## _cr14182 ## Source details **Canonical URL:** [_cr14182](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14182.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14182.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14182.pdf.json) --- ### The Spending Containment Package — context, objectives, and composition - Context and political backdrop: - Mission occurred before European Parliament elections; government headed by PM Valls with comfortable socialist majority until 2017; popular discontent could complicate reform and adjustment. - Objective: - Anchor fiscal adjustment by an expenditure reduction plan (Spending Containment Package) to restore fiscal space and target structural fiscal balance. - Package headline figures and timing: - Announced expenditure containment of €50 billion, relative to trend, over 2015-17; implies an effort of 2.2 percent of GDP and stabilization of real spending over three years. - By comparison, the expenditure effort planned for 2014 is €19 billion (including €4 billion in extra cuts). - Timing of cuts: €21 billion in 2015; €16 billion in 2016; €13 billion in 2017. - Aggregate impact: about 4 percent of spending for each level of government (central, sub-national, and social security). - Distribution of cuts (exact allocations): - Central government: €18 billion (spending rationalization, pooling purchases and ICT spending, reduced funding of state agencies, extension of wage freeze, stabilization of number of civil servants). - Local governments: €11 billion (cut in transfers from central government; local authorities may partially compensate via raising taxes and debt, subject to limits). - Health spending: €10 billion (ambulatory surgery €1 billion; rationalization and pooling of hospital spending €1 billion; cut in medicine costs notably through promotion of generics €3.5 billion; elimination of ineffective medical procedures €2.5 billion; plus savings from wage freeze and fighting fraud). - Social protection: €11 billion (€2.9 billion from recent reforms of family allowance and pensions; €4 billion from de-indexation of pensions, family, and housing allowances—expected to be adopted in 2014; €2.8 billion from additional reform of unemployment insurance and family allowances—yet to be defined; €1.2 billion from reduced administrative costs). - Execution notes and dependencies: - Wage freeze, de-indexation of social benefits, and impact of recent reforms are well identified; central government savings (outside wage and employment freeze) have yet to be announced. - Of the social spending saving, about €4 billion depends on reforms requiring consultation with social partners. - Local governments’ own tax base: 6 percent of GDP; they can only resort to debt financing for capital projects. - Footnote: base wage freeze applies to all levels of government. ### Real sector, demand, and competitiveness - Real sector and output: - Output gap widened to -2.2 percent in 2013. - Unemployment remained stuck above 10 percent. - Investment remains depressed; resilient wage growth and faltering productivity compressed profit margins and amplified contraction of investment. - Private consumption and savings: - Real consumption was 2.5 percent higher in 2013 than at the pre-crisis peak. - Household saving rate stable around 15½ percent in the last decade. - Real estate prices are 9 percent below pre-crisis peak. - Inflation and monetary conditions: - Inflation slowed from 2.3 percent in 2012Q2 to 0.9 percent in 2014Q1; inflation stabilized around 1 percent. - Core inflation bottomed out mid–2013 and has edged up to just over 1 percent. - Monetary easing transmitted into domestic interest rates, but falling inflation expectations increased real interest rates. - Competitiveness and external sector: - Staff considers the real exchange rate in 2013 was 5-10 percent higher (i.e., overvalued) relative to medium term fundamentals and desirable policy settings. - EBA model: 2013 current account 1 to 3 percent of GDP below its cyclically-adjusted norm. - Current account narrowed from 2.1 percent of GDP in 2012 to 1.3 percent in 2013, reflecting weak domestic demand more than export rebound. - Net international investment position: -20 percent of GDP (deteriorated since crisis but not judged a sustainability concern). ### Fiscal developments, strategy, and outlook - Recent fiscal position: - Government deficit: 4.2 percent of GDP in 2013 (2.8 percent in structural terms). - Tax burden increased by 2.8 percent of GDP from 2007 to 2013. - Contingent liabilities declined from 152 percent of GDP end 2012 to 134 percent of GDP in 2013 (slightly more than half related to pensions). - 10-year yield declined from 4.7 percent in June 2008 to less than 1.9 percent in May 2014 (table gives 1.85 percent in May 2014). - Fiscal strategy and pace: - Authorities project convergence to structural fiscal balance by 2017; staff’s more conservative scenario implies adjustment at same pace until 2019 to reach balance. - Target: structural fiscal adjustment averaging about ½ a percent of GDP a year until structural fiscal balance is reached. - Staff projects 2014 deficit of 4.0 percent of GDP (authorities project 3.8 percent based on additional saving measures to be adopted in summer 2014). - Structural adjustment in staff projections: 0.4 percent of GDP (bulk from expenditure containment). - Risks and challenges to the strategy: - Political backlash against taxation; falling tax buoyancy and inflation; expenditure slippages at local government level; rising social spending. - Social insurance system financially strained; about €4 billion of social spending savings depend on social partner agreement. - Local governments could cut productive investment, raise taxes, or increase debt in response to reduced transfers. ### Supply-side measures and labor market policies - Enterprise and household tax measures: - Tax cuts for enterprises totaling 2 percent of GDP in 2014–17 (CICE and RSP). - Household tax cuts of about 0.25 percent of GDP over 2015-17. - Combined CICE and RSP labor tax reductions: about 1.4 percent of GDP (staff estimate: at least 600,000 jobs in the long run after capital stock adjusts). - Authorities estimate RSP tax reductions would create about 200,000 jobs. - Product and regulatory reform: - Regulatory simplification and easing thresholds beyond 10, 20, and 50 employees. - Potential productivity gains: move to OECD frontier in PMR could increase productivity by 3 percent after 5 years (study cited); 2014 staff study estimated a 1 percent productivity gain in regulated services (less than 30 percent of GDP) could raise GDP by 0.8 percent after two years. - Authorities plan to reduce barriers to entry in regulated professions, change price-setting in regulated services, and give competition authority more visible role. - Labor market adaptability: - Law on job security and flexibility aims to ease collective dismissal procedures and enable renegotiation of conditions. - Other measures: better targeted professional training; introduction of rechargeable unemployment rights. - Unemployment insurance scheduled for review by 2016; staff recommended increasing work incentives and aligning employer contributions to job turnover. - Minimum wage and low-skilled employment: - Minimum wage (SMIC): EUR 1,445.4 per month. - Unemployment rates in 2012 by education: 16.2 percent (lower secondary or less); 9.9 percent (intermediate); 5.7 percent (tertiary). - Targeted labor tax cuts are costly (around 1 percent of GDP already in 2012) and could create low-wage traps. - Staff suggestion: indexation include unemployment rate of the low skilled; authorities reject this, citing social contract considerations. ### Financial sector soundness, FSAP updates, and regulatory transition - Banking sector metrics and resilience: - Large banking groups: loan-to-deposit ratio declined to 115.9 percent in 2013. - Banks meet the CRD-IV fully loaded minimum CET1 capital requirement; significant progress toward Basel III. - Short term wholesale funding represents around 10 percent of total liabilities in 2013, compared to 30 percent pre-crisis. - Non-performing loans: risen to 4.5 percent in 2013 (Table 5 referenced). - Funding and structural features: - Life insurance remains key for savings mobilization; a 2013 decision shifted 30 billion Euros from the CDC to bank deposits (equivalent to 1¾ percent of non-bank private deposits). - Banks face wholesale funding risks and net stable funding ratio (NSFR) gaps; NSFR precise definition still under discussion by the BCBS. - Policy consideration: reform of financial savings taxation might be necessary to level playing field (maturity-based approach suggested). - FSAP Update — key recommendation statuses: - ACPR monitors liquidity and preparedness for regulatory liquidity ratios (Done). - Law of July 26, 2013 extended ACPR authority on fit and proper requirements (Done). - FGDR (Fonds de Garantie des Dépôts et de Résolution) involvement in resolution: partly done via 2013 banking law. - Insurance supervision and Solvency II transposition to be completed by March 31, 2015 (ongoing/partly done). - Greater public disclosure and bank-by-bank data: authorities consider current disclosures adequate; No New Action on some transparency recommendations. - Cross-border spillovers and systemic risk: - Outward spillovers in 2008 could have affected more than ten countries; by 2012 significant outward spillovers would have been limited to Belgium, Italy, and Ireland. - Implicit subsidies for systemically important banks remain sizeable; TBTF risks remain important though possibly reduced by regulatory reforms. - Preparations for European banking union and comprehensive assessment expected to validate loan portfolio quality; additional provisioning surprises cannot be ruled out. ### Outlook, projections, and risks around the baseline - Growth and inflation projections: - Staff revised growth to 0.7 percent in 2014 and 1.4 percent in 2015 (relative to April WEO). - Inflation expected to remain around 1 percent, rising very gradually. - Authorities’ Stability Program projections: 1 percent in 2014, 1.7 percent in 2015, 2.25 percent by 2016; fiscal council judged these: realistic for 2014, possible but conditional for 2015, and optimistic for 2016-17. - Labor market: - Private sector should become a source of net job creation in 2014; unemployment expected to come down measurably only in 2016. - Fiscal outlook (staff baseline): - Staff projects a deficit of 4.0 percent of GDP in 2014; authorities project 3.8 percent based on additional saving measures. - Structural adjustment in staff projections: 0.4 percent of GDP (bulk from expenditure containment). - DSA baseline and stress tests (selected outcomes and assumptions): - Baseline debt-to-GDP ratio projected to peak at 95.1 percent in 2015 and decline to 89.1 percent by 2019. - Gross financing needs increase to 12.3 percent of GDP in 2015 then decline. - Interest payments: 2.3 percent of GDP in 2013; projected to average 2.2 of GDP during the projection period. - Stress test: growth shock (1.7 percentage points lower over 2015-2016) would raise debt-to-GDP to almost 103 percent in 2016 and decline thereafter. - Combined macro-fiscal shock: debt almost 103 percent of GDP in 2016 and 100 percent in 2019; gross financing needs peak at 14.9 percent of GDP in 2016 (below 20 percent benchmark). - Risk Assessment Matrix (selected entries and ratings): - Surges in global financial market volatility: Relative Likelihood: High; Impact: Medium overall. - Protracted slower growth in advanced and emerging economies: Relative Likelihood: High; Impact: Medium overall. - Risks from incomplete regulatory reforms to financial stability: Relative Likelihood: Medium; Impact: Medium overall. - Housing price correction (empirical