## 1. Potential Output in France

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### Context — Late recovery and fiscal slippages
- Real GDP growth: 0.2 percent in 2014.
- Investment and net exports declined in real terms in 2014; consumption and export growth began accelerating in late 2014 and early 2015, but corporate investment remained weak and residential construction depressed.
- Unemployment: 10.5 percent in April 2015.
- Core inflation: 0.6 percent year-on-year in April (2015).
- Unused production capacities, high unemployment, and lower import prices restrained inflationary pressures.
- External competitiveness and balance:
  - France’s share in world export markets declined substantially over the past decade.
  - The current account deficit in 2014 remained one to three percent of GDP weaker than its cyclically-adjusted norm.
  - Real exchange rate estimated to be five to ten percent overvalued (staff estimates, Appendix V).
  - Underlying causes: elevated unit labor costs, rising tax burden, prolonged real wage growth despite declining productivity growth.
- Fiscal outcomes:
  - Authorities’ 2012 objective: bring structural deficit to balance by 2016, with adjustment equally divided between revenue and expenditure.
  - Structural deficit reduced by about two percentage points of GDP in 2012–13.
  - Fiscal consolidation fell short in 2014: headline deficit broadly unchanged at 4 percent of GDP; expenditure and debt ratios continued to climb.
- Financial sector indicators:
  - Largest four banks raised CET1 ratios to above 10 percent (fully loaded Basel III basis).
  - All banks meet the 100 percent Liquidity Coverage Ratio.
  - NPL ratio declined to 4 percent.
  - Asset valuation adjustments in the ECB 2014 AQR less than 0.5 percent; stress test reduced CET1 ratio by around 3 percentage points.
  - Corporate indebtedness: 66 percent of GDP (adjusted for intercompany loans).
  - Household debt: 55 percent of GDP.
  - Banks remain dependent on wholesale funding and some banks have comparatively low leverage ratios.

### Outlook and risks — Short term (A) and medium term (B)
- Short-term baseline projections and drivers:
  - Real GDP growth projection: 1.2 percent in 2015 and 1.5 percent in 2016.
  - Drivers: improved consumer confidence, lower oil prices, depreciated euro, euro area recovery, and Quantitative Easing (QE) supporting lower interest rates and higher investment.
  - Inflation projection: annual average inflation 0.1 percent in 2015; core inflation 0.5 percent in 2015; inflation rises to 1.0 percent in 2016.
  - Output gap expected to narrow gradually as aggregate demand is supported by QE, euro depreciation, and slower fiscal consolidation.
  - Short-term risks: balanced — upside if QE and confidence filter faster into investment and exports; downside from confidence shocks (geopolitical or Greece-related), rebound in energy prices, or surge in financial volatility.
- Medium-term concerns and downside scenarios:
  - Potential output growth:
    - Past averages: 2.2 percent in 1981–99; 1.8 percent in 2000−08.
    - Current potential growth: around 1.1 percent.
    - Projected average potential growth under current policies (including recent and planned reforms): about 1.2 percent over 2015–20.
    - Potential output in 2020 projected to be eight percent lower than on pre-crisis trends.
  - Labor market and NAIRU:
    - NAIRU estimated at 9¼ percent, expected to decline only very slowly.
    - High and persistent unemployment projected throughout forecast period.
  - Key medium-term risk factors:
    - Less accommodative external environment (protracted stagnation in advanced countries, sustained increase in commodity prices).
    - Insufficient reform progress leading to persistent structural rigidities.
    - Financial volatility: vulnerability to a globally systemic closure in funding markets due to reliance on wholesale funding; low interest rates could weaken banks’ and insurers’ profitability or encourage increased risk-taking.
  - Spillovers:
    - Protracted stagnation in France could adversely affect euro area partners via aggregate demand and confidence channels.
    - Failure to meet fiscal and reform commitments could weaken credibility of EU economic governance.
    - French banks’ retrenchment could have adverse cross-border effects (e.g., Italy, emerging Europe).
  - Authorities’ view:
    - Authorities broadly concur with staff’s baseline projections and view near-term risks as tilted to the upside; they see recent reforms as contributing to domestic confidence but agree potential growth and employment are weaker than before the crisis.

### Box 1 — Estimating potential output in France: findings
- Methodology:
  - IMF staff used a multivariate filter incorporating relationships between actual and potential GDP, unemployment, and inflation; applied to France and other large euro area countries.
- Historical drivers of decline in potential growth:
  - Sustained decline in TFP growth since early 2000s, potentially linked to lower ICT returns and sectoral shifts from manufacturing to services.
  - Crisis legacies: prolonged slowdown in investment and rise in structural unemployment.
- Quantitative results:
  - Potential growth fell to less than 1 percent during the crisis years.
  - Under current policies and reforms, potential growth should rise but average only about 1.2 percent over 2015–20.
  - Decomposition (selected periods):
    - Potential growth: 2.2 (1994–1999), 1.8 (2000–2008), 1.0 (2009–2014), 1.2 (2015–2020).
  - Trend contributions: declines in ∆ Trend TFP and changes in ∆ Capital and ∆ Trend employment affect potential growth dynamics.

### Policy discussion and reform priorities
- Overarching message:
  - The current accommodative macroeconomic environment offers an opportunity to implement difficult, growth-supporting reforms that address long-standing structural rigidities and ensure fiscal sustainability.
- Recent and planned reforms:
  - Cuts in labor tax wedge:
    - CICE: corporate tax credit applying to six percent of the wage bill of employees earning up to 2½ times minimum wage.
    - Responsibility Pact: reduces employer’s social security contributions for wages up to 3.5 times the minimum wage.
  - Macron law: supply-side reforms to liberalize parts of the economy and advance some labor reforms; at a final stage of parliamentary approval after special constitutional procedure.
  - Rebsamen law (draft): intended to improve social dialogue and ease labor-related regulations hampering SME growth; expected adoption by year end.
- Staff assessment of reforms:
  - Recent and planned reforms estimated to raise real GDP growth by an average of ½ percent over the next five years.
  - While significant, current reforms are likely insufficient to restore pre-crisis potential growth or provide adequate fiscal margins.
- Staff policy recommendations (focus areas):
  - Underpin fiscal consolidation through deep spending reform.
  - Push ahead with broad-based reforms to foster employment creation.
  - Maintain momentum on product market reforms to improve competition, innovation, and investment incentives.

### Fundamental spending reform — summary recommendations
- Rationale:
  - Rising government spending has pushed up public debt and the tax burden, complicating fiscal adjustment.
- Key staff recommendations:
  - Keep spending flat in real terms starting with the 2016 budget.
  - Adopt a fiscal anchor ensuring primary general government expenditure grows in line with inflation, supported by a burden sharing mechanism, which would:
    - Deliver structural adjustment of about ½ percent of GDP per year.
    - Provide a safety margin to ensure headline deficit is reduced to below 3 percent of GDP by 2017.
    - Place debt on a firm downward trajectory and help achieve structural fiscal balance within the next five years.
    - Create fiscal space for tax alleviation in the order of ½ percent of GDP per year starting around 2020.
  - Clarify structural measures underpinning the announced spending package and identify additional savings.
  - Short-term measures could include:
    - Further tightening the budget constraint for local governments.
    - Steps to reduce staffing at all levels of government.
    - Better targeting of family allowances, housing subsidies, and unemployment and welfare benefits.
    - Reforming supplementary pensions.
  - Any windfall gains from potential interest savings or excess revenues should be saved.
- Deeper structural reforms to underpin lasting spending reductions:
  - Regular broad-based expenditure reviews across all government levels.
  - Streamline local government positions and institutions; further cuts in transfers; tighter caps on local borrowing and taxes; elimination of the universal competency clause.
  - Reverse growth in public employment based on staffing reviews.
  - Improve targeting and efficiency of social benefits.
  - Reform pension benefits by raising effective retirement age, streamlining special regimes, and ensuring financial sustainability of supplementary pensions.

### Labor market — assessment and recommended pillars to reduce structural unemployment
- Key facts:
  - Unemployment rose to 10.5 percent as of April 2015, from 7.5 percent in 2008.
  - Net job creation has stagnated since 2008 despite robust labor force growth.
  - 55 percent of young workers below 25 are on a fixed-term contract.
  - Unemployment among unskilled workers is almost three times that of skilled workers.
  - Long-term unemployment has almost doubled since the onset of the crisis.
  - NAIRU currently estimated at 9¼ percent.
- Staff recommendations (four pillars):
  - Enterprise-level agreements:
    - Enhance flexibility of social partners to agree on hours and wages in all enterprises.
    - Broaden usability of “job preservation agreements” that have been rarely used.
  - Minimum wage:
    - Limit minimum wage increases to inflation for as long as unemployment remains high.
  - Benefits:
    - Harmonize and strengthen job search incentives for unemployment and social welfare benefit recipients, including gradual reductions in benefits if reasonable job offers are refused.
    - Lengthen the period of work required for unemployment benefit eligibility and introduce degressivity of benefits.
  - Education and training:
    - 140,000 young people leave the education system without completing school each year.
    - Spending on professional training about 1.4 percent of GDP but primarily benefits skilled workers and large companies.
    - Better target resources on quality training for the young, the low-skilled, and unemployed.

### Product markets, housing, and competitiveness
- Barriers and impacts:
  - Barriers to competition in services and extensive regulation remain important obstacles to growth; productivity growth in services has been slow.
  - Staff estimate a 1 percent productivity gain in regulated services could raise GDP by 0.8 percent after two years.
  - Extensive regulatory requirements on businesses, especially above certain employee thresholds, limit investment incentives.
  - Combined with a heavy tax burden and labor market rigidities, these factors drag on competitiveness and growth potential.
- Recent product market reforms and staff recommendations:
  - Macron law includes liberalizations: opening hours, competition in regulated legal professions, toll road rent reductions, intercity bus transport liberalization.
  - Expand Competition Authority competencies and continue administrative simplification.
  - Staff recommendations:
    - Strengthen the Competition Authority; allow SMEs to launch class actions in anti-trust cases.
    - Further reduce disincentives for SMEs to grow above employee thresholds.
    - Liberalize regulated professions not covered by Macron law.
    - Enhance Business Simplification process effectiveness.
- Housing market:
  - Residential construction has fallen by 14 percent, and real house prices by 11 percent, since the peak in 2007.
  - Housing subsidies (rental cash assistance, subsidized mortgage rates, fiscal breaks) amounted to 1.9 percent of GDP in 2013.
  - Rental assistance may contribute to rising rents.
  - Staff recommended reviewing housing market functioning to alleviate supply constraints and improve targeting of benefits.

