bodies.
  - Directors noted French banks emerging with improving profitability, welcomed confirmation of resilience by stress tests, and recommended continued strong supervision and readiness to take additional measures to support banks if needed.

### Structural reforms and labor market
- Authorities implementing ambitious reform agenda to raise potential growth, create jobs, and strengthen competitiveness:
  - Pension reform noted above as central to consolidation and incentives for longer working lives.
  - Directors stressed importance of pressing ahead with structural reforms to strengthen competitiveness, boost job creation, and promote innovation.
  - Labor market recommendations:
    - Labor market activation and training policies.
    - Minimum wage moderation should continue to gradually establish a motivating pay scale for young and low-skilled workers.
    - For senior workers, improve incentives for continued work, including effective job-search requirements, pursued in tandem with pension reform.
  - Directors encouraged further steps to improve product and services market flexibility.

### Key statistics and selected indicators (2007–15)
- Real economy (change in percent):
  - Real GDP: 2.3 (2007), 0.1 (2008), -2.5 (2009), 1.4 (2010), 1.6 (2011), 1.8 (2012), 2.0 (2013), 2.1 (2014), 2.1 (2015)
  - Domestic demand: 3.3 (2007), 0.4 (2008), -2.4 (2009), 1.1 (2010), 1.5 (2011), 1.7 (2012), 1.9 (2013), 2.1 (2014), 2.1 (2015)
  - CPI (year average): 1.6 (2007), 3.2 (2008), 0.1 (2009), 1.3 (2010), 1.6 (2011), 1.8 (2012), 1.9 (2013), 1.9 (2014), 1.9 (2015)
  - Unemployment rate (in percent): 8.4 (2007), 7.8 (2008), 9.5 (2009), 10.0 (2010), 10.1 (2011), 9.7 (2012), 9.2 (2013), 8.7 (2014), 8.4 (2015)
  - Gross national savings (percent of GDP): 21.2 (2007), 19.8 (2008), 16.7 (2009), 17.9 (2010), 18.5 (2011), 18.7 (2012), 18.9 (2013), 19.1 (2014), 19.3 (2015)
  - Gross domestic investment (percent of GDP): 22.2 (2007), 22.0 (2008), 19.0 (2009), 19.5 (2010), 19.9 (2011), 20.1 (2012), 20.2 (2013), 20.4 (2014), 20.6 (2015)
- Public finance (percent of GDP):
  - Central government balance: -2.1 (2007), -2.8 (2008), -6.2 (2009), -5.6 (2010), -3.6 (2011), -2.3 (2012), -1.4 (2013), -0.6 (2014), 0.2 (2015)
  - General government balance: -2.7 (2007), -3.3 (2008), -7.5 (2009), -8.0 (2010), -6.1 (2011), -4.8 (2012), -3.9 (2013), -3.2 (2014), -2.4 (2015)
  - Structural balance (percent of potential GDP): -3.2 (2007), -3.1 (2008), -5.0 (2009), -4.9 (2010), -3.7 (2011), -3.0 (2012), -2.6 (2013), -2.4 (2014), -2.0 (2015)
  - Primary balance: 0.0 (2007), -0.5 (2008), -5.2 (2009), -5.4 (2010), -3.3 (2011), -1.9 (2012), -1.0 (2013), -0.1 (2014), 0.7 (2015)
  - General government gross debt1/: 63.8 (2007), 67.5 (2008), 78.1 (2009), 84.3 (2010), 87.8 (2011), 89.7 (2012), 90.3 (2013), 90.1 (2014), 89.1 (2015)
    - 1/ The debt figure does not include guarantees on nongeneral government debt.
- Balance of payments (in percent of GDP):
  - Exports of goods: 21.1 (2007), 21.1 (2008), 17.8 (2009), 20.7 (2010), 20.8 (2011), 20.9 (2012), 21.0 (2013), 21.1 (2014), 21.1 (2015)
    - Volume growth (in percent): 2.5 (2007), -0.8 (2008), -12.2 (2009), 6.8 (2010), 3.3 (2011), 3.5 (2012), 3.6 (2013), 3.7 (2014), 3.8 (2015)
  - Imports of goods: 23.2 (2007), 24.1 (2008), 20.2 (2009), 22.7 (2010), 22.7 (2011), 22.6 (2012), 22.6 (2013), 22.7 (2014), 22.8 (2015)
    - Volume growth (in percent): 5.7 (2007), 0.3 (2008), -10.6 (2009), 5.1 (2010), 2.6 (2011), 2.9 (2012), 3.3 (2013), 3.6 (2014), 3.8 (2015)
  - Trade balance: -2.1 (2007), -3.0 (2008), -2.5 (2009), -1.9 (2010), -1.8 (2011), -1.7 (2012), -1.7 (2013), -1.6 (2014), -1.6 (2015)
  - Current account: -1.0 (2007), -2.3 (2008), -2.2 (2009), -1.6 (2010), -1.5 (2011), -1.4 (2012), -1.4 (2013), -1.3 (2014), -1.3 (2015)
  - FDI (net): -2.5 (2007), -3.6 (2008), -3.8 (2009), -2.3 (2010), -2.2 (2011), -2.1 (2012), -2.0 (2013), -1.9 (2014), -1.8 (2015)
  - Official reserves (US$ billion): 45.7 (2007), 33.6 (2008), 46.6 (2009)
- Fund position (as of May 31, 2010):
  - Holdings of currency (percent of quota): 76.2
  - Holdings of SDRs (percent of allocation): 95.9
  - Quota (SDRs million): 10,739
- Exchange rates and effective rates:
  - Euro per U.S. dollar2/: 0.73 (2007), 0.68 (2008), 0.72 (2009), 0.76 (2010)
  - Nominal effective rate (2000=100): 102.4 (2007), 104.9 (2008), 104.3 (2009)
  - Real effective exchange rate (2000=100): 103.2 (2007), 105.3 (2008), 101.0 (2009)
    - 2/ For 2010, average for January-March.
- Potential output and output gap:
  - Potential output: 2.1 (2007), 1.6 (2008), 1.1 (2009), 1.1 (2010), 1.1 (2011), 1.2 (2012), 1.2 (2013), 1.3 (2014), 1.4 (2015)
  - Output gap: 1.1 (2007), -0.4 (2008), -3.9 (2009), -3.6 (2010), -3.0 (2011), -2.4 (2012), -1.7 (2013), -0.9 (2014), -0.2 (2015)
- 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