overvaluation 10-20 percent): Relative Likelihood: Medium; Impact: Low overall on banks given sound lending standards. - Weak implementation of fiscal and structural commitments: Relative Likelihood: Medium; Impact: Medium overall. - Main domestic risks: - Stalled recovery of investment; negative spiral of low growth and falling inflation; lower-than-expected growth fueling popular discontent and undermining fiscal resolve. - Public debt particularly sensitive to a lower growth scenario. ### Key policy recommendations and sequencing - Anchor adjustment on expenditure containment and structural measures to ensure permanent slowdown in spending growth; resist pressures to dilute program as difficult reforms are introduced. - Front-load revenue measures less than expenditure actions; staff agreed no additional measures beyond those planned should be taken in the near term given fragile recovery. - Boost supply-side measures: labor and product market reforms, regulatory simplification, and measures to fight rents by opening protected sectors to greater competition. - Labor market: broaden reforms to increase enterprise-worker flexibility; expand enterprise-level negotiations; review unemployment insurance in 2016 to increase work incentives. - Financial sector: ensure banks adapt to evolving regulatory framework; consider tax reforms on financial savings to reduce distortions; monitor wholesale funding and NSFR readiness. - Implementation and monitoring: - Use the medium-term budget to be presented in the fall to lock in specific measures. - Authorities seek coordination mechanisms to guide and monitor local governments; institutional reform of local government structures needed to translate transfer cuts into spending reductions. ### Selected key statistics (preserved exactly as presented) - Output gap: -2.2 percent (2013). - Household saving rate: around 15½ percent. - Real consumption: 2.5 percent higher in 2013 than pre-crisis peak. - Real estate prices: 9 percent below pre-crisis peak. - Government deficit: 4.2 percent of GDP in 2013. - Structural deficit: 2.8 percent of GDP in 2013 (structural terms). - Contingent liabilities: 152 percent of GDP end 2012; 134 percent of GDP in 2013. - 10-year yield: 4.7 percent in June 2008; less than 1.9 percent in May 2014 (table cites 1.85 percent in May 2014). - Loan-to-deposit ratio (six large banking groups): 115.9 percent in 2013. - Non-performing loans: 4.5 percent in 2013. - Spending containment: €50 billion over 2015-17; 2.2 percent of GDP. - 2014 planned expenditure effort: €19 billion (including €4 billion extra cuts). - Cuts by year: €21 billion (2015); €16 billion (2016); €13 billion (2017). - Central government cut: €18 billion. - Local government transfer cut: €11 billion. - Health spending cuts: €10 billion (ambulatory surgery €1 billion; hospital pooling €1 billion; generics €3.5 billion; ineffective procedures €2.5 billion). - Social protection savings: €11 billion (€2.9 billion; €4 billion; €2.8 billion; €1.2 billion). - Enterprise tax cuts: 2 percent of GDP in 2014–17. - Household tax cuts: about 0.25 percent of GDP over 2015-17. - Combined CICE and RSP labor tax reductions: about 1.4 percent of GDP. - Authorities’ RSP job creation estimate: about 200,000 jobs. - Staff job creation estimate from labor tax reductions: at least 600,000 in the long run. - Minimum wage (SMIC): EUR 1,445.4 per month. - Unemployment rates in 2012 by education: 16.2 percent; 9.9 percent; 5.7 percent. - Targeted labor tax cuts cost: around 1 percent of GDP (already in 2012). - Shift from CDC to bank deposits in 2013: 30 billion Euros (equivalent to 1¾ percent of non-bank private deposits). - Local governments’ own tax base: 6 percent of GDP. - Staff growth projections: 0.7 percent in 2014; 1.4 percent in 2015. - DSA baseline debt-to-GDP peak: 95.1 percent in 2015; decline to 89.1 percent by 2019. - Gross financing needs spike: 12.3 percent of GDP in 2015 (baseline projection). - Interest payments: 2.3 percent of GDP in 2013; projected to average 2.2 of GDP during projection period. - Real GDP growth (sample projection row): 0.7 1.4 1.7 1.8 1.9 1.9 (as presented in table sequences). - CPI year average sample: 1.0 (2013); 1.0 (2014); 1.2 (2015); 1.3 (2016); 1.4 (2017); 1.5 (2018); 1.6 (2019) — as presented. - Unemployment rate projections sample: 10.3 percent (2013); 10.3 percent (2014); 10.2 percent (2015); 10.0 percent (2016). *Italic: Source — IMF staff report excerpts and appendices from the supplied content unit.* ### 1. The Spending Containment Package __________________________________________________________ 18 ### 1. The Spending Containment Package ### Context and political backdrop - Mission took place before the European Parliament elections that recorded large gains for the far-right party at the expense of socialist and center right parties. - Following local election rebuke in April, the President nominated a new government headed by PM Valls. - Government can count on a comfortable socialist majority in parliament until Presidential and Parliamentary elections in 2017. - Popular discontent could make the reform and adjustment process more arduous. ### Real sector and output - Through the crisis, the economy fared better than other large euro area economies except Germany, but is behind others in the recovery cycle. - Investment remains depressed; output gap widened to -2.2 percent in 2013. - Unemployment remained stuck above 10 percent. - Demand constrained by a weak external environment and structural fiscal adjustment of nearly 3 percent of GDP over three years (2011–13). - Resilient wage growth helped sustain consumption but, combined with faltering productivity growth, compressed profit margins and amplified the contraction of investment. - Long-standing structural and competitiveness problems compounded negative factors. ### Private consumption and savings - Private consumption was an important factor of resilience during the crisis. - Real consumption was 2.5 percent higher in 2013 than at the pre-crisis peak. - Household saving rate has been relatively stable around 15½ percent in the last decade. - Stability of consumption occurred even as disposable incomes were squeezed by rising taxation, reflecting extensive social safety nets and sustained real wage growth. - Weak exposure to asset price changes helped cushion consumption: - Real estate prices are 9 percent below pre-crisis peak. - Financial holdings are mostly bank deposits and life insurance products with built-in shock absorbers. - Lending standards are based on capacity to repay rather than collateral. ### Inflation and monetary conditions - Disinflationary pressures began in 2012; inflation stabilized around 1 percent. - Inflation slowdown: from 2.3 percent in 2012Q2 to 0.9 percent in 2014Q1. - Slowdown originated from declining core, energy, and food inflation in about equal proportions. - Core inflation bottomed out mid–2013 due to: - Continued compression in profit margins. - Pass-through of lower import prices into manufacturing products. - Significant drop of telecom prices following the entry of a fourth operator. - Core inflation has edged up to just over 1 percent as some temporary factors waned. - Monetary easing transmitted into domestic interest rates, but monetary conditions tightened since 2012 because falling inflation expectations increased real interest rates. - Despite low nominal lending rates, real interest rates have risen as inflation has come down. ### Credit, debt, and banking funding - Balance sheet restructuring by banks occurred mostly by shedding non-core foreign activities while preserving core lending business. - Domestic credit growth remained positive through much of the crisis, although in 2013 the only growth was in mortgage lending. - Corporate and household debt levels have increased but remain moderate by international comparison. - Banks face wholesale funding risks and gaps relative to future net stable funding ratio requirements. - Loan-to-deposit ratio for the six large banking groups declined to 115.9 percent in 2013. - Large groups have met the CRD-IV fully loaded minimum CET1 capital requirement; many peers have gone further. - Deleveraging continued, with total assets of the five large banking groups down (exact decline not specified in supplied text). ### Fiscal developments and adjustment strategy - Government deficit was 4.2 percent of GDP in 2013 (2.8 percent in structural terms). - Structural fiscal deficits persist because public expenditure has tended to outrun GDP growth over decades, including through the fiscal stimulus of 2009. - Accumulation of deficits since 1975 reduced fiscal space and limited ability to sustain demand as the economy slowed in 2012–13. - Contingent liabilities declined from 152 percent of GDP end 2012 to 134 percent of GDP in 2013 (slightly more than half is related to pensions). - Despite increase in debt, government borrowing rates stabilized at historically low levels; the 10-year yield declined from 4.7 percent in June 2008 to less than 1.9 percent in May 2014. - Fiscal policy strategy: divide adjustment equally between revenue and expenditure measures but front-load revenue measures because of their lower (expected) multiplier. - Tax burden increased by 2.8 percent of GDP from 2007 to 2013. - Fiscal adjustment shifted from tax increases to expenditure containment in 2013, but growth of spending was still 0.9 percent in real terms. - Challenges to strategy: - Political backlash against taxation. - Falling tax buoyancy and inflation. - Expenditure slippages at the level of local governments. - Rising social spending. - Social insurance system has contributed to resilience but has become more difficult to sustain financially and reconcile with deficit reduction. - As the structural deficit in 2012–13 diverged significantly from the multi-year fiscal law of 2012, the fiscal council triggered the corrective mechanism in May 2014; government said it will take additional spending measures (0.2 percent of GDP) this summer and will likely send to Parliament, in the fall, a new multi-year fiscal law targeting structural balance in 2017 rather than in 2016 (consistent with the April 2014 stability program). ### Competitiveness and external sector - Loss of competitiveness has weighed on growth; competitiveness gap evident from export market share and unit labor cost developments. - Evidence based on price competitiveness is less clear because narrowing profit margins have compensated for loss of cost competitiveness. - EBA model estimates suggest the 2013 current account was 1 to 3 percent of GDP below its cyclically-adjusted norm. - Staff considers that the real exchange rate in 2013 was 5-10 percent higher (i.e., overvalued) relative to medium term fundamentals and desirable policy settings. - Export performance appears weak even after adjusting for France’s lesser integration in Global Value Chains. - Recent narrowing of the current account deficit—from 2.1 percent of GDP in 2012 to 1.3 percent in 2013—reflects weak domestic demand more than export rebound. - Net international investment position deteriorated since the crisis to -20 percent of GDP, but its size and trajectory do not raise sustainability concerns. ### Financial sector soundness - Financial sector indicators show continued improvements. - Banks built capital and liquidity buffers through increased profitability and funding structure adjustments. - Improvements reflected in rising price-to-book ratios. - Despite progress, banks remain exposed to wholesale funding risks and face net stable funding ratio gaps. *Source: IMF staff report excerpt — "1. The Spending Containment Package."