### Financial sector: low interest rate environment and implications
- General risks:
  - Prolonged very low interest rates could narrow bank profit margins, inflate asset prices, and increase private debt accumulation.
- Banks:
  - Low interest rates squeeze interest margins, exacerbated by mortgage refinancing.
  - Regulated savings deposit rates set well above the ECB policy rate aggravate margin pressure.
  - Around 60 percent of regulated savings deposits centralized at Caisse des Dépôts et Consignations, mainly for building social housing; guaranteed return currently 1 percent for main savings schemes for portion not remunerated to banks.
  - Lending opportunities increasing as corporate credit demand picks up; banks can use ECB’s low-interest TLTRO funds.
  - Net impact from QE on banks’ profitability is uncertain given offsetting forces.
- Insurers:
  - Margin squeeze likely exacerbated by Solvency II requiring significant holdings of safe assets.
  - Low returns may increase redemption rates as consumers shift to alternative investments.
  - Insurers in France can adjust minimum guaranteed return on life insurance annually.
- Markets:
  - Main stock market index rose by 12 percent in the year to mid-June.
  - Real estate prices remain about 10−15  percent overvalued by some metrics; price pressures could reemerge over the medium term.
  - Impact of future price adjustments mitigated by stringent lending standards and manageable household debt levels.

### Staff summary appraisal and recommended fiscal anchor
- Fiscal and macro context:
  - Recovery supported by lower oil prices, a depreciated euro, and very low interest rates.
  - Potential output growth well below pre-crisis rates; structural unemployment high; competitiveness weak.
  - France faces a difficult fiscal adjustment task with public spending at record-high levels and rising debt.
  - Authorities are containing public spending, reducing the labor tax wedge, and advancing supply-side reforms.
- Recommended fiscal anchor:
  - Zero real primary spending growth, with appropriate burden sharing across levels of government, would deliver structural adjustment of about ½ percent of GDP per year.
  - Spending containment should rely on higher quality structural measures based on regular broad-based expenditure reviews at all levels, including staffing reform, streamlining local government institutions, better targeting of social benefits, and increasing the effective retirement age.

*Source: IMF staff report — "1. Potential Output in France" (excerpt).*

### 1. Potential Output in France _____________________________________________________________________ 8

### 1. Potential Output in France

### Context — Late recovery and fiscal slippages
- Economic performance and recovery
  - Real GDP growth: 0.2 percent in 2014.
  - Investment and net exports declined in real terms in 2014; consumption and export growth began accelerating in late 2014 and early 2015, but corporate investment remained weak and residential construction depressed.
  - Unemployment reached 10.5 percent in April 2015.
- Inflation and disinflation
  - Core inflation: 0.6 percent year-on-year in April (2015).
  - Unused production capacities, high unemployment, and lower import prices restrained inflationary pressures.
- Competitiveness and external balances
  - France’s share in world export markets declined substantially over the past decade.
  - The current account deficit in 2014 remained one to three percent of GDP weaker than its cyclically-adjusted norm.
  - The real exchange rate estimated to be five to ten percent overvalued (staff estimates, Appendix V).
  - Underlying causes include elevated unit labor costs, rising tax burden, and prolonged period of solid real wage growth despite declining productivity growth.
- Fiscal outcomes and slippages
  - Authorities’ 2012 objective: bring structural deficit to balance by 2016, with adjustment equally divided between revenue and expenditure.
  - Structural deficit was reduced by about two percentage points of GDP in 2012–13.
  - Fiscal consolidation fell short in 2014: headline deficit broadly unchanged at 4 percent of GDP; expenditure and debt ratios continued to climb.
- Financial sector indicators
  - Largest four banks raised CET1 ratios to above 10 percent (fully loaded Basel III basis).
  - All banks meet the 100 percent Liquidity Coverage Ratio.
  - NPL ratio declined to 4 percent.
  - Asset valuation adjustments in the ECB 2014 AQR less than 0.5 percent; stress test reduced CET1 ratio by around 3 percentage points.
  - Corporate indebtedness: 66 percent of GDP (adjusted for intercompany loans).
  - Household debt: 55 percent of GDP.
  - Banks remain dependent on wholesale funding and some banks have comparatively low leverage ratios.

### Outlook and risks — Short term (A) and medium term (B)
- Short-term baseline projections and drivers
  - Real GDP growth projection: 1.2 percent in 2015 and 1.5 percent in 2016.
  - Drivers: improved consumer confidence, lower oil prices, depreciated euro, euro area recovery, and Quantitative Easing (QE) supporting lower interest rates and higher investment (Appendix I).
  - Inflation projection: annual average inflation 0.1 percent in 2015; core inflation 0.5 percent in 2015; inflation rises to 1.0 percent in 2016.
  - Output gap expected to narrow gradually as aggregate demand is supported by QE, euro depreciation, and slower fiscal consolidation.
  - Short-term risks: balanced — upside if QE and confidence filter faster into investment and exports; downside from confidence shocks (geopolitical or Greece-related), rebound in energy prices, or surge in financial volatility.
- Medium-term concerns and downside scenarios
  - Potential output growth decline
    - Past averages: 2.2 percent in 1981–99; 1.8 percent in 2000−08.
    - Current potential growth: around 1.1 percent.
    - Projected average potential growth under current policies (including recent and planned reforms): about 1.2 percent over 2015–20.
    - Potential output in 2020 projected to be eight percent lower than on pre-crisis trends.
  - Labor market and NAIRU
    - NAIRU estimated at 9¼ percent, expected to decline only very slowly.
    - High and persistent unemployment projected throughout forecast period.
  - Key medium-term risk factors (Appendix IV)
    - Less accommodative external environment (protracted stagnation in advanced countries, sustained increase in commodity prices).
    - Insufficient reform progress leading to persistent structural rigidities.
    - Financial volatility: vulnerability to a globally systemic closure in funding markets due to reliance on wholesale funding; low interest rates could weaken banks’ and insurers’ profitability or encourage increased risk-taking.
  - Spillovers
    - Protracted stagnation in France could adversely affect euro area partners via aggregate demand and confidence channels.
    - Failure to meet fiscal and reform commitments could weaken credibility of EU economic governance.
    - French banks’ retrenchment could have adverse cross-border effects (e.g., Italy, emerging Europe).
  - Authorities’ view
    - Authorities broadly concur with staff’s baseline projections and view near-term risks as tilted to the upside; they see recent reforms as contributing to domestic confidence but agree potential growth and employment are weaker than before the crisis.

### Box 1 — Estimating potential output in France: findings
- Methodology
  - IMF staff used a multivariate filter incorporating relationships between actual and potential GDP, unemployment, and inflation; applied to France and other large euro area countries.
- Historical drivers of decline in potential growth
  - Sustained decline in TFP growth since early 2000s, potentially linked to lower ICT returns and sectoral shifts from manufacturing to services.
  - Crisis legacies: prolonged slowdown in investment and rise in structural unemployment.
- Quantitative results
  - Potential growth fell to less than 1 percent during the crisis years.
  - Under current policies and reforms, potential growth should rise but average only about 1.2 percent over 2015–20.
  - Decomposition (selected periods, as presented):
    - Potential growth: 2.2 (1994–1999), 1.8 (2000–2008), 1.0 (2009–2014), 1.2 (2015–2020) — as shown in the Box chart.
  - Trend contributions: declines in ∆ Trend TFP and changes in ∆ Capital and ∆ Trend employment affect potential growth dynamics.

### Policy discussion and reform priorities
- Overarching message
  - The current accommodative macroeconomic environment offers an opportunity to implement difficult, growth-supporting reforms that address long-standing structural rigidities and ensure fiscal sustainability.
- Recent and planned reforms (as described)
  - Cuts in labor tax wedge: CICE and Responsibility Pact.
    - CICE: corporate tax credit applying to six percent of the wage bill of employees earning up to 2½ times minimum wage.
    - Responsibility Pact: reduces employer’s social security contributions for wages up to 3.5 times the minimum wage.
  - Macron law: supply-side reforms to liberalize parts of the economy and advance some labor reforms; at a final stage of parliamentary approval after special constitutional procedure.
  - Rebsamen law (draft): intended to improve social dialogue and ease labor-related regulations hampering SME growth; expected adoption by year end.
- Staff assessment of reforms
  - Recent and planned reforms estimated to raise real GDP growth by an average of ½ percent over the next five years (Table 7).
  - While significant, current reforms are likely insufficient to restore pre-crisis potential growth or provide adequate fiscal margins.
- Staff policy recommendations (focus areas)
  - Underpin fiscal consolidation through deep spending reform (see "Fundamental Spending Reform to Underpin Fiscal Sustainability").
  - Push ahead with broad-based reforms to foster employment creation.
  - Maintain momentum on product market reforms to improve competition, innovation, and investment incentives.
- Fundamental spending reform (introductory note)
  - Rising government spending has pushed up public debt and the tax burden, complicating fiscal adjustment.
  - Staff emphasizes the need for spending-side reforms to secure fiscal sustainability while avoiding procyclical damage to the recovery.

*Source: IMF staff report — "1. Potential Output in France" (excerpt).*

### 17.      High and rising government spending has been at the core of France’s fiscal problems

### 17.      High and rising government spending has been at the core of France’s fiscal problems

### High and rising government spending: findings
- General government expenditures reached a record high in 2014, at over 57½ percent of GDP—about 12 percentage points above the average of the other euro area countries.
- Growth in spending was driven primarily by social security and local government spending, which expanded on average one percentage point per year faster than GDP, while central government spending has been growing on par with GDP.
- France’s tax burden is now about ten percentage points of GDP above the euro area average, constraining the growth potential of the private sector.
- With a persistent structural deficit, public debt rose to 95½ percent of GDP in 2014, from 21 percent of GDP in 1980.