### Executive Board summary and recommendations
- Directors’ overall view:
  - France weathered the global crisis better than most peers due to timely government intervention, resilient financial sector, large social safety nets, and low trade openness.
  - With recovery underway, policy focus should shift from crisis management to strengthening foundations through fiscal consolidation, supporting full recovery of the financial system, improving financial regulation, and implementing structural reforms.
- Recommendations and priorities emphasized:
  - Implement vigorous structural reform agenda to support recovery, strengthen competitiveness, and boost job creation.
  - Ensure credible and significant fiscal consolidation anchored by realistic macroeconomic assumptions and strengthened institutions (independent council, fiscal rule).
  - Continue spending restraint in central government and nominal freeze of transfers to local governments.
  - Pursue pension reform to increase retirement age and achieve system equilibrium by 2018.
  - Pursue efforts to better control healthcare spending.
  - Maintain strong financial supervision, complete regulatory reform (systemic risk board), and remain prepared to support banks if needed.
  - Continue national transparency and disclosure efforts alongside Europe-wide coordination.

*Source: IMF staff report supplement and Public Information Notice (PIN) No. 10/103, July 29, 2010.*

### 2011. Short-term indicators from business surveys already suggest a recovery in investment,

### 2011. Short-term indicators from business surveys already suggest a recovery in investment,

### Investment outlook
- Short-term indicators from business surveys already suggest a recovery in investment.
- The conventional accelerator effect should gather steam.
- Forecast for private investment is underpinned by:
  - interest rates expected to remain low;
  - positive effects of the removal of the local business tax (Taxe Professionnelle).
- Authorities note downside risks should be nuanced because recent data suggest credit growth has ceased to slowdown.

### Views on potential growth
- Authorities estimate French potential growth at 1.7 percent per year over the medium term (2009-13).
- Divergence with staff mainly relates to the foreseen impact of the crisis on total factor productivity growth.
- Authorities note the crisis had a less disruptive effect on the financial sector and on households’ balance sheets in France.
- Pension reform is expected to gradually translate into a higher rate of activity:
  - employment rate in the 55-64 years bracket has already been raised by 3.6 percentage points since 2002.