* ### 7.5 percent in 2013. Non-performing loans have risen to 4.5 percent in 2013 (Table 5), but continue ### France: Outlook and Risks (excerpt) ### Outlook and growth projections - Staff revised growth projections (relative to April WEO) to 0.7 percent in 2014 and 1.4 percent in 2015. - Recovery drivers in the baseline: stronger external and domestic private demand (from gains in real disposable income and gradual improvements in profit margins), a lesser fiscal drag, and supply side measures gaining strength over the medium term. - Labor market: following 2 years of net job destruction, the private sector should become a source of net job creation in 2014, but the unemployment rate should begin to come down measurably only in 2016. - Authorities’ Stability Program projections (prepared prior to Q1 results): growth of 1 percent in 2014, 1.7 percent in 2015, rising to 2.25 percent by 2016. The fiscal council judged these projections: realistic for 2014, possible but subject to “realization of several positive assumptions” in 2015, and optimistic for 2016-17. ### Inflation outlook and risks - Inflation is expected to remain around 1 percent, rising only very gradually over the medium term. - Projection assumptions: moderate wage inflation related to labor market slack and the need for enterprises to restore profit margins. - Downside inflation risks: wage growth could decelerate more rapidly in a context of continued slow output growth; falling inflation could feed into wages through the indexation of the minimum wage. ### Fiscal outlook and assumptions - The 2014 budget was prepared on the basis of prudent macroeconomic assumptions, reflecting the moderating role of the fiscal council. - Authorities project a deficit of 3.8 percent of GDP based on additional saving measures to be adopted in summer 2014. - Staff projects a deficit of 4.0 percent (reflecting the downward revision to growth and lower tax buoyancy). - Structural adjustment in staff projections: 0.4 percent of GDP, the bulk coming from expenditure containment. ### External adjustment and competitiveness - In staff’s baseline, the current account deficit is projected to close over the medium-term in tandem with the fiscal deficit. - Adjustment channel: internal depreciation induced by public expenditure containment and labor tax reductions, and by wage moderation—consistent with staff recommendations to close the external gap. - Competitiveness note: CICE tax credit imputed to lower labor costs (CICE mentioned as 0.9 percent of GDP elsewhere in the text). ### Financial sector developments and risks - System capital and liquidity ratios have improved and markets have responded positively. - In French systemically important banks, capital ratios meet fully-loaded Basel III requirements; leverage ratios are in the low range, reflecting relatively low risk-weights. - Stable financing sources have increased, but wholesale funding remains large; medium-term risks relate to banks’ ability to adapt to regulatory changes and legal risks from global operations. - Outward spillovers: research indicates that while in 2008 credit and funding shocks to French banks could have induced banking failures in more than ten countries, as of 2012 significant outward spillovers would have been limited to Belgium, Italy, and Ireland. - Improvement in capital ratios since the crisis should help limit outward spillovers to the real sector in the event of renewed liquidity stress. ### Risks around the baseline - Overall assessment: risks remain substantial, reflecting uncertainty about timing and strength of the cyclical turnaround and the impact of popular discontent on policy resolve. - Main external risks: slower global growth and financial market volatility. - Main domestic risks: - A stalled recovery of investment amid an uncertain outlook—leading indicators remain below average. - A negative spiral of low growth and falling inflation, with adverse effects on investment and the fiscal deficit. - Lower-than-expected growth could fuel popular discontent and undermine fiscal resolve, though the fiscal responsibility framework would likely limit backtracking. - Public debt is particularly sensitive to a lower growth scenario (DSA referenced). - Financial sector specific risks: reliance on wholesale funding; pressures from stricter leverage ratios could trigger deleveraging and erode profits; legal risks related to global operations could weigh heavily if penalties curtail international activities. ### Risk Assessment Matrix (selected entries) - Surges in global financial market volatility (e.g., related to geopolitical tensions, revised market expectation, UMP exit) - Relative Likelihood: High - Impact on France if Realized: Market volatility and higher-than-expected increases in long-term rates. Medium overall impact; inward spillovers have been limited in recent years but could affect interest rates in the future. - Protracted period of slower growth in advanced and emerging economies - Relative Likelihood: High - Impact on France if Realized: Weak demand could take a toll on productive capacities. Risk of deflation in Europe has increased. Medium overall impact; trade and investment links dampen short-run effects but domestic growth would suffer eventually. Entrenchment of high structural unemployment and limited fiscal space would make it difficult to exit a low growth trap. - Risks to financial stability from incomplete regulatory reforms (medium term) - Relative Likelihood: Medium - Impact on France if Realized: French banks vulnerable to a globally systemic closure in funding markets; pressures to meet stricter leverage ratios on a short horizon could trigger deleveraging and erode profits. Medium overall impact. - Housing price correction - Relative Likelihood: Medium - Impact on France if Realized: Empirical estimates suggest 10-20 percent overvaluation. Low overall impact on banks due to sound lending standards, but possibly larger impact if accompanied by shocks to income and employment. - Weak implementation of fiscal and structural policy commitments - Relative Likelihood: Medium - Impact on France if Realized: Political resolve for reform may wane in face of protracted low growth and popular discontent. Medium overall impact; reversal of commitments could undermine investment and growth, and aggravate the external imbalance enough to trigger adverse market reactions. *Source: IMF staff report excerpt (France: Outlook and Risks).* ### 18. A comprehensive policy program to address structural imbalances. Persistent fiscal ### _cr14182 - 18. A comprehensive policy program to address structural imbalances. Persistent fiscal ### Diagnosis and motivation - Persistent fiscal deficits have eroded fiscal space, limiting capacity to counter future shocks without putting fiscal credibility at risk. - Underutilization of labor resources, with an employment rate of youth and seniors among the lowest in the OECD, has lowered potential GDP and impacted social spending, adversely affecting the fiscal balance and taxation. - A competitiveness gap has further undermined potential growth. - The April 2014 Stability Program and National Reform Program set out an ambitious course of adjustment and reform centered on a very sizeable correction in public expenditure and measures to increase the supply response of the economy. ### Fiscal adjustment strategy - Target: structural fiscal adjustment averaging about ½ a percent of GDP a year until (structural) fiscal balance is reached. - Authorities project convergence to structural fiscal balance by 2017 (horizon of the Stability Program). - Under staff’s more conservative macroeconomic scenario, fiscal adjustment would need to continue at the same pace until 2019 to reach balance. - Staff and authorities agreed no additional measures should be taken this year beyond those already planned, given the fragility of the recovery. ### Adjustment anchored by an expenditure reduction plan (Spending Containment Package) - Announced expenditure containment of €50 billion, relative to trend, over 2015-17 implies an effort of 2.2 percent of GDP and would result in a stabilization of real spending over the three years. - By comparison, the expenditure effort planned for 2014 is €19 billion (including €4 billion in extra cuts added in supplementary budgets). - Timing of cuts: - €21 billion in 2015 - €16 billion in 2016 - €13 billion in 2017 - Aggregate impact: Cumulatively, represent about 4 percent of spending for each level of government (central, sub-national, and social security). - Distribution of cuts: - Central government: €18 billion through spending rationalization, pooling purchases and ICT spending across ministries, reduced funding of state agencies, extension of the wage freeze introduced in 2010, and stabilization of the number of civil servants. - Local governments: €11 billion cut in transfers from the central government, expected to lead to equivalent cuts in spending; local authorities could partially compensate via raising taxes and debt, subject to limits. - Health spending: €10 billion; identified measures include development of ambulatory surgery (€1 billion), rationalization and pooling of hospital spending (€1 billion), cut in medicine costs notably through promotion of generics (€3.5 billion), elimination of ineffective medical procedures (€2.5 billion), plus savings from wage freeze and fighting fraud. - Social protection: €11 billion; €2.9 billion from recent reforms of family allowance and pensions; €4 billion from de-indexation of pensions, family, and housing allowances—expected to be adopted in 2014; €2.8 billion from additional reform of unemployment insurance and family allowances—yet to be defined; €1.2 billion from reduced administrative costs. - Execution notes: - Wage freeze, de-indexation of social benefits, and impact of recent reforms are well identified. - Central government savings (outside wage and employment freeze) have yet to be announced. - Health savings are identified and rationing mechanisms exist to ensure execution, though subject to external factors. - Of the social spending saving, about €4 billion depends on reforms of social protection programs requiring consultation with social partners. - Local governments can realize savings by reducing employment through attrition and by containing current and capital spending; potential leakage into higher taxes or higher debt is uncertain. - Footnotes in package: - The base wage freeze applies to all levels of government. - The narrow own tax base for local governments is 6 percent of GDP; local governments can only resort to debt financing for capital projects, so debt could increase only by shifting financing from own resources to debt. ### Risks, implementation, and piloting - Significant implementation risks due to scale of effort: resistance likely as measures are debated with social partners and parliament. - Institutional reform to contain local government spending will take effect over the medium term; in the interim, local governments could cut productive investment, raise taxes, or increase debt in response to reduced transfers, undermining the strategy. - Authorities emphasize strong political will and parliamentary endorsement to pursue measures, though concessions may be made at the margins. - Authorities view the local government effort as doable without disorderly adjustment or leakages, since it implies stabilization of real spending (compared to a reduction of about 1 percent per year for the central government). - Authorities are seeking coordination mechanisms to guide and monitor local government actions through consolidation; they believe raising taxes is no longer politically viable for local elected officials. ### Supply-side measures and labor market policies - Tax cuts for enterprises totaling 2 percent of GDP in 2014–17, comprising the CICE tax credit scheme introduced in 2013 and tax breaks under the Responsibility and Solidarity Pact (RSP). - Enhanced