### Fiscal strategy, risks, and planned adjustment
- The fiscal strategy has shifted to expenditure-based consolidation.
- Reliance on nominal containment measures (public service wage-scale freezes, temporary under-indexation of pensions and certain social benefits) did not deliver the adjustment envisaged in last year’s Stability Program due to growth and inflation coming in below projections.
- The European Council granted France two additional years, until 2017, to bring its headline deficit below the EDP threshold.
- The Stability Program includes additional spending reductions of 0.2 percent of GDP for both 2015 and 2016, which would bring the headline deficit narrowly below 3 percent of GDP in 2017 under baseline assumptions.
- While the 2015 deficit objective appears on track to be met, there is a risk that medium-term targets will be missed if growth or inflation fall short, or additional spending needs arise.

### Staff recommendations for fiscal adjustment
- Keep spending flat in real terms starting with the 2016 budget.
- Adopt a fiscal anchor ensuring primary general government expenditure grows in line with inflation, supported by a burden sharing mechanism, which would:
  - Deliver structural adjustment of about ½ percent of GDP per year.
  - Provide a safety margin to ensure headline deficit is reduced to below 3 percent of GDP by 2017.
  - Place debt on a firm downward trajectory and help achieve structural fiscal balance within the next five years.
  - Create fiscal space for tax alleviation in the order of ½ percent of GDP per year starting around 2020.
- Clarify structural measures underpinning the announced spending package and identify additional savings.
- Short-term measures could include:
  - Further tightening the budget constraint for local governments.
  - Steps to reduce staffing at all levels of government.
  - Better targeting of family allowances, housing subsidies, and unemployment and welfare benefits.
  - Reforming supplementary pensions.
- Any windfall gains from potential interest savings or excess revenues should be saved.

### Deeper structural reforms to underpin lasting spending reductions
- Employ regular broad-based expenditure reviews to assess efficiency and quality across all government levels and prepare for deeper structural reforms, including:
  - Streamlining local government positions and institutions, supported by further cuts in transfers, tighter caps on local borrowing and taxes, and elimination of the universal competency clause that allows local governments to spend in all areas.
  - Reversing the growth in public employment based on reviews of staffing at all levels of government.
  - Improving targeting and efficiency of social benefits, including unemployment, welfare, families, and housing allowances.
  - Reforming pension benefits by raising the effective retirement age, streamlining special pension regimes, and ensuring the financial sustainability of supplementary pensions.

### Authorities’ views on fiscal policy
- Authorities confirmed fiscal consolidation will be fully expenditure-based going forward and emphasized spending containment efforts since last year.
- They consider the multi-year strategy in the Stability Program provides adequate margins to meet medium-term targets and confirmed any windfall would be used to reduce debt.
- Authorities concurred with staff on the need to reduce the expenditure-to-GDP ratio toward the euro area average, contain local spending, control the wage bill, and improve targeting of social security programs.
- They noted constitutional fiscal autonomy of sub-national governments makes local spending containment challenging, but progressive cuts in transfers and the creation of an indicative spending target (ODEDEL) should help.
- The 2016 budget will include structural measures alongside horizontal nominal spending measures.

### Combatting unemployment: assessment and drivers
- Unemployment rose to 10.5 percent as of April 2015, from 7.5 percent in 2008.
- Net job creation has stagnated since 2008 despite robust labor force growth.
- Employment rates remain relatively low; inactivity rates of the young are among the highest in Europe.
- Labor market segmentation:
  - 55 percent of young workers below 25 are on a fixed-term contract.
  - Unemployment among unskilled workers is almost three times that of skilled workers.
- Long-term unemployment has almost doubled since the onset of the crisis.
- The NAIRU is currently estimated at 9¼ percent.

### Staff recommendations to reduce structural unemployment (four pillars)
- Enterprise-level agreements:
  - Enhance flexibility of social partners to agree on hours and wages in all enterprises.
  - Recent “job preservation agreements” have been rarely used due to restrictive conditions; staff recommend broader usability.
- Minimum wage:
  - France’s minimum wage level is one of the highest in the euro area, hampering employability of the young and low-skilled.
  - Staff recommend limiting minimum wage increases to inflation for as long as unemployment remains high.
- Benefits:
  - Harmonize and strengthen job search incentives for unemployment and social welfare benefit recipients, including gradual reductions in benefits if reasonable job offers are refused.
  - Strengthen unemployment benefit incentives by lengthening the period of work required for eligibility and introducing degressivity of benefits.
- Education and training:
  - Each year, 140,000 young people leave the education system without completing school.
  - Spending on professional training amounts to about 1.4 percent of GDP but primarily benefits skilled workers and those in large companies.
  - Better target resources on quality training for the young, the low-skilled, and unemployed.

### Authorities’ views on labor market reforms
- Reducing unemployment is the government’s central objective; structural reform efforts increasingly focus on the labor market.
- Authorities estimate the Responsibility Pact and CICE will create around half a million jobs.
- The Macron law would facilitate use of job preservation agreements; a working group will recommend further steps for company-level flexibility.
- On the minimum wage, authorities emphasized its social role and noted recent tax wedge reductions have lowered the effective cost of labor at lower salary ranges.
- Ongoing review of unemployment insurance and measures to enforce job search requirements are planned; the draft Rebsamen law would merge two supplementary income support programs for the working poor.
- Introduction of portable training aims to encourage labor mobility; government exploring options to promote apprenticeships and better target training resources.
- Early June government measures to promote employment in SMEs include increasing allowed renewals for fixed-term contracts, easing threshold effects for small firms, subsidizing micro enterprises recruiting their first employee, and extending the trial period of apprenticeships.

### Removing growth bottlenecks: services, product markets, housing
- Barriers to competition in services and extensive regulation remain important obstacles to growth; productivity growth in services has been slow.
- Staff estimate a 1 percent productivity gain in regulated services could raise GDP by 0.8 percent after two years.
- Extensive regulatory requirements on businesses, especially above certain employee thresholds, limit investment incentives.
- Combined with a heavy tax burden and labor market rigidities, these factors drag on competitiveness and growth potential.

### Recent product market reforms and recommendations
- The Macron law includes supply-side reforms: liberalize opening hours, enhance competition in regulated legal professions, reduce rents received by toll road operators, and open up intercity bus transport.
- The law expands competencies of the Competition Authority regarding barriers to entry affecting retail and regulated legal professions.
- Ongoing simplification of administrative burden is supported by the Business Simplification Council.
- Staff welcomed reforms but underscored significant remaining potential for productivity gains from enhanced competition in services and reduction of red tape.

### Housing market constraints and recommendations
- Residential construction has fallen by 14 percent, and real house prices by 11 percent, since the peak in 2007.
- Housing subsidies include rental cash assistance (received by 44 percent of tenants), subsidized mortgage rates for households, and fiscal breaks for providers (including social housing), together amounting to 1.9 percent of GDP in 2013.
- Studies have found rental assistance may contribute to rising rents.
- Staff recommended reviewing the functioning of the housing market to alleviate constraints on the supply of affordable housing and improve targeting of benefits.

### Authorities’ views on product markets and housing
- Authorities are confident ongoing product market reforms will foster competition and growth.
- Recent measures to support employment creation in SMEs include alleviating administrative and tax requirements and labor constraints; temporarily more favorable amortization rules should boost investment near-term.
- Plans exist to reform qualification requirements that act as barriers to entry into certain professions.
- Authorities stress the importance of state seed money to foster innovation and steer the economy toward growth sectors.
- On housing, authorities consider recent measures to increase supply (simplifying regulations, increasing availability of land) are starting to bear fruit and noted certain rental assistance benefits are under scrutiny to contain expenditure.

### Adapting the financial sector: low interest rate environment and risks
- Prolonged very low interest rates could create vulnerabilities via narrowing bank profit margins, asset price inflation, and private debt accumulation.

Banks
- Low interest rates squeeze interest margins, especially because of a sharp increase in mortgage refinancing.
- Interest rates on regulated savings deposits are set well above the ECB’s policy rate, aggravating margin pressure.
- Around 60 percent of these deposits are centralized at the Caisse des Dépôts et Consignations and earmarked mainly for building social housing; banks are partly remunerated for the centralized deposits, and must pay the full guaranteed return (currently 1 percent for the main savings schemes) for the portion that is not.
- Lending opportunities are increasing as corporate credit demand picks up; banks can use the ECB’s low-interest Targeted Long-term Refinancing Operations funds to expand credit.
- Net impact from QE on banks’ profitability is difficult to predict given offsetting forces.

Insurers
- Margin squeeze will likely be exacerbated by new regulations (Solvency II) requiring significant holdings of safe assets.
- Low returns may increase redemption rates as consumers shift to alternative investments.
- Insurers in France have greater room for maneuver than in some other countries because the minimum guaranteed return on life insurances is adjusted every year.

Markets
- Low interest rates could feed into asset prices as investors shift into equities, higher-yield instruments, and possibly real estate.
- The main stock market index rose by 12 percent in the year to mid-June.
- Real estate prices have been on a declining trend but remain about 10−15  percent overvalued by some metrics; price pressures could reemerge over the medium term.
- Impact of future price adjustments is mitigated by relatively stringent lending standards and manageable levels of household debt.

*Source: IMF staff report (Selected Issues Chapter I–IV) as presented in the content unit.*

### 30.      Banks and supervisors should continue to adapt to a changing regulatory

### 30.      Banks and supervisors should continue to adapt to a changing regulatory environment

### Banking sector resilience and vulnerabilities
- French banks have strengthened their capital ratios and "fared relatively well in the ECB’s Comprehensive Assessment."
- Challenges remaining:
  - Relatively low leverage ratios and risk weights.
  - Continued dependence on wholesale funding.
  - Uncertain profitability prospects.
- Liquidity metrics:
  - The big four banks have achieved a 100 percent Liquidity Coverage Ratio.
  - The Net Stable Funding Ratio could be more challenging given structural reliance on wholesale funding.
- Regulatory and market pressures likely to tighten bank conditions and could push risk outside the banking system.
- Potential medium-term capital needs:
  - Additional capital raising efforts may be needed as national regulatory discretion is gradually reduced, practices harmonized, a European leverage ratio is adopted, and new global requirements on “too important to fail” banks are introduced for globally systemic banks.