### Fiscal sustainability and consolidation strategy
- The global crisis and the large fiscal impulse led to a sharp deterioration of public finances, prompting ambitious fiscal consolidation.
- Cost of financing for the Treasury remains at historically low levels: 2.9 percent for 10-year bonds.
- Government commitment to a large and durable fiscal consolidation starting in 2011:
  - Stability program will bring the deficit down from 8 percent of GDP in 2010 to 6 percent in 2011, and aims at returning to 3 percent of GDP by 2013.
  - Half of the adjustment in 2011 will come from structural savings; the rest from the phasing out of the stimulus and recovery of tax revenues.
  - Complete package of measures to secure the announced deficit path will be finalized by September.
- Consolidation approach:
  - Achieve most consolidation over 2011-13 through expenditure cuts (all levels of government contributing).
  - Pension reform is a key element:
    - gradual increase in the legal retirement age from 60 to 62 and the legal minimum age of full pension entitlement from 65 to 67;
    - reform will eliminate the deficit associated with the pension system by 2018;
    - immediate impact on tax revenue via a moderate increase in taxation of investment income;
    - residual deficits during the transition financed by the Reserve Fund of the pension system (Fonds de reserve des retraites), which has accumulated over €33 billion of assets;
    - reform will reduce the general government deficit by 0.5 point of GDP in 2013 and 1.2 point by 2020;
    - reform will save close to 10 points in the gross public debt-to-GDP ratio through the period.
- Structural governance measures to underpin consolidation:
  - multiyear budgetary framework maintained and to be strengthened;
  - better control of healthcare spending via strengthening of the early warning procedure on spending overruns;
  - decision to ban the introduction of any new tax measure outside the budget law (Loi de Finances) or the social security budget law (Loi de Financement de la Sécurité Sociale);
  - consideration of introducing a fiscal rule at the constitutional level, with proposals from the working group chaired by Michel Camdessus to be discussed with major political parties, with a view to introducing the rule in 2011.

### Structural reforms to boost growth and competitiveness
- Authorities committed to maintaining the pace of structural reforms in line with E.U and G20 MAP commitments to improve competitiveness, flexibility of labor and product markets, and raise potential growth.
- Key competitiveness actions:
  - removal of the local business tax (Taxe Professionnelle) to improve competitiveness and attractiveness to foreign investment;
  - elimination of the discretionary increase in the minimum wage, as recommended by the IMF, to help address the rise in unit labor costs and export performance deterioration;
  - launch of a €35 billion investment program (Grand Emprunt or Dépenses d’Avenir) designed to have only a marginal effect on public finances and to leverage private resources to boost capacities in education, research, and innovation;
  - continued success of the tax credit on research and development expenditures (credit d’impôt recherche).
- Labor market flexibility and participation:
  - temporary unemployment schemes softened the crisis impact; France transitioned from above to below the Euro area average rate of unemployment during the crisis;
  - net job creations expected to resume by end-year;
  - efforts to raise employment rates, especially among vulnerable groups, continue;
  - pension reform will be phased in at a faster pace than similar reforms in other countries, with fairly rapid impact on senior worker participation;
  - measures to foster low-skilled workers’ participation include the PIT tax credit (Prime pour l’emploi) and the Working Solidarity Benefit (RSA).
- Competition and domestic market efficiency:
  - authorities agree further enhancing domestic competition would strengthen economic efficiency;
  - scope to build on measures in the Economic Modernization Law and on transposition of the E.U Services Directive;
  - ongoing reforms to boost competition in utilities sectors.

### Financial sector stability
- French financial sector proved resilient and remains solid.
- Banks have restored profitability and strengthened capital base; sound position to support recovery.
- E.U stress testing results:
  - all the four French banks tested (accounting for 80 percent of the total assets of the French banking system) have easily passed the most adverse scenario, with a Tier 1 ratio above 9 percent on average.
- Authorities consider risks from banks’ exposure to the so-called “EA5” should be nuanced:
  - geographical breakdown of exposures and nature of claims matter;
  - French banks are mainly exposed through loans to corporates rather than securities and government bonds, suggesting potential losses would be gradual and slow;
  - strong revenue flows: the four biggest French banks posted a 28 percent increase in net income in the first quarter of 2010.
- Authorities report full transparency on French banks’ exposures to sovereign risk in Europe and judge exposures manageable even under adverse simulations.
- Regulatory and supervisory reforms:
  - introduction of a financial levy based on financial institutions’ riskiest assets;
  - establishment of a framework for sound compensation practices in the financial industry;
  - reform of the supervisory architecture: creation of a unique supervisor for banking and insurance and establishment of a systemic risk board.

### International cooperation
- Authorities remain committed to international cooperation and provide significant financial support to the IMF:
  - French commitment to the New Arrangements to Borrow (NAB) for SDR 18.6 billion ratified by the Parliament on June 7, 2010;
  - France pledged a SDR 1.3 billion loan to the PRGT which will soon be effective.

*2011. Short-term indicators from business surveys already suggest a recovery in investment,*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10240.pdf_