program of regulatory simplification in consultation with enterprises, including easing regulatory thresholds beyond 10, 20, and 50 employees. - Household tax cuts of about 0.25 percent of GDP over 2015-17 to more directly support demand. - Employment impact estimates: - Authorities estimate RSP tax reductions would create about 200,000 jobs. - Staff estimate reductions in labor taxes under the CICE and the RSP (about 1.4 percent of GDP in all) would create at least 600,000 in the long run, after capital stock fully adjusts. - Authorities expect gains can be realized in full by 2017; staff consider it would take longer, noting demand-side constraints and model limitations. - Product market reform: - Slow product-by-product liberalization has yielded mixed results; OECD PMR indicator shows no progress over the last five years. - A move by France to the OECD frontier in PMR indicators could increase productivity by 3 percent after 5 years (study cited). - A 2014 staff study estimated a 1 percent productivity gain in regulated services (accounting for less than 30 percent of GDP) could raise GDP by 0.8 percent after two years. - Authorities plan a more decisive approach: reducing barriers to entry in regulated professions, changing price-setting mechanisms of regulated services, and giving the competition authority a more visible role; state intervention envisaged mostly as seed money to leverage private initiative. - Staff highlighted potential employment benefits from liberalizing retail opening hours and simplifying urban planning rules. - Labor market adaptability: - Rigidities include high and unpredictable dismissal costs; law on job security and flexibility aims to increase adaptability by easing collective dismissal procedures and enabling renegotiation of conditions. - Other measures: better targeted professional training and introduction of rechargeable unemployment rights to reduce inactivity traps. - Unemployment insurance system scheduled for review by 2016; staff recommended using the review to increase work incentives (e.g., revisiting degressivity rules and high ceiling on benefits) and aligning employer contributions to job turnover. - Social dialogue: - Staff recommended expanding scope for enterprise-level negotiations over work and pay. - Authorities report improved social dialogue since involving social partners in reforms pursued since 2012. - Challenge for less skilled workers: - Minimum wage (EUR 1,445.4 per month) may limit job creation for low skilled. - Unemployment rates in 2012: 16.2 percent for workers with education up to a lower secondary degree; 9.9 percent for intermediate education; 5.7 percent for tertiary education. - Authorities’ approach: eliminate labor taxes at and near the minimum wage, expand subsidized job schemes and apprenticeship/work-study schemes. - Targeted labor tax cuts are costly (around 1 percent of GDP already in 2012) and could create low-wage traps. - Role of minimum wage (SMIC): - Staff suggested indexation include the unemployment rate of the low skilled to balance ensuring a living wage against exclusion costs. - Authorities consider SMIC central to the social contract and will continue to focus on facilitating job placement through subsidized jobs, apprenticeships, and skills improvement. ### Financial sector resilience and regulatory adaptation - Progress toward banking union: preparations for the Single Supervisory Mechanism well underway; comprehensive assessment expected to validate loan portfolio quality, though additional provisioning surprises cannot be ruled out. - Concerns that ECB harmonization of bank risk model validations and uncoordinated multiplication of regulatory safeguards (GLAC, MREL) could have unintended effects on financial intermediation. - Staff/GFSR analysis: implicit subsidies for systemically important banks remain sizeable; TBTF risks remain important though possibly reduced by regulatory reforms. - Structural features: - French financial system centered on banks for credit provision and life insurance for savings mobilization; this creates a structural funding gap filled through wholesale markets, resulting in relatively high loan-to-deposit ratios and elevated liquidity risk. - Banks have reduced loan-to-deposit ratios considerably since 2011, aided by weak credit demand and low long-term rates making life insurance less attractive. - A 2013 decision reduced the share of regulated saving deposits directed to the CDC, shifting 30 billion Euros from the CDC to bank deposits (equivalent to 1¾ percent of non-bank private deposits). - Policy considerations: - Increased securitization and greater reliance on market financing by firms could reduce funding risks but remain limited. - Staff underscored that reform of financial savings taxation might become necessary to level the playing field, for instance by taking a maturity-based rather than a product-based approach to tax incentives. ### Implementation risks and mitigating measures - Likely resistance and political economy constraints during parliamentary and social partner negotiations. - Institutional reform to rationalize overlapping local government structures is necessary to ensure transfer cuts translate into spending reductions. - Risk that local governments react by cutting productive investment, raising taxes, or increasing debt. - Authorities plan coordination mechanisms to guide and monitor local governments and believe wage freeze and other measures provide means to deliver central government savings. - Some savings depend on reforms requiring agreement with social partners (notably about €4 billion of social spending savings). ### Key statistics and exact figures cited - Structural fiscal adjustment target: about ½ a percent of GDP a year. - Expenditure containment: €50 billion over 2015-17; 2.2 percent of GDP over three years. - 2014 planned expenditure effort: €19 billion (including €4 billion in extra cuts). - Annual frontloaded cuts: €21 billion (2015), €16 billion (2016), €13 billion (2017). - Central government cut: €18 billion. - Local government transfer cut: €11 billion. - Health spending cuts: €10 billion (ambulatory surgery €1 billion; hospital pooling €1 billion; generics €3.5 billion; elimination of ineffective procedures €2.5 billion). - Social protection savings: €11 billion (€2.9 billion recent reforms; €4 billion de-indexation expected 2014; €2.8 billion further reforms yet to be defined; €1.2 billion administrative). - Enterprise tax cuts: 2 percent of GDP in 2014–17. - Household tax cuts: about 0.25 percent of GDP over 2015-17. - Combined CICE and RSP labor tax reductions: about 1.4 percent of GDP (staff estimate yields at least 600,000 jobs in the long run). - Authorities’ RSP job creation estimate: about 200,000 jobs. - Minimum wage (SMIC): EUR 1,445.4 per month. - Unemployment rates in 2012 by education: 16.2 percent (lower secondary or less); 9.9 percent (intermediate); 5.7 percent (tertiary). - Targeted labor tax cuts cost: around 1 percent of GDP (already in 2012). - Shift from CDC to bank deposits in 2013: 30 billion Euros (equivalent to 1¾ percent of non-bank private deposits). - Local governments’ own tax base: 6 percent of GDP. *Source: IMF staff report text (chapter 18) as provided in the supplied content.* ### 33. The strategy laid out by the authorities for the next three years holds the promise of ### The strategy laid out by the authorities for the next three years holds the promise of placing the French economy on more solid foundations over the medium term. ### Assessment of the strategy - The authorities’ package has coalesced into a coherent set of policies based on an accurate understanding of the challenges. - Objectives are backed by well-identified policies. - The strategy is ambitious and "naturally subject to risks"; deeper structural reforms could boost its impact. ### Fiscal adjustment: pace, instruments, and structural focus - The chosen pace and instrument of fiscal adjustment are judged "right." - After "three years of substantial adjustment," a more moderate pace under the Stability Program is appropriate given economic weakness. - The decision to anchor adjustment by an explicit expenditure target addresses a "fundamental structural weakness of public finances." - Emphasis should shift from simple expenditure containment to structural measures that ensure the rate of growth of spending is curbed permanently. - Important structural decisions noted: rationalization of local government layers and measures to contain the growth of health spending. ### Political and economic risks; sequencing - Both political and economic risks weigh on the strategy. - Pressures to dilute the program could increase as difficult reforms are introduced; these pressures "should be resisted" to preserve simultaneous pursuit of tax cuts and deficit reductions. - The medium-term budget to be presented to parliament in the fall is an opportunity to lock in specific measures and reinforce the strategy. - Economic downside risk: a delayed recovery is the greatest risk. If growth disappoints "by an appreciable margin," the pace of adjustment could be eased by moving forward or accelerating proposed tax cuts, but this should not justify postponing structural spending measures. ### Monetary conditions and cyclical appropriateness - Monetary conditions have been "insufficiently supportive of adjustment and restructuring." - France did not suffer from financial fragmentation; lending rates remain at "record low levels." - Monetary conditions have become tighter because of the strengthening euro and the fall of inflation and its impact on real interest rates. - Such tightening "does not appear appropriate for France’s cyclical position." ### Supply-side measures and structural reform priorities - Supply-side measures to restart investment and job creation are welcome and should be boosted by labor and product market reforms. - Proposed tax cuts will give breathing space to enterprises whose squeezed profit margins have impeded investment. - Regulatory simplification is welcome but insufficient alone to durably improve potential growth. - Renewed focus on "fighting rents" should guide reform by opening protected sectors to greater competition. - Labor market reform should be broadened to give enterprises and workers more flexibility to negotiate working conditions; this also requires establishing a more cooperative social dialogue. - Minimum wage: acknowledged as "a legitimate instrument" to ensure work pays a living wage, but its level should be set with a view to limiting its exclusion effect for the low skilled. - Authorities’ efforts to enhance employment opportunities for the low skilled (job subsidies, apprenticeships, work-study programs) are welcome but "unlikely, by themselves, to close the employment gap for this group." ### Financial sector resilience and regulatory transitions - The economy and public finances are "better shielded today from the risks of banking shocks," but the evolving regulatory framework may require continued adjustments for banks. - Positive elements: higher liquidity and capital buffers, enhanced loss absorption capacity, and a strengthened European resolution framework to mitigate too-big-to-fail risks. - Balance sheet adjustments to meet new requirements could reduce banks’ intermediation role in the French economy. - Diversifying financing channels carries benefits but "will take time to develop and they are subject to risks." - Important policy consideration: ensure banks’ financing role is not constrained by distortions in the taxation of financial instruments as banks adapt. ### Timing of next consultation - It is proposed that the next Article IV consultation take place on the standard "12-month" cycle. *Italic: Source — IMF staff report content as provided in the supplied content unit.