### Authorities' views and supervisory actions
- On regulated savings deposits:
  - Authorities acknowledged current interest rates on regulated savings deposits may affect transmission of ECB monetary policy.
  - Authorities took note of staff’s recommendation to reduce these rates and review tax advantages for certain savings and insurances products.
- On insurers:
  - Authorities are carrying out stress tests to identify and address risks well in advance.
- On QE and search-for-yield:
  - Authorities are closely monitoring possible side-effects of QE, but have observed very little “search-for-yield” behavior so far.
- On housing market:
  - Authorities do not see risks to financial stability at this point, citing prudent lending based on repayment ability, predominance of fixed-rate mortgages, and the mortgage insurance scheme.
- On regulatory harmonization under SSM:
  - Authorities consider France’s large banks reasonably well placed to adapt, but recognize that tougher capital and liquidity requirements combined with low interest margins could weigh on banks’ profitability and limit credit expansion over the medium term.
- On shadow banking:
  - Authorities are monitoring risks related to “shadow banking”; the EU directive on alternative investment fund management has brought new investment entities into the regulatory net.

### Fiscal and macroeconomic context (staff appraisal highlights)
- Growth and risks:
  - A solid recovery is underway, with short-term risks broadly balanced.
  - Recovery supported by sharply lower oil prices, a depreciated euro, and very low interest rates.
  - Upside: QE and improved confidence could boost investment.
  - Downside external risks: potential confidence losses, a sustained increase in energy prices, or a pronounced slowdown in advanced economies.
  - The external position has improved but remains moderately weaker than implied by fundamentals.
- Policy direction and reform needs:
  - General policy direction is appropriate, but further reforms are needed to address structural rigidities weighing on medium-term prospects.
  - Potential output growth remains well below pre-crisis rates; structural unemployment is high; competitiveness is weak.
  - France faces a difficult fiscal adjustment task with public spending at record-high levels and the debt ratio continuing to rise.
  - Authorities are taking actions: containing public spending, reducing the labor tax wedge, advancing supply-side reforms.
  - Additional bold reforms are required to rein in public spending, revive job creation, and remove growth bottlenecks.
- Fiscal stance and targets:
  - The switch to expenditure-based fiscal consolidation is welcome.
  - Government’s medium-term fiscal framework would reduce the overall deficit narrowly below 3 percent of GDP in 2017 under baseline assumptions.
  - Risk that medium-term targets may be missed and debt continues to increase if growth or inflation disappoint or new spending pressures arise.
- Recommended fiscal anchor:
  - Fiscal anchor of zero real primary spending growth, with appropriate burden sharing across levels of government, would deliver structural adjustment of about ½ percent of GDP per year.
  - Spending containment should rely on higher quality structural measures based on regular broad-based expenditure reviews at all levels of government, including staffing reform, streamlining local government institutions, better targeting of social benefits, and a further increase in the effective retirement age.

### Labor market and product-market reform recommendations
- Labor market (context and recommended measures):
  - Key issues: high structural unemployment (especially among young and low-skilled), low employment ratio, duality, judicial uncertainty around dismissals, high minimum wage, wage rigidity.
  - Recent measures: cut in employer’s social security contribution (Responsibility Pact); tax credit (CICE) on firms’ payroll on wages below 2.5 * minimum wage; flexibility on hours and pay for firms in difficulties (Accords de maintien de l’emploi - AMEs); subsidized jobs; portability of professional training rights.
  - Underway: reducing judicial uncertainty around individual dismissals (Macron law); simplifying use of AMEs (Macron law); reforming union representation and streamlining mandatory social discussions (Rebsamen law).
  - Additional staff recommendations:
    - Reform the minimum wage formula.
    - Reform unemployment benefits and strengthen job search framework.
    - Expand flexibility for social partners to agree on hours and pay at the enterprise level.
    - Improve targeting of professional education and training.
- Product markets, real estate, and financial sector (context and recommendations):
  - Key issues: Low TFP growth; export market share loss; barriers to competition in services; excessive business regulation; lack of affordable housing; distortive rates on regulated savings deposit.
  - Recent reforms: liberalization of some regulated professions and sale of some health products; creation of Business Simplification Council; simplification of housing-related regulations.
  - Underway: liberalizing legal professions, coach transport, retail trade opening hours, expanding competencies of the Competition Authority (Macron law); easing labor-related regulations for firms above certain employee thresholds (Rebsamen law); temporary measure to boost investment through favorable amortization rules.
  - Additional staff recommendations:
    - Strengthen the Competition Authority; allow SMEs to launch class actions in anti-trust cases.
    - Further reduce disincentives for SMEs to grow above certain employee thresholds.
    - Liberalize regulated professions not covered by the Macron law.
    - Enhance the effectiveness of the Business Simplification process.
    - Alleviate constraints on the supply of affordable housing and improve targeting of benefits.
    - Reduce regulated savings rates and review tax incentives for savings and insurance products.

### Financial sector policy implications
- Continued monitoring and adaptation:
  - Banks and supervisors should continue to adapt to the changing regulatory environment as banking union takes hold and the SSM begins supervising France’s banks.
  - Remaining directives on resolution and deposit guarantees are slated for transposition into French law in the coming months.
- Specific policy recommendations:
  - Monitor and address banks’ reliance on wholesale funding and their liquidity profile given potential Net Stable Funding Ratio challenges.
  - Reduce guaranteed interest rates under regulated savings schemes to support proper transmission of ECB monetary policy.
  - Review tax incentives on financial savings and insurance products.
  - Continue strengthening capital and liquidity in line with evolving European and global regulatory standards.

*IMF staff appraisal and Box 2 (Key Structural Reforms) excerpts from the France country report content provided.*

### 39.      It is proposed that the next Article IV consultation take place on the standard 12-

### _cr15178 - 39.      It is proposed that the next Article IV consultation take place on the standard 12-

### Economic performance during the crisis years
- Economy showed resilience: consumption and government spending remained robust; financing costs continued to trend down; indebtedness increased but "stayed manageable overall."
- External position weakened and potential growth slowed down significantly.
- Real GDP growth (index, 2007 = 100): shown for France, Germany, Italy, Spain, Euro area (graphical).
- Average growth of GDP components, 2007–14 (In annual growth): private consumption, government spending, investment contributions shown (graphical).
- 10 Year Government Bond Yields (In percent) plotted for 2007–2015 across France, Germany, Italy, Spain, Euro area.
- Indebtedness by sector, 2014 (In percent of GDP): general government, households, nonfinancial corporations (graphical).
- Current account (average) and Net IIP (end of period) shown in percent of GDP for periods 2000–07 and 2008–14.

### Real sector and inflation
- France’s recovery lagged but growth should accelerate in the near term, supported by a rebound in exports and private consumption.
- Inflation dynamics:
  - CPI (year average) (Table 1 projections): 2010: 1.7; 2011: 2.3; 2012: 2.2; 2013: 1.0; 2014: 0.6; 2015: 0.1; 2016: 1.0; 2017: 1.1; 2018: 1.2; 2019: 1.5; 2020: 1.7.
  - Core and headline inflation series plotted by quarter (graphical).
- Composite Leading Indicator (CLI) and France CLI (index, 2007–2015) shown.
- GDP by demand components (2013–20 projections) detailed: contributions from construction & business investment, government consumption & investment, stockbuilding, private consumption, net exports (graphical).
- Effect of QE on financial markets: 10-year government bond yield and 2-year treasury note bid rate movements around Draghi's Jackson Hole speech (Aug.22, 2014), QE announcement (Jan.22, 2015), QE implementation (Mar.9, 2015).

### Competitiveness
- France lost export market share inside and outside the euro area (Market Shares index, 2000 = 100).
- Real Unit Labor Costs and components (labor productivity, real wages, real unit labor costs) across subperiods 1990–99, 2000–07, 2008–14.
- ULC-based real effective exchange rate (REER) appreciated (index, 2005=100) for France vs Germany.
- Selected wage indicators (basic monthly salary, labor cost index, compensation per employee, Harmonized CPI) indexed to Q1 2000 = 100.
- Contributions to profit margins charted: productivity, real wages, social contributions, terms of trade, other.
- Labor cost per hour remains high despite recent reduction in the tax wedge (Labor Costs per Hour by Components, 2014, in euros).

### External sector
- Net exports declined since early 2000s alongside REER appreciation (Net Exports of Goods and Services in billions of euros; REER index, 2005 = 100).
- Share in World Merchandise Exports (Change in percent, 1997-2014) shows France among countries with declining shares.
- Exchange rate projections (2013–2019): Nominal effective exchange rate, ULC-based; Real effective exchange rate, ULC-based; Dollars per euro (right scale). Note: "Dotted line indicates September Global Assumptions."
- Commodity Fuel Index (2005 = 100) with Current and September 2014 scenarios (graphical).
- Energy Imports (In percent of GDP) and Current Account by Components (net exports of goods, net exports of services, income, current transfers) plotted for 2007–2016.
- Table 3 (Balance of Payments projections, percent of GDP): Current account projections 2015: -0.4; 2016: -0.5; 2017: -0.5; 2018: -0.6; 2019: -0.5; 2020: -0.5.
- Exports of goods projections (percent of GDP): 2015: 24.1; 2016: 24.6; 2017: 25.0; 2018: 25.3; 2019: 25.5; 2020: 25.6.

### Banking sector and credit
- System capital and liquidity strengthened since the crisis; maturity structure of liabilities improved.
- CET1 capital levels at French banks exceed 10 percent, but leverage ratios look low relative to peers.
- Bank capital and leverage ratios (Bank Capital and Leverage Ratios): Core Equity Tier 1 ratio, fully loaded, 2015Q1 and Leverage, 2014 plotted.
- Credit growth:
  - Corporate loans (y/y percent change) series for France, Germany, Euro area (graphical).
  - Housing loans (y/y percent change) series for France, Germany, Euro area (graphical).
- Lending rate spreads over average deposit rates for mortgages (mortgages new) declined; spreads for business loans broadly stable.
- Table 5 (Core Financial Soundness Indicators, 2007–14):
  - Regulatory capital to risk-weighted assets: 2007: 10.2; 2008: 10.5; 2009: 12.4; 2010: 12.5; 2011: 12.2; 2012: 14.0; 2013: 15.1; 2014: 15.3.
  - Nonperforming loans to total gross loans: 2007: 2.7; 2008: 2.8; 2009: 3.6; 2010: 3.5; 2011: 3.5; 2012: 4.0; 2013: 4.5; 2014: 4.0.
  - Liquid assets to short-term liabilities: 2007: 150.3; 2008: 139.6; 2009: 150.1; 2010: 144.4; 2011: 136.3; 2012: 164.0; 2013: 165.2; 2014: 178.5.