* ### Appendix I. Main Recommendations of the 2013 Article IV ### Appendix I. Main Recommendations of the 2013 Article IV Consultation and Authorities’ Actions ### Fiscal Policy - Fund recommendation: "Many Directors saw merit in allowing for a smoother pace of adjustment than envisaged in the [2013] Stability Program to support the hesitant recovery. Many other Directors advised the authorities to persevere with the consolidation plans under the program, noting that it already allows automatic stabilizers to operate. While Directors welcomed the shift to structural deficit targeting, a number of them noted that nominal targets should not be neglected." - Authorities’ outcomes and actions: - Deficit targets in the 2013 Stability Program were missed: by 0.5 percent of GDP in 2013 and by a projected 0.8 percent of GDP in 2014 (authorities’ projections). - Rebalance fiscal adjustment toward expenditure containment, including in the areas of social security and local spending — status: "Rebalancing is taking place: expenditure measures accounted for 35 percent of structural adjustment in 2013, and an expected 86 percent in 2014." - Fiscal outlook highlights: - Under the baseline, the primary balance would shift to a surplus in 2018. - The pace of structural adjustment is expected to slow from 0.9 percentage point per year (2011-13) to about ½ a percentage point per year during 2014-19. - Structural balance would be almost reached by the end of the projection period. ### Financial Sector Policy - Fund recommendation: Better align tax incentives on financial products with regulatory objectives, including by removing tax disincentives against deposits and phasing out regulated interest rates. - Authorities’ actions: - The 2013 reform rebalanced tax incentives provided to life insurance savings toward equity investments in SMEs. - "No other reform is being considered, as banks do not presently appear constrained in their ability to provide credit." ### Structural Reforms - Fund recommendations and authorities’ actions: - Reform pensions to increase labor market participation rather than contribution rates. - Authorities’ action: "The pension reform of 2013 relied in the short term on higher contribution rates, and starting in 2020 on lengthening the contribution period to reach full pension." - Pursue deeper labor market reforms to increase employment of the young and low-skilled. - Authorities’ action: "Subsidized job programs were increased with a target of 340,000 new hires in 2014; apprenticeship and work-study programs were also expanded." - Open product and services markets to greater competition. - Authorities’ action: "The following sectors were opened to greater competition: pregnancy tests, prescription eye-glasses, auto insurance, and veterinary services. The consumer law of March 2014 opens the door to collective action." *Source: IMF Staff.* ### Appendix II. France: Public Debt Sustainability Analysis (DSA) ### Baseline projection and key debt outcomes - Baseline projection: debt-to-GDP ratio is projected to peak at 95.1 percent in 2015 and to decline to 89.1 percent by 2019 as economic recovery gains traction and the primary balance shifts to a surplus starting in 2018. - Gross financing needs: would increase substantially in 2015, to 12.3 percent of GDP, but decline thereafter. - Interest payments and debt service: - Interest payments were at the historically low level of 2.3 percent of GDP in 2013. - Interest payments would remain low averaging 2.2 of GDP during the projection period (text uses "2.2 of GDP"). - Market context: - 10-year benchmark yields declined from 4.7 percent in June 2008 to 1.85 percent in May 2014. - Spreads over German Bunds increased to almost 190 basis points in November 2011, and were back to 40 basis points early-June 2014. - Debt dynamics drivers: - The combined effect of low growth and persistent fiscal deficits (augmented by the fiscal stimulus of 2009) increased the debt-to-GDP ratio by almost 29 percentage points in six years to 91.8 percent in 2013. - Part of the increase in the debt ratio reflects financial support to other Euro area countries which grew from 0.2 percent of GDP in 2010 to 3.1 percent of GDP in 2013, expected to increase to 3.2 percent of GDP by 2014 before declining. ### Macroeconomic assumptions (as stated) - Growth: After two years of quasi stagnation, the economy should grow by 0.7 percent in 2014. The growth rate is expected to rise steadily to 1.9 percent in the end of the projection period, with the output gap almost closed in 2019. - Inflation (GDP deflator): projections and historical values appear in the tables (for example, inflation: 1.2, 1.3, 1.4, 1.4, 1.5, 1.6 over projection years in the baseline table). - Effective interest rate: projected values (examples from table) 2.5, 2.4, 2.4, 2.4, 2.5, 2.6 for projection years in baseline. - Pace of structural adjustment: projected to slow to about ½ percentage point per year during 2014-19 from 0.9 percentage point per year during 2011-13. - Primary balance: projected to shift to surplus in 2018 and be above its debt-stabilizing level starting in 2016. ### Realism of projections and forecast errors - Median forecast errors and biases (2005-13): - Median forecast error for real GDP growth: -0.82 percent (suggesting slight upward bias in staff projections). - Median forecast bias for inflation: -0.01 percent. - Median forecast error for primary balance: 0.08 percent (small; staff projections slightly conservative). - Feasibility of projected fiscal adjustment: - Reduction in the cyclically-adjusted primary balance would average 0.6 percent per year during the projection period, smaller than the averaged 0.9 percent reduction per year achieved during 2011-13. - The projected adjustment and level of the CAPB are below thresholds based on high debt country experience. ### Heat map and vulnerabilities - Debt burden benchmark (85 percent) is breached under baseline and all stress test scenarios — risk from debt level deemed high. - Gross financing needs remain below the benchmark of 20 percent of GDP in the baseline and all stress test scenarios. - Public debt held by foreigners: steady decline from mid-2010 when foreigners held 70.6 percent of French debt; that share increased in 2013 and reaches 65.1 percent. ### Stress tests and scenario outcomes (as presented) - Growth shock: - Assumption: real output growth rates are lower by one standard deviation over 2015-2016, i.e., 1.7 percentage points relative to the baseline. - Secondary assumptions: assumed decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth) and interest rate assumed to increase 25 basis points for every 1 percent of GDP worsening of primary balance. - Outcome: debt-to-GDP ratio would increase to almost 103 percent of GDP in 2016 and declines thereafter. - Primary balance shock: - Assumption: cumulative 2.0 percent deterioration in the primary balance over 2015-2019. - Outcome: debt-to-GDP ratio would increase to 95.6 percent of GDP in 2015 and declines thereafter. - Interest rate shock: - Assumption: an increase of 238 basis points in the cost of debt throughout the projection period. - Outcome: in 2019, the impact on gross financing needs is 1 percent of GDP and 2 percentage points for the debt-to-GDP ratio. Deterioration is back-loaded as old debt matures and new higher-rate debt is issued. - Real exchange rate shock: - Assumption: 13 percent devaluation of the real exchange rate in 2015. - Outcome: debt-to-GDP ratio would be marginally smaller (0.4 percentage point) than in the baseline due to the inflation channel. - Combined macro-fiscal shock: - Aggregates shocks to real growth, interest rate, exchange rate, and primary balance. - Outcome: debt would reach almost 103 percent of GDP in 2016 and decline to 100 percent of GDP in 2019. Gross financing needs would peak at 14.9 percent of GDP in 2016 (below the 20 percent benchmark). ### Selected numeric tables and indicators (figures transcribed as presented) - Nominal gross public debt (sequence from table): 69.9 88.7 91.8 94.3 95.1 95.0 94.0 92.0 89.1 - Public gross financing needs (sequence from table): 8.2 9.6 8.4 8.8 12.3 11.5 10.0 7.9 4.8 4.8 5 (as text shows concatenated numbers; preserved sequence as presented) - Real GDP growth (projection row): 0.7 1.4 1.7 1.8 1.9 1.9 - Inflation (GDP deflator, projection row example): 1.2 1.3 1.4 1.4 1.5 1.6 - Primary Balance (projection row example): -1.9 -1.3 -0.7 0.0 0.9 1.9 - Effective interest rate (projection row example): 2.5 2.4 2.4 2.4 2.5 2.6 - Change in gross public sector debt (cumulative projection from table): 2.9 4.3 3.0 2.5 0.8 -0.1 -0.9 -2.0 -2.9 -2.7 - Identified debt-creating flows (sequence): 2.5 3.7 3.2 2.6 0.9 0.0 -0.8 -1.9 -2.8 -1.9 - Primary deficit (sequence): 1.8 2.4 2.1 1.9 1.3 0.7 0.0 -0.9 -1.9 -1.1 - Primary (noninterest) revenue and grants (sequence): 49.5 51.7 52.8 52.8 52.5 52.3 52.1 52.1 52.1 13.6 - Primary (noninterest) expenditure (sequence): 51.3 54.1 54.9 54.7 53.7 52.9 52.1 51.1 50.2 14.8 - Automatic debt dynamics (sequence): 0.7 1.3 1.3 0.4 -0.3 -0.7 -0.8 -0.9 -0.9 -3.3 - Real interest rate / Real GDP growth components included in table sequences (preserved as presented): - Real interest rate sequence example: 1.6 1.5 1.6 1.1 1.0 0.9 0.8 0.8 0.8 5.4 - Real GDP growth sequence example: -0.8 -0.3 -0.3 -0.7 -1.3 -1.6 -1.7 -1.8 -1.7 -8.7 - Contingent liabilities and net privatization proceeds reported as zeros across projections in the table. - Market indicators (as of May 14, 2014 table extract): - Real GDP growth: 1.2 0.3 0.3 0.7 1.4 1.7 1.8 1.9 1.9 - Nominal GDP growth (sequence): 2.9 1.5 1.1 2.0 2.8 3.1 3.3 3.5 3.6 - Ratings (examples): Moody's Aa1 Aa1; S&Ps AAAA; Fitch AA+ AA+ - Sovereign spreads and CDS (examples in table): EMBIG (bp) 44; 5Y CDS (bp) 42 *Source: IMF staff.* ### Appendix III. FSAP Update: Status of Main ### Appendix III. FSAP Update: Status of Main Recommendations ### Overall Financial Sector Oversight - Recommendation: Enhance public disclosure of financial institution conditions and risks. - Priority/Timing: H S - Status: No New Action. Authorities consider availability and comparability of financial information for the main banking groups as adequate and no new initiatives are expected (e.g., the publication of bank-by-bank data by ACPR, including prudential returns). - Actions: In 2013, the AMF conducted a review of public documents of listed banks and made recommendations to individual banks. Authorities will continue reporting on financial sector developments in BdF and ACPR annual and other reports, BdF annual thematic Financial Stability Review and AMF Cartographie des Risques. - Recommendation: Give serious consideration to modifying MoF participation in the Boards of ACP and AMF to support independence of the supervisory process. - Priority/Timing: M M - Status: No New Action. No plans to modify MoF participation in ACPR or AMF Boards. Authorities reiterated disagreement with the FSAP evaluation. - Recommendation: Eliminate limits on headcount for ACP, AMF, and H3C. - Priority/Timing: M M - Status: No New Action. Authorities indicated sufficient margin to accommodate higher resource needs related to additional responsibilities given to ACPR by the 2013 banking law. Removal of headcount limits not expected in near-term given pressure not to expand budgets. BdF can provide supplementary resources to ACPR if needed. ### Banking Supervision - Recommendation: Continue monitoring banks’ funding position and availability of collateral to access liquidity through the secured debt market and/or central bank facilities. - Priority/Timing: H H - Status: Done. ACPR monitors on an ongoing basis the liquidity position of French banks. At regular intervals, ACPR reviews preparedness of main banking groups in meeting new regulatory liquidity ratios. - Recommendation: Give ACP powers to assess the suitability of Board members (of both banks and insurance companies) and to require removal of all unsuitable Board members. - Priority/Timing: H M - Status: Done. Law of separation and regulation of banking activities of July 26, 2013 amends the Monetary and Financial Code to extend ACPR’s authority to assess fit and proper requirements for: - Credit institutions, upon appointment and throughout their tenure and in case of emergency; - Insurance firms, throughout their term, with the ability to suspend when requirements of sufficiently good repute and competence are no longer met and in case of emergency. - Recommendation: Give ACP powers to ensure it receives prior notification of major acquisitions and is, therefore, able to consider them ex ante. - Priority/Timing: H S - Status: Partly Done. The 2013 banking law strengthened ACPR’s capacity to review major acquisitions by banks. No other legislative initiatives expected in near term. Authorities indicated granting ACPR formal approval powers for acquisition of EU financial institutions would be inconsistent with EU law (Directive 2007/44/EC). - Recommendation: Require full and consistent disclosure of the capital treatment in place and the related financial interactions within complex groups. - Priority/Timing: H S - Status: No New Action. Authorities reiterated disagreements with the FSAP evaluation and noted that practices are fully consistent with European rules and Basel standards for cooperative groups. For bancassurance groups, exemption allowing more lenient EU capital treatment lapsed at the end of 2012. Practices now aligned with CRDIV and the conglomerate directive. No plans to revise disclosure requirements regarding related financial interactions within complex groups. ### Insurance Supervision - Recommendation: Introduce enforceable legal and regulatory corporate governance requirements. - Priority/Timing: H M - Status: Partly done. Monetary and Financial Code requires nomination and renewal of executives to be reported to the ACPR, which may oppose if fit and proper and experience conditions are not met. - Note: Governance requirements in line with international norms expected to be imposed in context of transposition of the Solvency II directive, to be completed by March 31, 2015. - Recommendation: Require insurance companies to have internal audit and actuarial control functions. - Priority/Timing: H M - Status: Ongoing. Entry into force of these requirements is expected in the context of transposition of the Solvency II directive, to be completed by March 31, 2015. - Recommendation: Enhance insurance companies’ disclosures, including on valuation of technical provisions; risk exposures and concentrations; risk management; corporate governance; and sensitivity results from forms of stress testing. - Priority/Timing: H S - Status: (No explicit status line beyond Solvency II transposition context in source.) ### Securities Regulation - Recommendation: Establish stronger conflict-of-interest arrangements to govern industry participation in the AMF Board. - Priority/Timing: H M - Status: No New Action. No plans to modify composition of AMF Board. Authorities reiterated disagreement with the FSAP evaluation. - Recommendation: Strengthen AMF’s supervision of investment service providers and financial advisors by increasing onsite work, including inspections. - Priority/Timing: H S - Status: Partly Done. AMF reviewed all associations of financial investment advisors (CIF) between 2012 and early 2013 to assess capacity to inspect and control members. Under the strategic plan for 2013-16, AMF is working to further strengthen CIF supervision; a specific methodology for control is being developed which could be used from 2014. - Recommendation: Provide greater enforcement powers to the H3C and increase its staffing levels. - Priority/Timing: M M - Status: Ongoing. H3C is expanding staff dedicated to supervision of commissaires aux comptes and this trend is expected to continue in the near-term. European laws were adopted in April 2014 and are to be transposed within 2 years. ### Resolution Framework - Recommendation: Modify composition of Fonds de Garantie des Dépôts (FGD) Board to limit the potential for conflict of interest. - Priority/Timing: H M - Status: No changes to the FGDR Board. The 2013 banking law, which put in place a resolution authority (ACPR), stipulates that the Director of the FGD is a member of the resolution college at the ACPR. Changes to FGDR composition are not envisaged. - Recommendation: Expand FDG’s powers in the resolution process, so as to assume assets and liabilities from a failing bank. - Priority/Timing: H S - Status: Partly Done. The 2013 banking law allows the FGD to be involved in bank resolution under the new name of FGDR (Fonds de Garantie des Dépôts et de Résolution), in association with the renamed banking supervisor, ACPR (Autorité de Contrôle Prudentiel et de Résolution). ### Central Counterparties - Recommendation: LCH.Clearnet SA should measure its exposures continuously throughout the business day. - Priority/Timing: H S - Status: Partly Done. The central counterparty can calculate multiple intra-day margin calls as prices and positions change. - For fixed-income instruments, one automatic intraday margin call is calculated. - For CDS, a margin call is done upon initiation of the operation independently of all netting. - Margin calls are manually triggered for cash & derivatives. - Collateral is re-valued daily, with haircuts applied meant to cover extreme but plausible market movements. *Source: _cr14182 - Appendix III. FSAP Update: Status of Main* ### 99.7 percent confidence interval. ### _cr14182 - 99.7 percent confidence interval. ### Recommendations and Compliance (Selected supervisory, AML/CFT, and BCP actions) - 99.7 percent confidence interval. - Carry out annually an external audit of LCH.Clearnet SA business continuity plan, including that of the in-sourcing company. - Priority: H - Time span: M - Status: Ongoing. In compliance with the authorization process under European Market Infrastructure Regulation (EMIR), ACPR will conduct an audit of LCH.Clearnet SA’s business continuity plan. - Additional measures: Consistent with EMIR obligations, internal rules of LCH.Clearnet SA will require an annual external audit of the BCP. Contractual arrangements with the providers of business continuity services were modified to allow for the possibility of external audit at any time. - AML/CFT: Strengthen the implementation of AML/CFT measures in the overseas territories. - Priority: H - Time span: M - Status: Partly Done. - An agreement covering the financial aspects of the December 19, 2011 agreement between ACP and the overseas issuance institutes (IEDOM and IEOM) was signed on September 10, 2012. - These agreements enlarge the mandate of the institutes to cover AML/CFT, including provision of assistance to the ACPR’s onsite controls. - On November 23, 2012, the Ministry of Justice released two circulars to remind prosecutors (including in overseas departments and territories) to be vigilant and deepen exchanges with TRACFIN. - Various meetings and training sessions have been convened for overseas departments. - Complete legislation to enable the authorities to seize laundered property. - Priority: H - Time span: M - Status: Done. - Note: 2/ H/M: indicates high or medium priority level. S/M: indicates the time span in which the recommendation could be implemented (short or medium term). ### Fund Relations, Membership, and Quota Data (As of April 30, 2014) - Membership Status: Joined December 27, 1945; Article VIII. - General Resources Account (SDR Million; Percent of Quota): - Quota 10,738.50 100.00 - Fund Holding of Currency (Exchange Rate) 8,055.42 75.01 - Reserve Tranche Position 2,683.20 24.99 - Lending to the Fund: New Arrangements to Borrow 2,506.82 - SDR Department (SDR Million; Percent of Allocation): - Net Cumulative Allocation 10,134.20 100.00 - Holdings 9,287.05 91.64 - Outstanding Purchases and Loans: None - Latest Financial Arrangements: None - Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Forthcoming Principal / Charges/Interest - 2014: 0.83 - 2015: 1.17 - 2016: 1.17 - 2017: 1.17 - 2018: 1.17 - Total: 0.83 1.17 1.17 1.17 1.17 - Implementation of HIPC Initiative: Not applicable - Implementation of Multilateral Debt Relief Initiative (MDRI): Not applicable - Implementation of Post-Catastrophe Debt Relief (PCDR): Not applicable - Exchange Rate Arrangements: - France’s currency is the euro, which floats freely and independently against other currencies. - France maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for exchange restrictions imposed solely for the preservation of international security. - Restrictions maintained (in accordance with EU regulations and UN Security Council resolutions) on current or military international transactions with respect to: Belarus; the Democratic Republic of Congo; the former Government of Côte d’Ivoire; the Islamic Republic of Iran; the former government of Iraq; the Democratic People’s Republic of Korea; Guinea (republic of); Guinea Bissao; the former Government of Liberia; the former Government of Libya; Myanmar; the former Government of Tunisia; Transnistria (the independentist region of Moldova); Eritrea; the former Government of Egypt; Somalia; Sudan and South Sudan; Syria; certain individuals associated with the murder of former Lebanese Prime Minister Rafiq Hariri; and Zimbabwe. - Measures have been taken to freeze accounts of listed persons and entities linked to terrorists pursuant to EU regulations (n°881/2002, n°2580/2001 and n°753/2011) and UN Security Council resolutions (resolutions 1267 and 1373 and subsequent resolutions). ### FSAP, ROSC, and Standards Assessments (Summaries and developments) - Article IV Consultation: - The last Article IV consultation was concluded on July 29, 2013. France is on the standard 12-month consultation cycle. - ROSC and Fiscal Transparency: - France–Report on the Observance of Standards and Codes (ROSC): Module I–Fiscal Transparency (October 17, 2000) and updates (IMF Country Report No. 01/196, 11/05/01; No. 04/345, 11/03/04). - Summary: France has achieved a high level of fiscal transparency and introduced improvements in coverage and presentation of fiscal information, including more complete information on government assets and liabilities and disclosure of contingent liabilities. Accounting standards moved toward accruals principles and were clearly explained. - Reforms: Loi organique aux lois de finance (LOLF) fully effective on January 1, 2006; the first multi-annual fiscal framework law adopted in January 2009 (fiscal objectives for 2009–12); State Audit Office assigned to certify public accounts; accruals basis accounting implementation confirmed; strengthened parliamentary oversight. - Transparency in Monetary and Financial Policies ROSC: - Reports and updates (IMF Country Reports No. 02/15/01, No. 01/197, No. 02/248). - Summary: High priority on transparency; major agencies disclose objectives, legal and institutional frameworks, and open policymaking processes. Issues included supervisory framework for mutual insurance firms; subsequent reforms created CCAMIP in August 2003 and unified supervision under Autorité de contrôle prudentiel (ACP) in 2010, later renamed Autorité de contrôle prudentiel et de résolution (ACPR). - Data Module ROSC: - Reports and updates (IMF Country Report No. 03/339, 10/2903; No. 04/345; No. 05/398). - Summary: France observes the Fund’s Special Data Dissemination Standard (SDDS). INSEE and Banque de France have clear mandates for macroeconomic datasets; high accuracy and timeliness; data accessible to the public. - Recommendations and follow-up: Clarify INSEE responsibility