### Fiscal sector
- Spending has outpaced GDP, resulting in a high expenditure-to-GDP ratio and eroded fiscal buffers.
- Structural deficit remains elevated, making it difficult to close even in good times, despite taxes being ratcheted up.
- Table 2 (General Government Accounts, percent of GDP; 2010–20 projections):
  - Revenue series: 2010: 49.6; 2011: 50.8; 2012: 52.0; 2013: 52.9; 2014: 53.5; 2015: 53.2; 2016: 53.1; 2017: 53.0; 2018: 53.0; 2019: 53.0; 2020: 53.0.
  - Expenditures series: 2010: 56.4; 2011: 55.9; 2012: 56.8; 2013: 57.0; 2014: 57.5; 2015: 57.1; 2016: 56.5; 2017: 55.8; 2018: 55.1; 2019: 54.3; 2020: 53.7.
  - Balance (Maastricht definition): 2010: -6.8; 2011: -5.1; 2012: -4.8; 2013: -4.1; 2014: -4.0; 2015: -3.8; 2016: -3.4; 2017: -2.8; 2018: -2.1; 2019: -1.3; 2020: -0.7.
  - Primary balance: 2010: -4.5; 2011: -2.6; 2012: -2.4; 2013: -1.9; 2014: -1.9; 2015: -1.9; 2016: -1.6; 2017: -1.0; 2018: -0.3; 2019: 0.4; 2020: 1.0.
  - Structural balance (percent of potential GDP): 2010: -5.8; 2011: -4.7; 2012: -3.8; 2013: -2.9; 2014: -2.4; 2015: -2.2; 2016: -2.0; 2017: -1.8; 2018: -1.5; 2019: -1.1; 2020: -0.7.
  - Gross debt (Maastricht definition): 2010: 81.5; 2011: 85.0; 2012: 89.4; 2013: 92.3; 2014: 95.6; 2015: 97.3; 2016: 98.2; 2017: 98.2; 2018: 97.3; 2019: 95.5; 2020: 93.0.
- Expenditure path and staff projections charted (2013–2020) with deficit and structural deficit projections.

### Labor market
- Unemployment remains a problem; employment rates are relatively low.
- Unemployment rate (projections from Table 1): 2010: 9.3; 2011: 9.2; 2012: 9.8; 2013: 10.3; 2014: 10.3; 2015: 10.2; 2016: 9.9; 2017: 9.7; 2018: 9.5; 2019: 9.3; 2020: 9.1.
- Employment rate comparisons (2007 vs 2014) show France below U.S., U.K., and Germany.
- Minimum wage is high relative to median wage (Minimum Wages, 2013: ratio of minimum to median shown graphically; France among highest).
- Real wages continued to increase during the crisis despite rising unemployment (Basic Monthly Salary and Unemployment Rate series, 2005Q1–2014Q4).
- Labor market duality rising: hirings by contract modality show share of fixed-term (>1 month, <1 month) and open-ended contracts (2007–2012 series).

### Product market and structural features
- Productivity growth in services is relatively low with wide heterogeneity across service types (Labor productivity and employment in market services, 1996–2014).
- Total Factor Productivity by industry indexed to 1989=100 for multiple sectors.
- France is one of the more regulated economies in the OECD (Overall PMR Indicator by Country; index 0–6, lower less restrictive).
- Professional services regulation has become more stringent over the past decade (Professional Services Regulation index series for France and peers).
- Forward and backward linkages of services indicate strong forward linkages to the rest of the economy; liberalization of services can unleash significant output gains (Forward/Backward linkage charts and Productivity Multipliers).

### Projections and selected indicators (Table 1 highlights, 2010–20)
- Real GDP growth (change in percent): 2010: 2.0; 2011: 2.1; 2012: 0.2; 2013: 0.7; 2014: 0.2; 2015: 1.2; 2016: 1.5; 2017: 1.7; 2018: 1.8; 2019: 1.9; 2020: 1.9.
- Private consumption (change in percent): 2010: 1.8; 2011: 0.5; 2012: -0.2; 2013: 0.4; 2014: 0.6; 2015: 1.5; 2016: 1.8; 2017: 1.8; 2018: 1.9; 2019: 2.0; 2020: 2.0.
- Gross national savings (percent of GDP): 2010: 21.1; 2011: 22.2; 2012: 21.1; 2013: 20.9; 2014: 21.2; 2015: 21.3; 2016: 21.1; 2017: 21.3; 2018: 21.5; 2019: 21.7; 2020: 21.9.
- General government gross debt (Table 2 memo / repeated): 2010: 81.5; 2011: 85.0; 2012: 89.4; 2013: 92.3; 2014: 95.6; 2015: 97.3; 2016: 98.2; 2017: 98.2; 2018: 97.3; 2019: 95.5; 2020: 93.0.
- Potential output (change in percent) (Table 1): 2010: 1.0; 2011: 1.1; 2012: 1.0; 2013: 1.0; 2014: 1.0; 2015: 1.1; 2016: 1.1; 2017: 1.1; 2018: 1.2; 2019: 1.3; 2020: 1.3.
- Output gap (Table 1): 2010: -1.6; 2011: -0.6; 2012: -1.4; 2013: -1.7; 2014: -2.5; 2015: -2.4; 2016: -2.0; 2017: -1.5; 2018: -1.0; 2019: -0.5; 2020: 0.0.

### Vulnerability, market and sectoral indicators (Table 4 highlights, 2007–14)
- External indicators:
  - Exports (annual % change, in U.S. dollars): 2007: 14.0; 2008: 5.2; 2009: -19.6; 2010: 7.0; 2011: 15.8; 2012: -3.2; 2013: 4.9; 2014: 1.6.
  - Current account balance (percent of GDP): 2007: -0.1; 2008: -0.9; 2009: -0.8; 2010: -0.8; 2011: -1.0; 2012: -1.5; 2013: -1.4; 2014: -1.0.
- Market indicators:
  - Public sector debt (percent of GDP, selected): 2007: 64.2; 2008: 67.9; 2009: 78.8; 2010: 81.5; 2011: 85.0; 2012: 89.4; 2013: 92.3; 2014: 95.6.
  - 3-month T-bill yield (eop, percentage points): 2007: 3.8; 2008: 1.9; 2009: 0.4; 2010: 0.5; 2011: 0.1; 2012: 0.1; 2013: 0.1; 2014: -0.03.
  - 10-year government bond (United States) series and spread with US bond plotted.
- Banking sector indicators:
  - Credit to the private sector (end-of-period 12-month growth rates): 2007: 13.4; 2008: 6.2; 2009: -0.7; 2010: 5.6; 2011: 4.4; 2012: 2.0; 2013: 0.5; 2014: 0.5.
  - Share of housing loans in bank credit to the private sector: 2007: 37.1; 2008: 37.6; 2009: 39.2; 2010: 40.2; 2011: 40.8; 2012: 41.2; 2013: 42.6; 2014: 41.3.
  - Nonperforming loans to total loans: 2007: 2.7; 2008: 2.8; 2009: 3.6; 2010: 3.5; 2011: 3.5; 2012: 4.0; 2013: 4.5; 2014: 4.0.

### Structural reforms implemented and planned (Table 7)
- Territorial reform (Done): reform of governance of large metropolitan areas; consolidation of regions from 22 to 13; incentivize fusion of communes. Long-term GDP effects listed (example entries: 0.3, 1.0).
- Product market reforms (Done and To Come): administrative simplification measures; measures to promote market efficiency (e.g., internet sales); continued administrative simplification; stimulation of competition and liberalization of protected professions.
- Investment and innovation policy (Done by 2030): Creation of Public Investment Banque (BPI); Strategic investment plan including streamlined financing (PIA2). To come: Extension of BPI loans to 2015-17 horizon; Over-amortization of 40 percent for 2015-16 productive investments.
- Energy Transition (To Come): Energy Transition and Green Growth law (impact value 0.8 shown; NA for some items).
- Labor costs and labor market measures (Done and To Come): Tax credit for payroll up to 2.5 x SMIC (Crédit d’impôt compétitivité emploi); Reduction of SSC and family contribution (Pacte de responsabilité - Part 1); To come: Reduction of corporate taxes by 2017 (Pacte de responsabilité - Part 2); Partial liberalization and simplification of labor market; Bill on the Modernisation of Social Dialogue; Unemployment convention 2016.
- Labor market support for most disadvantaged (Done and To Come): Subsidized employment of disadvantaged youth (Emplois d'avenir); extension of Emplois d'avenir (65'000 additional jobs) and improved targeting of public employment services.
- Education reforms (Done and To Come): Increase of means allocated to education; plan for gender equality in education; planned education reform at various schooling levels; reform of professional training/apprenticeship system; Plan to avoid dropouts and promote re-entry; Plan for digitalization of education.
- Table shows estimated long-term effects on GDP (percent) for selected reforms and notes sources: Programme Nationale de Reforme 2015; Estimates from OECD, Trésor-Insee Mésange, and government calculations.

*Source: IMF staff report content as presented in the provided document.*

### Appendix I. Estimating the Impact of External Shocks

### Appendix I. Estimating the Impact of External Shocks

### Recent external shocks affecting the outlook
- Combined headline effect: +0.8 percentage points of additional growth, cumulatively over 2015–16.
- Identified shocks since summer 2014:
  - Slowdown in demand from trading partners.
  - Euro depreciation.
  - Decline in oil prices.
  - Interest rate effects of QE.
- Observed magnitudes and related WEO/market assumptions:
  - Oil: Energy prices decline by 32.6% in 2015 and raise by 12.4% in 2016.
  - Export demand addressed to France is 2.7 and 0.4 percent lower in 2015 and 2016 respectively (relative to September 2014 WEO assumptions).
  - Euro depreciates against dollar by 14% in 2015 and 0.3% in 2016; ULC-based REER depreciates by 2.2 percent in 2015 and 0.1 percent in 2016.
  - QE: Term premium reduced by 63 bps between end-September 2014 and March 2015 (affecting lending rates and equities).