for government finance statistics; improve data sharing between Banque de France and other statistical producers; review classification and valuation in balance-of-payments statistics; improve consistency between current account and goods and services account; align timing of revisions in quarterly and annual national accounts; facilitate identification of INSEE data production units. France implemented several recommendations, including promoting understanding of statistical revisions, more use of firm-level data, and work on portfolio investment income on an accrual basis. - Financial Sector Stability and FSAP: - France–Financial System Stability Assessment (FSSA) IMF Country Report No. 04/344, 11/03/04; updates and detailed assessments include IMF Country Reports No. 05/185, No. 05/186, No. 12/341, No. 13/180, No. 13/181, No. 13/182, No. 13/183, No. 13/184, No. 13/185 (June 2013 and June 2013 series). - Summary: 2004 report concluded France’s financial sector is strong and well supervised; no systemic-risk-causing weaknesses identified. Strengths supported by financial soundness indicators and conformity to Basel Committee, IAIS, IOSCO, FATF, and CPSS standards. - 2012 FSAP Update: Confirmed resilience of France’s financial system to severe market pressures but identified challenges: banks’ size, complexity, and dependence on wholesale funding; larger banks restructuring balance sheets to more stable funding, reducing cross-border presence, and building up capital; vulnerability to sustained funding disruptions and reduced profitability which could delay capital-raising plans. - Regulatory and supervisory regime: Very high standard across banks, insurance, and securities markets. Areas for improvement included greater de jure independence of supervisory authorities; disclosure of capital treatment and financial interactions within complex banking groups; move toward a more economic risk-focused approach to insurance regulation and supervision; enhanced supervision of investment service providers and financial advisors. - Disclosure shortcomings: Despite extensive public financial disclosures under IFRS and Pillar III of Basel II, financial sector data disclosure falls short of international best practice. Recommendations: publish regular and comparable institution-by-institution data and detailed official analyses of financial sector developments in France. ### Statistical Issues and National Accounts Developments - The economic database is comprehensive and of high quality; data provision to the Fund is adequate for surveillance. - Data producers and dissemination: - Authorities regularly publish a full range of economic and financial data and calendar dates of main statistical releases. - France subscribes to the Fund’s Special Data Dissemination Standard (SDDS). - Electronic data transmission from INSEE and data from Banque de France, ministry of finance, and ministry of labor and solidarity feed the Economic Data Sharing System. - Methodology and coverage: - Monetary and banking statistics conform with the European Central Bank framework and are comparable to STA Standardized Report Forms. - Statistics for IFS on banking institutions and monetary aggregates are prepared monthly and timely; monetary data also disseminated in the quarterly IFS Supplement. - France follows the European System of Integrated Economic Accounts 1995 (ESA95). - GDP and expenditure components available from 1978 onward; annual and quarterly accounts reliable though estimates differ slightly before quarterly accounts are revised to align with annual accounts. - Revisions and methodological changes: - In 2014, national accounts estimates were rebased to 2010 prices and the methodology changed leading to an upward revision of the level of GDP and to a revision of public finance data. - Government finance statistics: - Strengthened recently; central and general government data presented more comprehensively; 2006 and 2007 data reflect impacts of recent budgetary reform. - Source data collected by Ministry of Economy and Finance; INSEE principally responsible for compilation and dissemination of fiscal data consistent with ESA95. - INSEE’s website enhanced to include expenditure tables and government revenues by subsector (central government, miscellaneous central government agencies, local governments, and social security administration). - Balance-of-payments: - Starting in January 2014, balance-of-payments statistics are published monthly using BPM6 guidelines. - Need for greater coherence between the external current account and the rest of the world account in national accounts; promising early results on the transportation account. ### Table of Common Indicators Required for Surveillance (As of May 2014; Date of Latest Observation / Date Received / Frequency of Data / Frequency of Reporting / Frequency of Publication) - Exchange Rates: 04/14 04/14 Monthly Monthly Monthly - International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: 03/14 05/14 Monthly Monthly Monthly - International Investment Position: 2012 Q1:2013 Annual Annual Annual - Reserve/Base Money: 04/14 05/14 Monthly Monthly Monthly - Broad Money: 04/14 05/14 Monthly Monthly Monthly - Central Bank Balance Sheet: 04/14 05/14 Monthly Monthly Monthly - Consolidated Balance Sheet of the Banking System: 04/14 05/14 Monthly Monthly Monthly - Interest Rates2: 04/14 05/14 Monthly Monthly Monthly - Consumer Price Index: 04/14 05/14 Monthly Monthly Monthly - Revenue, Expenditure, Balance and Composition of Financing3 —General Government4: 2013 05/14 Annual Annual Annual - Revenue, Expenditure, Balance and Composition of Financing3 —Central Government5: 03/14 05/14 Monthly Monthly Monthly - Stock of Central Government Debt: 04/14 05/14 Monthly Monthly Monthly - Stock of Central Government-Guaranteed Debt: Q1:2012 04/14 Quarterly Quarterly Quarterly - External Current Account Balance: 03/14 05/14 Monthly Monthly Monthly - Exports and Imports of Goods and Services: 03/14 05/14 Monthly Monthly Monthly - GDP/GNP: Q4:2013 05/14 Quarterly Quarterly Quarterly - Gross External Debt: Q4:2013 05/14 Quarterly Quarterly Quarterly - Notes/footnotes from the table: 1. Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. 2. Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. 3. Foreign, domestic bank, and domestic nonbank financing. 4. The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. 5. This information is provided on a budget-accounting basis (not on a national accounts basis). ### Press Release Excerpt — IMF Executive Board Concludes 2014 Article IV Consultation with France (Press Release No.14/326; July 3, 2014) - The Executive Board concluded the Article IV consultation with France on July 1, 2014. - Summary observations: - The economy fared better than most other large euro area economies through the crisis, reflecting the resilience of private consumption, lack of financial fragmentation, and lower levels of household and corporate debt. - Banks’ financial position has also been strengthened. - After two years of near stagnation unemployment remains high. - A loss of competitiveness has weighed on growth, and compressed profit margins have constrained investment. - Outlook projection: - GDP growth projected at 0.7 percent in 2014. *Prepared by The European Department; informational annex and excerpts from the IMF staff report and related material in the source PDF.* ### 1.4 percent in 2015, based on stronger external and domestic private demand, reflecting gains in ### _cr14182 - 1.4 percent in 2015, based on stronger external and domestic private demand, reflecting gains in ### Executive Board assessment and overall judgment - Directors noted that the French economy has shown resilience during the global financial crisis but that the pace of recovery has been slow. - Directors welcomed the authorities’ economic strategy in the Stability Program and the National Reform Program and considered the policies and objectives well aligned. - An ambitious adjustment and reform agenda is critical to: - address structural imbalances, - guard against future shocks, - address employment and competitiveness gaps, - boost the economy’s growth potential. - Given implementation risks, Directors recommended the strategy be backed by comprehensive upfront measures in the fall budget and could be boosted by deeper structural reforms. - Directors endorsed a steady and more moderate pace of fiscal adjustment focused on expenditure measures and noted the proposed pace strikes an appropriate balance between restoring fiscal space and supporting recovery. - Directors urged anchoring adjustment on expenditure and relying on structural measures to ensure a permanent slowdown in spending growth. - Directors welcomed supply-side measures to revive investment and job creation and encouraged further labor and product market reforms, including opening protected sectors to greater competition. - Directors observed improved banking resilience (stronger liquidity and capital buffers; improved bank resolution framework) but noted the regulatory framework is still evolving and additional bank adjustments will be needed to meet prudential requirements. ### Macroeconomic outlook and recent developments - Staff projection: Real GDP growth of 1.4 percent in 2015, based on stronger external and domestic private demand, reflecting gains in real disposable income and improved profit margins. - Inflation is expected to remain subdued at around 1 percent. - These trends should allow the private sector to become a source of net job creation this year. - Recent developments: - Encouraging signs at end-2013 with recovery in investment and private sector jobs for the first time in two years. - Annual growth rate stands at around 1 percent. - Q1 2014 slowdown attributed to temporary factors: mild weather (decrease in energy expenditure), after-effect of exceptional possibility to unlock employee savings invested in their company at end-2013, and increase in tax rate on polluting vehicles. - Demand indicators (manufactured goods consumption, commercial vehicles, VAT-based indicators of investment) are encouraging; a rebound in consumption and investment is highly likely for Q2. - Authorities’ macro forecasts (Stability and Growth Program): - GDP growth: 1 percent in 2014, 1.7 percent in 2015, and 2¼ percent in 2016-2017. - Authorities will wait for Q2 figures before revising the macro scenario for the draft budget law. ### Fiscal adjustment: pace, composition, and macroeconomic impacts - Fiscal adjustment history and targets: - Fiscal adjustment substantial over past three years; deficit was 4.2 percent in 2013. - Authorities’ program targets continued adjustment with a view to closing the structural fiscal deficit over the medium term, based on expenditure containment and supply-side measures including tax reductions. - Fiscal adjustment trajectory (authorities’ description): - Deficit will shrink from 5.1 percent of GDP in 2011, 4.8 percent in 2012, 4.2 percent in 2013 to 3.8 percent in 2014 and 3.0 percent in 2015. - Structural balance will be brought close to equilibrium by 2017 via adjustment of 0.8 point per year in 2014 and 2015, then 0.5 point per year thereafter. - Composition of adjustment: - Adjustment will rely exclusively on the expenditure side with a target of €50Bn expenditure savings relative to trend (a freeze in real expenditures compared to 1½ percent growth over the 2000 decade). - Savings allocation over three years: - Central government and central government agencies: €18 billion (efficiency and cost control). - Local government: €11 billion (bring expenditure growth in line with inflation; cuts on state transfers; organizational reform including halving number of régions by 2017 and eliminating département councils by 2021). - Health insurance system: €10 billion (structural reforms to control costs while ensuring quality and coverage). - Social protection system: €11 billion (reforms already adopted on pensions and family benefits; efficiency gains in management of social security funds; stabilization of benefits in nominal terms for one year except minimum social benefits). - Civil service: stabilization of pay scale; continued recruitment in priority sectors. - Supplementary budget bill (presented June 11) includes extra savings of €4 bn and a break of €1.1 bn on income tax for middle- and low-income households (cost to be compensated by increased revenues from anti-fraud service - STDR). - Tax and labor-cost measures (Responsibility and Solidarity Pact): - Total labor-cost reduction targeted: €30 Bn (including prior CICE of €20 Bn), equivalent to 1 ½ percent of GDP. - By 2016, no social security payroll contributions on minimum-wage jobs other than unemployment insurance contributions. - Family allowance contributions reduced on jobs paying up to three and a half times the minimum wage. - Corporate tax measures: - C3S (corporate social solidarity contribution based on turnover) reduced starting in 2015 and phased out by 2017. - Exceptional corporate income tax payment for large corporations phased out in 2016. - Standard corporate income tax rate to decrease starting in 2017 to 28 percent by 2020. - Measures in favor of low-income workers total €5 Bn by 2017, including reduction in employee social security contributions for minimum-wage workers. - Macroeconomic impacts: - Responsibility and Solidarity Pact expected to add half a percentage point to growth and create nearly 200,000 additional jobs in the medium term (authorities’ estimate). - IMF staff estimates: total long-term impact of recent labor-cost lowering actions (including CICE) would create at least 600,000 additional jobs. ### Structural reforms: labor and product markets - Labor market reforms enacted: - Law on sécurisation de l’emploi (transposed national multisector agreement on January 11, 2013): framework for agreements to protect jobs when a company’s economic situation deteriorates while securing workers’ careers. - Act of March 5, 2014 on vocational training: individual and transferable rights to training (individual training accounts), simplifies system, expands training scope especially for vulnerable individuals (unemployed and young people), aims to meet short- and medium-term skills needs. - Agreement of March 22, 2014 on unemployment benefits: introduction of “rechargeable” unemployment benefit entitlements preserving unused benefits when a new job is accepted. - Minimum wage policy: - Authorities do not endorse staff recommendation to include unemployment rate of the low skilled in indexation rule. - 2013 reform of indexation rule intended to guarantee purchasing power of low-income workers; authorities argue decreasing minimum wage in bad times would have unacceptable social consequences and unclear macroeconomic effects. - Existing tax and social exemptions plus CICE and Responsibility and Solidarity Pact measures reduce the tax wedge at minimum wage level. - Product market reforms and simplification: - Consumer Act (February 13, 2014) promotes competition and consumer interests; creates class action procedure for consumer disputes; enhances competition in services, particularly healthcare (opticians, chemists) and financial sector (banking and insurance); estimated household purchasing-power gain of €1.5bn. - Act of January 2, 2014 eliminated restrictions in legal and accounting professions to develop business of notaries, lawyers, and accountants; further legislative changes under consideration (cost-based pricing, organizational changes). - Businesses simplification program launched July 2013: more than 200 measures proposed, over half linked directly to firms’ routine; government given right to speed up process; a council for businesses’ simplification designed 50 new measures; from May 2014 onward, 10 new simplification measures to be decided each month. - Businesses Simplification Committee scheduled to review rules governing access and permission to exercise certain professions by end of year; in June 2014, the Economy Minister asked the French Competition Authority for an opinion on fixation and revision of tariffs of specific regulated professions. ### Key quantitative indicators (selected) - Real economy (change in percent): - Real GDP: -2.9 (2009), 2.0 (2010), 2.1 (2011), 0.3 (2012), 0.3 (2013), 0.7 (2014), 1.4 (2015), 1.7 (2016), 1.8 (2017), 1.9 (2018), 1.9 (2019) — Projections noted. - Domestic demand: -2.6 (2009), 2.1 (2010), 2.0 (2011), -0.3 (2012), 0.2 (2013), 0.7 (2014), 1.0 (2015), 1.4 (2016), 1.6 (2017), 1.7 (2018), 1.7 (2019). - Nominal GDP (billions of euros): 1939 (2009), 1998 (2010), 2059 (2011), 2091 (2012), 2114 (2013), 2156 (2014), 2215 (2015), 2284 (2016), 2359 (2017), 2442 (2018), 2530 (2019). - CPI (year average): 0.1 (2009), 1.7 (2010), 2.3 (2011), 2.2 (2012), 1.0 (2013), 1.0 (2014), 1.2 (2015), 1.3 (2016), 1.4 (2017), 1.5 (2018), 1.6 (2019). - Unemployment rate (in percent): 9.1 (2009), 9.3 (2010), 9.2 (2011), 9.8 (2012), 10.3 (2013), 10.3 (2014), 10.2 (2015), 10.0 (2016), 9.7 (2017), 9.4 (2018), 9.3 (2019). - Public finance (percent of GDP): - Central government balance: -6.0 (2009), -6.1 (2010), -4.4 (2011), -3.9 (2012), -3.3 (2013), -3.2 (2014), -3.1 (2015), -2.6 (2016), -2.1 (2017), -1.3 (2018), -0.5 (2019). - General government balance: -7.2 (2009), -6.8 (2010), -5.1 (2011), -4.9 (2012), -4.2 (2013), -4.0 (2014), -3.4 (2015), -2.7 (2016), -2.1 (2017), -1.2 (2018), -0.3 (2019). - Structural balance (percent of potential GDP): -5.4 (2009), -5.5 (2010), -4.5 (2011), -3.8 (2012), -2.8 (2013), -2.4 (2014), -1.9 (2015), -1.6 (2016), -1.4 (2017), -0.9 (2018), -0.2 (2019). - Primary balance: -4.9 (2009), -4.5 (2010), -2.6 (2011), -2.4 (2012), -2.1 (2013), -1.9 (2014), -1.3 (2015), -0.7 (2016), 0.0 (2017), 0.9 (2018), 1.9 (2019). - General government gross debt: 78.0 (2009), 80.8 (2010), 84.4 (2011), 88.7 (2012), 91.8 (2013), 94.3 (2014), 95.1 (2015), 95.0 (2016), 94.0 (2017), 92.0 (2018), 89.1 (2019). - Balance of payments (percent of GDP): - Exports of goods: 17.9 (2009), 19.6 (2010), 20.6 (2011), 20.9 (2012), 20.5 (2013), 19.8 (2014), 19.7 (2015), 19.7 (2016), 19.8 (2017), 19.9 (2018), 19.9 (2019). - Exports volume growth (in percent): -11.3 (2009), 9.0 (2010), 6.9 (2011), 1.1 (2012), 2.2 (2013), 3.4 (2014), 4.8 (2015), 4.6 (2016), 4.6 (2017), 4.6 (2018), 4.6 (2019). - Imports of goods: 20.1 (2009), 22.3 (2010), 24.3 (2011), 24.3 (2012), 23.5 (2013), 22.8 (2014), 22.2 (2015), 21.9 (2016), 21.8 (2017), 21.7 (2018), 21.5 (2019). - Imports volume growth (in percent): -9.4 (2009), 8.9 (2010), 6.3 (2011), -1.3 (2012), 1.7 (2013), 3.1 (2014), 3.2 (2015), 3.5 (2016), 3.8 (2017), 3.9 (2018), 3.9 (2019). - Trade balance: -2.2 (2009), -2.7 (2010), -3.7 (2011), -3.4 (2012), -2.9 (2013), -3.0 (2014), -2.5 (2015), -2.2 (2016), -2.0 (2017), -1.8 (2018), -1.6 (2019). - Current account: -1.3 (2009), -1.3 (2010), -1.7 (2011), -2.1 (2012), -1.3 (2013), -1.5 (2014), -0.9 (2015), -0.5 (2016), -0.2 (2017), 0.0 (2018), 0.3 (2019). - FDI (net): -3.1 (2009), -1.2 (2010), -0.7 (2011), -0.5 (2012), 0.3 (2013), 0.0 (2014), -0.2 (2015), -0.4 (2016), -0.6 (2017), -0.8 (2018), -1.0 (2019). - Potential output and output gap: - Potential output: 1.1 (2009), 0.9 (2010), 0.9 (2011), 0.9 (2012), 1.0 (2013), 1.0 (2014), 1.1 (2015), 1.2 (2016), 1.3 (2017), 1.4 (2018), 1.5 (2019). - Output gap: -3.1 (2009), -2.1 (2010), -0.9 (2011), -1.5 (2012), -2.2 (2013), -2.5 (2014), -2.2 (2015), -1.7 (2016), -1.1 (2017), -0.6 (2018), -0.2 (2019). - Social indicators: - Per capita GDP (2006): US$35,471. - Life expectancy at birth (2009): 77.7 (male) and 84.4 (female). - Poverty rate (mid-2000s): 14.1 percent (60 percent line), 7.1 percent (50 percent line). - Income distribution (ratio top/bottom quintiles, 2004): 4.2. *Sources: French authorities; IMF staff estimates and projections.* ### 4. Financial sector ### 4. Financial sector ### Progress on capital and funding metrics - French banks have made "significant progress towards meeting Basel III requirements." - Banks "meet the CRD-IV fully loaded minimum CET1 capital requirement." - Short term wholesale funding "only represents around 10 percent of total liabilities in 2013, compared to 30 percent pre-crisis." - Uncertainty remains on net stable funding requirements (NSFR) because "the precise definition and calibrations of the NSFR ratio are still under discussion by the BCBS"; authorities "strongly believe in French banks’ capacity to meet the new requirements" if published in a timely manner. ### Regulatory and supervisory measures - National measure: "loi de separation et de regulation des activités bancaires established on July 26, 2013." - European measures: "setting-up of the single supervision and resolution mechanisms." - These measures, together with "significant efforts made by banks to strengthen their resilience, have decreased the systemic risks posed by a potential failure." - Ongoing efforts: "The ongoing asset quality review and the stress test will also be key to provide additional clarity on the banks that will be subject to the ECB’s direct supervision." ### Financing the economy and market development - Authorities are "confident that the financing needs of the economy will continue to be satisfied when the demand for funding will become more buoyant, despite the evolving regulatory framework." - Reform approach is two-pronged to help finance firms’ growth and development: - Market financing: work with market participants to "ease market access of firms large enough to benefit from market financing (the euro private placement workstream) and restarting a robust and viable loan securitization market"; intended to allow "all French firms to find solutions when their demand for funding will gain further momentum." - Diversifying funding sources: reforms in the insurance sector including "reform of life insurance products, adjustment in the prudential treatment of the simplest securitized products invested in loans to corporate" and "the introduction of a dedicated SME bucket in savings plan (PEA-PME)." ### 5. Risk assessment ### Global and euro-area risks - "Uncertainty remains high, mainly stemming from international developments." - "The pace of France's recovery hinges on that of the euro area." - Recent ECB actions to tackle the risk of a low inflation period are described as "welcome," notably because "monetary conditions have become tighter over the past months, as staff’s report emphasizes." ### Domestic behavioral uncertainty and scenarios - There is "uncertainty about the behavior of private sector economic agents." - Possible positive scenario: - "Brighter prospects for growth could lead to a stronger rebound in investment, which would entail more jobs, thereby boosting household incomes and consumption." - Policy-dependent outcomes: - "Policies to support competitiveness and employment will have a positive impact, but the scale of this impact will depend on how businesses behave." - Firms could: - "pass on lower labor costs in the form of price competitiveness gains that favor exports and curb domestic inflation," or - "prefer to boost their profit margins which could boost non price competitiveness." ### Political commitment - Authorities reject the assessment of "the risk of a political resolve lessening." - They state they have "repeatedly expressed a very strong commitment to stay the course of reform" and highlight that "the method based on social dialogue allowed significant achievements, notably on the labor market reform." *Source: IMF staff report — chapter 4 (Financial sector) and section 5 (Risk assessment).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14182.pdf_