### Methodology and assumptions
- Baseline and shock sizing:
  - Simulations conducted ex ante relative to the October 2014 WEO macroeconomic baseline.
  - Shock sizes quantified by comparing September 2014 and March 2015 global WEO assumptions.
- Transmission channels modeled (based on Lebrun and Pérez Ruiz (2014) demand-equation elasticities):
  - (i) Energy price windfall → private consumption, business investment, imports.
  - (ii) Slowdown in demand from trading partners → exports.
  - (iii) Euro depreciation → exports.
  - (iv) QE-induced reduction in cost of capital → investment.
- Key explicit assumptions:
  - Lower energy prices are fully passed onto consumers.
  - ULC-based REER depreciation follows WEO assumptions (2.2 percent in 2015; broadly stable through 2016).
  - QE-related term premium reduction lowers the real cost of capital via lending rates and equities.
- Simulations conducted one by one, ceteris paribus, using elasticities estimated for French private consumption, business investment, exports, and imports.

### Simulated results and quantified impacts (2015–16 cumulative)
- Oil price decline:
  - Demand-channel impacts (cum. 2015–16):
    - Private consumption: demand impact 0.7; GDP impact 0.4
    - Business investment: demand impact 0.3; GDP impact 0.1
    - Imports: demand impact -0.8; GDP impact -0.2
    - Total net demand impact reported as 0.2 (percent of GDP) in table; gross impact on consumption and investment is +0.4 percent of GDP cumulatively over 2015–16, partly offset by higher imports (about -0.2 percent of GDP).
  - Interpretation: Muted net impact on real GDP growth consistent with past patterns (some windfall gains initially saved).
- Euro depreciation:
  - Cumulative impact on real GDP growth over 2015–16: +0.5 percentage points.
  - Transmission: assumed 2 percent impact on exports; exports projected to grow by 5.5 and 4.9 percent in real terms in 2015 and 2016 respectively.
  - Dampening factors: France’s relatively low export-to-GDP ratio, high share of exports to euro-area partners, and limited depreciation in real ULC terms.
- Slowdown in demand from trading partners:
  - Cumulative impact on real GDP growth over 2015–16: -0.3 percentage points.
  - Table entry: Exports: demand impact -1.1; GDP impact -0.3.
- QE-related term premium reduction:
  - Assumed term premium reduction: 63 bps since end-September 2014.
  - Cumulative impact on real GDP growth over 2015–16: +0.4 percentage points via higher business investment.
  - Table entries:
    - Business investment: demand impact 2.6; GDP impact 0.4
    - Imports: demand impact -1.0; GDP impact -0.3
    - Total reported in table: 0.1 (percent of GDP) for the QE scenario net effect.
  - Caveat: Impact is subject to high uncertainty; scenario based on historical link between interest rates and investment and does not model expectations channel or effects of protracted low growth on investment and credit demand.

### Net impact, aggregation, and caveats
- Aggregation:
  - Joint impact of positive shocks (oil decline, euro depreciation, QE) is estimated at 1.4 percent of GDP over 2015–16.
  - This positive contribution is partly offset by the import response and lower partner country demand; headline combined effect reported as +0.8 percentage points of additional growth cumulatively over 2015–16.
- Simulation limitations and omitted factors:
  - Simulations do not capture near-term forecast errors, base effects from data revisions, changes in timing of policy/reform impacts, and other domestic and external factors affecting near-term growth.
  - QE impact excludes expectations channel and potential dampening from protracted low growth on investment and credit demand.
- Consistency with broader WEO assumptions and data sources:
  - Shock magnitudes drawn from September 2014 vs. March 2015 WEO assumptions.
  - Sources cited: IMF Global Assumptions data, Bloomberg, and IMF Staff calculations.

*Source: IMF Global Assumptions data, Bloomberg, and IMF Staff calculations.*

### 1.34 is the max positive growth rate shock

### _cr15178 - 1.34 is the max positive growth rate shock

### Realism of Baseline Assumptions
- Real GDP growth (projection): 2015: 1.2; 2016: 1.5; 2017: 1.7; 2018: 1.8; 2019: 1.9; 2020: 1.9 (percent)
- Inflation (GDP deflator, projection): 2015: 0.8; 2016: 0.8; 2017: 1.1; 2018: 1.3; 2019: 1.4; 2020: 1.5 (percent)
- Nominal GDP growth (projection): 2015: 0.8; 2016: 1.4; 2017: 0.8; 2018: 2.0; 2019: 2.3; 2020: 2.8 (percent) — table lists nominal GDP growth across years
- Effective interest rate (defined as interest payments divided by debt stock): 2013: 3.8; 2014: 2.6; 2015: 2.4; 2016: 2.2; 2017: 2.0; 2018: 2.0; 2019: 2.0; 2020: 2.0 (percent)
- Public gross financing needs (in percent of GDP): 2013: 8.5; 2014: 8.3; 2015: 8.8; 2016: 9.2; 2017: 10.2; 2018: 9.0; 2019: 6.9; 2020: 6.8; 2020: 4.5 (table shows sequence)
- Nominal gross public debt (in percent of GDP): 2013: 73.7; 2014: 92.3; 2015: 95.6; 2016: 97.3; 2017: 98.2; 2018: 98.2; 2019: 97.3; 2020: 95.5; 2020: 93.0 (table lists across years)
- Change in gross public sector debt (cumulative projections): 2013: 2.8; 2014: 2.9; 2015: 3.3; 2016: 1.7; 2017: 0.9; 2018: 0.0; 2019: -0.9; 2020: -1.8; 2020: -2.5; 2020: -2.5 (table shows sequence)

### Debt Dynamics and Key Statistics
- Primary (noninterest) revenue and grants (percent of GDP): 2013: 49.9; 2014: 52.8; 2015: 53.4; 2016: 53.1; 2017: 53.0; 2018: 52.9; 2019: 52.9; 2020: 52.9; cumulative: 17.7
- Primary (noninterest) expenditure (percent of GDP): 2013: 51.8; 2014: 54.8; 2015: 55.4; 2016: 55.0; 2017: 54.6; 2018: 53.9; 2019: 53.2; 2020: 52.5; cumulative: 20.9
- Primary deficit (percent of GDP): 2013: 1.9; 2014: 1.9; 2015: 1.9; 2016: 1.9; 2017: 1.6; 2018: 1.0; 2019: 0.3; 2020: -0.4; 2020: -1.0; 2020: -3.3 (table lists across years and cumulative)
- Automatic debt dynamics contribution (percent of GDP): 2013: 0.7; 2014: 1.0; 2015: 1.5; 2016: 0.2; 2017: -0.3; 2018: -0.7; 2019: -1.0; 2020: -1.2; 2020: -1.3; cumulative: -4.3
  - Real interest rate contribution (percent): 2013: 1.5; 2014: 1.6; 2015: 1.6; 2016: 1.3; 2017: 1.2; 2018: 0.9; 2019: 0.7; 2020: 0.5; 2020: 0.4; cumulative: 4.9
  - Real GDP growth contribution (percent): 2013: -0.8; 2014: -0.6; 2015: -0.2; 2016: -1.1; 2017: -1.4; 2018: -1.6; 2019: -1.7; 2020: -1.8; 2020: -1.7; cumulative: -9.2
- Other identified debt-creating flows (percent of GDP): 2013: 0.3; 2014: 0.7; 2015: 0.2; 2016: 0.0; 2017: 0.0; 2018: 0.0; 2019: 0.0; 2020: 0.0; cumulative: 0.0
- Residual, including asset changes (percent of GDP): 2013: 0.0; 2014: -0.7; 2015: -0.4; 2016: -0.4; 2017: -0.4; 2018: -0.3; 2019: -0.2; 2020: -0.1; 2020: -0.1; cumulative: -1.5
- Public Debt Held by Non-Residents: 64% (figure label)

### Baseline and Alternative Scenarios
- Baseline scenario key variables (2015–2020):
  - Real GDP growth: 1.2; 1.5; 1.7; 1.8; 1.9; 1.9 (percent)
  - Inflation: 0.8; 0.8; 1.1; 1.3; 1.4; 1.5 (percent)
  - Primary Balance: -1.9; -1.6; -1.0; -0.3; 0.4; 1.0 (percent of GDP)
  - Effective interest rate: 2.2; 2.0; 2.0; 2.0; 2.0; 2.0 (percent)
- Historical scenario key variables (2015–2020):
  - Real GDP growth: 1.2; 0.9; 0.9; 0.9; 0.9; 0.9 (percent)
  - Inflation: 0.8; 0.8; 1.1; 1.3; 1.4; 1.5 (percent)
  - Primary Balance: -1.9; -2.0; -2.0; -2.0; -2.0; -2.0 (percent of GDP)
  - Effective interest rate: 2.2; 2.0; 2.1; 2.2; 2.3; 2.4 (percent)
- Constant Primary Balance scenario:
  - Primary Balance held at -1.9 across 2015–2020 (percent of GDP)
  - Other variables same as baseline for growth and inflation

### Stress Tests and Shock Specifications
- Stress test shock magnitudes and experiment notes:
  - "1.34 is the max positive growth rate shock (percent)" (document title/heading)
  - "no restriction on the interest rate shock"
  - "2 is the max positive pb shock (percent GDP)"
  - "no restriction on the exchange rate shock"
  - Restrictions on upside shocks: listed numbers 30, 45, 64%, 12 (as presented)
- Stress test scenarios (selected projections shown):
  - Real GDP Growth Shock scenario (2015–2020):
    - Real GDP growth: 1.2; -0.1; 0.0; 1.8; 1.9; 1.9 (percent)
    - Inflation: 0.8; 0.4; 0.7; 1.3; 1.4; 1.5 (percent)
    - Primary balance: -1.9; -2.7; -3.2; -0.3; 0.4; 1.0 (percent of GDP)
    - Effective interest rate: 2.2; 2.0; 2.1; 2.1; 2.1; 2.1 (percent)
  - Real Interest Rate Shock scenario:
    - Effective interest rate (2015–2020): 2.2; 2.0; 2.3; 2.4; 2.6; 2.7 (percent)
  - Real Exchange Rate Shock scenario:
    - Inflation includes a 2016 value of 1.2 (percent) relative to baseline (table entries)
  - Combined Shock scenario (selected):
    - Real GDP growth: 1.2; -0.1; 0.0; 1.8; 1.9; 1.9 (percent)
    - Effective interest rate: 2.2; 2.0; 2.3; 2.5; 2.6; 2.8 (percent)
- Outcome indicators under stress (figures referenced):
  - Gross Nominal Public Debt under stress scenarios depicted rising to values above baseline in percent of GDP and percent of revenue (figures shown, exact series in graphics)

### Risk Assessment Matrix (RAM) — Key Risks, Likelihood, Impacts, Policy Responses
- A surge in financial volatility
  - Relative Likelihood: High
  - Impact on France if realized: Medium
  - Policy response: Ensure that banks reduce reliance on wholesale funding
- Protracted period of slower growth in key advanced and emerging economies
  - Relative Likelihood: High
  - Impact: Medium
  - Policy response: Continue with and deepen structural reforms to lift output growth and reduce structural unemployment
- Sustained rise in higher oil prices
  - Relative Likelihood: High
  - Impact: Low
  - Note: France’s reliance on nuclear energy provides some cushion
- Financial imbalances from protracted period of low interest rates
  - Relative Likelihood: Medium
  - Impact: Medium (over medium term)
  - Policy response: Monitor lending standards and risks; Monitor life insurance sector and take policy action as needed
- Weak implementation of fiscal and structural policy commitments
  - Relative Likelihood: Medium
  - Impact: Medium
  - Policy response: (implicit) maintain political commitment; preserve reform momentum
- Changes in forthcoming regulatory landscape larger than expected
  - Relative Likelihood: Medium
  - Impact: Medium
  - Policy response: Promote continued restructuring and cost cutting efforts by banks
- Bond market stress from a reassessment in sovereign risk
  - Relative Likelihood: Medium
  - Impact: Low/Medium
  - Note: Direct impact would be low due to limited trade and financial linkages; indirect confidence effects could be larger

### External Position, Current Account, and Competitiveness
- Net international investment position (NIIP): around -15 percent of GDP in 2013
- Gross asset position: 271 percent of GDP in 2013
- Gross liability position: about 286 percent of GDP in 2013
- Public external debt accounts for about 20 percent of the gross liability position (2013)
- Current account:
  - 2002 surplus: 2.3 percent of GDP; 2014 deficit: 1 percent of GDP
  - 2015 projection: -0.4 percent of GDP (improvement from 2014)
  - Energy trade deficit in 2014: 3 percent of GDP; estimated savings from lower energy prices in 2015: 0.9 percent of GDP
  - Staff assesses 2014 current account to be 1 to 3 percent of GDP below its cyclically-adjusted norm
  - Medium-term projection: current account deficit stabilizes at about 0.6 percent of GDP
- Real exchange rate and competitiveness:
  - Trend: 11.3 percent cumulative appreciation of the ULC-based REER over the last 10 years (loss of competitiveness)
  - EBA Level REER model gap: +10 percent
  - EBA Index REER model gap: about -1 percent
  - Staff assessment: real exchange rate above fundamentals by 5-10 percent
  - Recent euro/dollar realignment implies a 5 percent depreciation in the CPI-based REER relative to the 2014 average (and ½ percent below the 2013 average)
- Policy recommendations to improve external position and competitiveness:
  - Wage moderation (especially of the minimum wage)
  - Continued reform of the labor market
  - Productivity-enhancing reforms (increasing competition in product markets and further regulatory simplification)
  - Gradual elimination of the fiscal deficit over the medium term

*Source: IMF staff (France: Public DSA and Risk Assessment material, as of May 26, 2015).*

### Appendix V. External Sector Report

### Appendix V. External Sector Report — FRANCE

### Fund Relations (As of May 31, 2015)
- Membership Status: Joined December 27, 1945; Article VIII.  
- General Resources Account:
  - Quota: 10,738.50 SDR Million (100.00 percent of Quota)
  - Fund Holding of Currency (Exchange Rate): 9,287.37 SDR Million (86.49 percent)
  - Reserve Tranche Position: 1,451.22 SDR Million (13.51 percent)
  - Lending to the Fund: New Arrangements to Borrow 1,890.09 SDR Million
- SDR Department:
  - Net Cumulative Allocation: 10,134.20 SDR Million (100.00 percent of Allocation)
  - Holdings: 9,329.16 SDR Million (92.06 percent)
  - Outstanding Purchases and Loans: None
- Latest Financial Arrangements (historical):
  - Stand-By Sep 19, 1969–Sep 18, 1970: Amount Approved 985.00 SDR Million; Amount Drawn 985.00 SDR Million
  - Stand-By Jan 31, 1958–Jan 30, 1959: Amount Approved 131.25 SDR Million; Amount Drawn 131.25 SDR Million
  - Stand-By Oct 17, 1956–Oct 16, 1957: Amount Approved 262.50 SDR Million; Amount Drawn 262.5 SDR Million
- Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2015: 0.20; 2016: 0.58; 2017: 0.58; 2018: 0.58; 2019: 0.58
  - Total: 2015: 0.20; 2016: 0.58; 2017: 0.58; 2018: 0.58; 2019: 0.58
- Implementation of HIPC Initiative: Not applicable
- Implementation of MDRI: Not applicable
- Implementation of 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. These restrictions involve certain individuals and entities and target specified countries (list provided in source).
  - 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).
- Article IV Consultation:
  - Last Article IV consultation concluded on July 1, 2014.
  - France is on the standard 12-month consultation cycle.

### Summary of ROSC, FSAP, and Related Assessments
- Fiscal Transparency (ROSC Module I):
  - Found that France has achieved a high level of fiscal transparency and introduced improvements in coverage and presentation of fiscal information.
  - Notable progress: final accounts publication includes more complete information on government assets and liabilities and disclosure of contingent liabilities; accounting standards changed to reflect accruals principles in a number of areas.
  - Suggested further steps: identify and report quasi-fiscal activities in the budget presentation; provide a more consolidated picture of fiscal activity outside the appropriation process; improve reconciliation of stated policies with outcomes at the general government level.
  - Legal/Institutional reforms: Loi organique aux lois de finance (LOLF) fully effective January 1, 2006; first multi-annual fiscal framework law adopted January 2009 covering 2009–12; State Audit Office assigned certification of public accounts; accruals basis accounting implementation confirmed; strengthened parliamentary oversight.
- Transparency in Monetary and Financial Policies (ROSC Module II):
  - 2000 ROSC: transparency accorded high priority; major agencies disclose objectives, legal and institutional frameworks; monetary policy not assessed (Banque de France is member of the European System of Central Banks).
  - Issues noted: framework for supervision and regulation applicable to mutual insurance firms less well defined; subsequent reforms merged supervisors into CCAMIP (August 2003) and unified banking and insurance supervision under Autorité de contrôle prudentiel (ACP) in 2010, later renamed Autorité de contrôle prudentiel et de résolution (ACPR).
- Data Module (ROSC):
  - France found in observance of the Fund’s Special Data Dissemination Standard (SDDS).
  - Strengths: clear mandate of INSEE and Banque de France for six macroeconomic datasets; adherence to international/European methodologies; high degree of accuracy, relevance, and timeliness.
  - Recommendations: clarify responsibility of INSEE as producer of government finance statistics; improve data sharing between Banque de France and rest of statistical system; review classification and valuation methods in balance-of-payments statistics; improve consistency between current account and goods and services account in national accounts; align timing of revisions in quarterly and annual national accounts; facilitate identification of data production units of INSEE.
  - Ongoing implementation: promote broader understanding of statistical data revisions; greater use of firm-level data to improve measurement of changes in stocks; intensify work on portfolio investment income to start recording transactions on an accrual basis.
- Financial System Stability Assessment (FSAP) and Updates:
  - 2004 FSAP: concluded France’s financial sector is strong and well supervised; no systemic-risk-causing weaknesses identified; banking sector well capitalized; insurance sector vulnerabilities contained; securities markets large and sophisticated.
  - FSAP Update (January and June 2012): confirmed resilience to severe market pressures and identified challenges—risks from banks’ size, complexity, and dependence on wholesale funding; larger banks restructuring balance sheets (more stable funding, reduced cross-border presence, building capital) but remain vulnerable to sustained funding disruptions and reduced profitability.
  - Regulatory/supervisory regime rated very high; areas for improvement: greater de jure independence of supervisory authorities; disclosure of capital treatment and financial interactions within complex groups; move toward economic risk-focused insurance regulation; enhanced supervision of investment service providers and financial advisors.
  - Disclosure shortcomings: publication of regular and comparable institution-by-institution data and detailed official analyses of financial sector developments recommended to strengthen market discipline.

### Statistical Issues and Data Practices
- General:
  - Economic database described as comprehensive and of high quality; data provision to the Fund adequate for surveillance.
  - France subscribes to the Fund’s SDDS and is working on implementing transmission of data in electronic format using the Statistical Data and Metadata A data standard.
  - A ROSC mission assessed the statistical system in March 2003; report published October 2003 with a factual update November 2004.
- National Accounts:
  - France adopted ESA 2010 in May 2014, transitioning from ESA95 and revising national accounts data.
  - New data sources incorporated; as a result, the GDP level in 2010 has been revised 3.2 percent upward.
  - Historical data series available from 1949.
- Government Finance Statistics (GFS):
  - Starting from September 2014, GFS data based on ESA 2010 methodology, likely including revisions of general government deficit and debt levels from 1995 onwards.
  - Revised data series published in October 2014.
  - Source data collected by the Ministry of Economy and Finance; INSEE principally responsible for compilation and dissemination of fiscal data in ESA-consistent framework.
- Monetary and Financial Statistics:
  - Monetary data for International Financial Statistics based on ECB framework.
  - Banking institutions and monetary aggregates statistics prepared monthly and timely; disseminated in quarterly IFS Supplement on monetary and financial statistics.
- External Sector:
  - Starting June 2014, monthly balance-of-payments statistics published using BPM6 guidelines.
  - Back casting of previous periods started with publication of Annual report of the balance of payments and the international investment position end-June 2014.
  - Expectation of greater international consistency once all EU members adopt BPM6.

### Table of Common Indicators Required for Surveillance (As of June 2015)
- Exchange Rates: Date of Latest Observation 05/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 05/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- International Investment Position: Date of Latest Observation 2014; Date Received Q1:2015; Frequency of Data Annual; Frequency of Reporting Annual; Frequency of Publication Annual
- Reserve/Base Money: Date of Latest Observation 04/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- Broad Money: Date of Latest Observation 04/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- Central Bank Balance Sheet: Date of Latest Observation 04/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- Consolidated Balance Sheet of the Banking System: Date of Latest Observation 04/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- Interest Rates: Date of Latest Observation 04/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- Consumer Price Index: Date of Latest Observation 04/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- Revenue, Expenditure, Balance and Composition of Financing—General Government: Date of Latest Observation 2015; Date Received 05/15; Frequency of Data Annual; Frequency of Reporting Annual; Frequency of Publication Annual
- Revenue, Expenditure, Balance and Composition of Financing—Central Government: Date of Latest Observation 03/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- Stock of Central Government Debt: Date of Latest Observation 04/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- External Current Account Balance: Date of Latest Observation 03/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- Exports and Imports of Goods and Services: Date of Latest Observation 03/15; Date Received 05/15; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly
- GDP/GNP: Date of Latest Observation Q1:2015; Date Received 05/15; Frequency of Data Quarterly; Frequency of Reporting Quarterly; Frequency of Publication Quarterly
- Gross External Debt: Date of Latest Observation Q4:2014; Date Received 05/15; Frequency of Data Quarterly; Frequency of Reporting Quarterly; Frequency of Publication Quarterly
- Footnotes included in table (as in source): definitions and inclusions for reserve assets, interest rates, financing composition, general government composition, and central government accounting basis.

### Statement by the Staff Representative on France (Executive Board Meeting July 8, 2015)
- New information since staff report issuance does not alter the thrust of staff appraisal.
- Noted substantial uncertainty in the euro area following recent events in Greece (expiration of European program and referendum); broader market reaction generally contained:
  - Euro exchange rate remained stable against the U.S. dollar.
  - Sovereign spreads widened moderately for a number of countries.
  - Equity prices declined throughout the euro area; bank equities showed noticeable contagion effects.
- For France:
  - Sovereign yields remained broadly stable since issuance of the staff report.
  - Stock prices declined alongside other euro area markets, with contagion effects particularly noticeable for bank equities.
- Risks:
  - Heightened uncertainty may continue to weigh on markets and sentiment.
  - Direct trade and financial linkages between France and Greece are limited, but adverse developments in Greece could weigh on regional confidence and indirectly affect France’s prospects.
  - Staff continues to see risks to France’s short-term growth outlook as broadly balanced, with heightened uncertainty around Greece weighing on the downside.
- Policy implications:
  - Emphasized importance of timely and effective policy actions to manage potential spillovers, especially at the euro area level.
  - Called for a concerted effort to accelerate deeper integration within the euro area and strengthen firewalls.
  - Upcoming euro area Article IV report will elaborate on these policy challenges.

### Statement by Mr. de Villeroché, Executive Director for France (July 8, 2015)
- Thanked staff for discussions and the staff report.
- Stated: "French economic recovery is well underway."
- Authorities have pursued a comprehensive reform agenda since 2012 to reduce the fiscal deficit, address excessive unemployment, and improve competitiveness; this strategy is starting to bear fruits.
- Suggested the report could have put stronger emphasis on the impact of recent or on-going reforms.
- Long-term supportive factors for France’s growth prospects cited: strong birth rate; rising innovation efforts by French corporates; highly qualified and productive workforce; excellent infrastructure; stable investment rate during the crisis.

*Source: Appendix V. External Sector Report — FRANCE (staff report materials and annexes, June 23, 2015; data and statements as provided in the source document).*

### 1. Economic outlook

### 1. Economic outlook

### Short-term performance and near-term projections
- GDP rose by a robust 0.6 percent (quarter-on-quarter) in Q1 2015.
- Staff growth projections: 1.2 percent in 2015 and 1.5 percent in 2016.
- Government’s voluntarily cautious scenario: 1.0 percent in 2015 and 1.5 percent in 2016.
- Other forecasts:
  - Consensus Forecasts: 1.2 percent in 2015 and 1.6 percent in 2016.
  - OECD and the European Commission: 1.1 percent in 2015 and 1.7 percent in 2016.
- Drivers supporting aggregate demand in the short run:
  - Structural reforms beginning to pay off.
  - Decrease in oil prices.
  - Moderate depreciation of the effective exchange rate.

### Medium-term outlook
- Growth should gradually improve as internal drivers replace the role of external factors.
- Investment is expected to strengthen in line with more robust activity levels.
- Stability Programme forecasts: growth reaching 1.5 percent in 2017 and 1.8 percent in 2018, broadly in line with staff projections.

### Key takeaway
- Ongoing improvement in the economic situation with projections that are slightly above government scenarios and within the lower range of available forecasts.

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### 2. Public finances

### 2014 execution
- French public deficit: 4.0 percent of GDP in 2014.
- Objective in the multiyear budget law for 2014-2019 (passed December 2014): 4.4 percent of GDP for 2014.
- Nominal public spending excluding tax credits increased by only 0.9 percent in 2014.
- 2014 Stability Programme target for nominal public spending excluding tax credits: 1.4 percent.
- Observation: 0.9 percent increase in 2014 is the lowest in decades.

### Fiscal medium-term consolidation path
- France targets a 0.5 point of GDP structural adjustment of public balance in 2015, 2016 and 2017.
- Objective: bring headline deficit below 3 percent in 2017 with a safety margin under a prudent growth scenario.
- Consolidation approach: fully based on expenditure containment.
- Government commitment: implement a EUR 50 billion savings plan over 2015-2017 (enacted in the multiyear budget law of December 2014).
- Additional measures to offset low inflation:
  - EUR 4 billion in expenditure-based savings measures in 2015.
  - EUR 5 billion in expenditure-based savings measures in 2016.
- Staff view: the alternative fiscal adjustment path presented by staff does not make a compelling argument for faster consolidation.

### Long-term sustainability
- Factors improving long-term sustainability:
  - Strong demographics.
  - Improvement in older workers participation rate.
  - Phasing-in of recent pension reforms.
- Latest pension reform adopted in 2014: will raise the number of years of service required to obtain a full pension, up to 43 years in 2035.
- Negotiations underway (to be signed in 2015) on financing the supplementary retirement scheme.
- European Ageing Report 2015 projection: public pension spending is expected to decrease by 2.8 percent of GDP between 2013 and 2060.
- Conclusion: financial equilibrium of France’s pension system is no longer a major issue for the long-term sustainability of public finances.

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### 3. Structural reforms

### Overall commitment
- France is fully committed to reforming its economy to reduce unemployment, improve competitiveness, and enhance potential growth.

### Improving cost competitiveness
- Labor cost and tax reductions (Crédit d’Impôt Compétitivité Emploi and the Responsibility and Solidarity Pact) represent a positive supply shock of almost EUR 40 billion (close to 2 percent of GDP).
- Effects already observed:
  - Average unit labor cost in the manufacturing sector is inferior to German unit labor costs.
  - Profit margins have been recovering since the beginning of 2015 and reached their highest level since early 2011.
- Empirical studies, including previous staff working papers, find a very positive impact of labor tax cuts on employment and growth.
- Note on external rebalancing:
  - Pre-crisis decade: real wages in line with productivity in France.
  - Post-crisis: real wages slowed down less markedly than productivity, due in particular to negative inflation surprises.
  - Unit labor costs in France have been less dynamic than in Germany since mid 2012, a positive development for domestic perspective and demand rebalancing within the euro area.

### Cutting red tape and improving public administration efficiency
- “Simplification shock” measures implemented enabled EUR 3.3 billion savings since 2013.
- A permanent council of companies’ executives and public administration representatives will propose and assess new measures every six months.
- Institutional reforms:
  - Number of regions will be halved by merging administrative structures.
  - Repartition of competencies among different levels of local government will be further simplified and clarified.

### Improving the functioning of product markets
- The Macron Law on growth, economic activity, and equal economic opportunities aims to enhance competition across the economy.
- Provisions (law to be definitively adopted by summer 2015):
  - Improve functioning of transportation services.
  - Improve retail distribution (more power to the French competition authority).
  - Open up regulated professions and link their tariffs to costs.
  - Release conditions governing Sunday and evening working.
  - Reform commercial courts for comprehensive, more efficient processing of the most important cases.

### Improving the functioning of the labor market
- The Rebsamen Law on social dialogue modernization will:
  - Increase effectiveness of social dialogue at firm level by rationalizing rules and adapting them to company size.
  - Give companies greater leeway with regard to collective agreements.
  - Simplify social dialogue and reduce the effect of thresholds related to the number of employees.
- Government announcement after staff visit (early June): Small Businesses Act with measures to:
  - Boost employment and activity through improved flexibility and security (job retention agreements).
  - Enhance job creation with strong financial incentives for first job creation.
  - Allow renewal of fixed-term contracts two times instead of one.
  - Cut legal uncertainty on individual dismissals costs (prud’hommes).

### Overall impact of structural reforms
- Government estimate: reforms implemented since 2012 and to be adopted by the end of the year will have a positive impact of about 4 points of GDP by 2020, with significant impact starting in 2015 and 2016.
- OECD estimate: impact of several reforms decided between 2012 and 2014 to have a positive impact of 3 points of GDP at a 10-year horizon.

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### 4. Financial sector

### Risks and resilience
- Staff’s report highlights potential build-up of risks due to the low interest rate environment; these risks are not specific to the French financial sector and should be closely monitored.
- Insurers:
  - French average guaranteed rates are relatively low, in most cases based on an annual revisable commitment.
  - Total duration gap is not of significant size compared to peers.
- Banks:
  - French banks have made strong progress towards meeting Basel III requirements.
  - In-depth assessment of the AQR did not lead to significant revision, suggesting current RWA calculation is well grounded and prudent.
  - French banks have reduced dependence on short term wholesale funding; loan–to-deposit ratio has decreased, in particular due to an increase in deposits since 2008 following an adjustment of their funding model.
- Regulated savings deposits and accounts:
  - Play a key role in encouraging a stable pool of savings.
  - Authorities acknowledge the importance of having regulated interest rates consistent with efficient transmission of ECB monetary policy.
  - Guaranteed interest rate on the housing savings plan (Plan Epargne Logement) was recently cut.

*Source: _cr15178 - 1. Economic outlook*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15178.pdf_