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### Context — Recovery and Reforms
- Since 2013, government advanced supply-side reforms, including services liberalization and income, labor, and corporate tax cuts.
- Fiscal consolidation strategy shifted from tax increases to spending restraint.
- El Khomri reform of the labor code moved through the lower house using a constitutional procedure, triggering a confidence vote, union-led strikes, and fuel blockades; political climate and social dialogue increasingly tense approaching May 2017 Presidential elections.
- Real GDP growth: 1.3 percent in 2015 (fastest pace in four years).
- Recovery drivers: private consumption and corporate investment pickup; net external demand weak; unemployment ~10 percent.
- Core inflation: 0.6 percent in May 2016 (below euro area average).
- Bank credit growth ~4 percent in 2015 for households and companies; larger firms increased bond market financing.

### Key Fiscal and External Outcomes (findings)
- Fiscal results and debt:
  - Overall fiscal deficit: 3.6 percent of GDP in 2015 (authorities’ projection: 3.8 percent of GDP).
  - Real primary spending continued to grow faster than GDP; policy measures explained less than a third of the deficit improvement.
  - 10-year bond yield averaged 0.8 percent in 2015.
  - Public debt: 96.1 percent of GDP at end-2015.
- External position and competitiveness:
  - Current account deficit narrowed to less than 1/4 percent of GDP in 2015.
  - Staff assessment: current account was 1/2 to 2 1/2 percent of GDP lower than cyclically-adjusted norm; real exchange rate 3 to 9 percent overvalued.
  - Competitiveness impaired by solid real wage growth despite declining productivity growth, regulatory barriers, and a high tax burden.
  - A weaker euro, low oil prices, and cuts in the labor tax wedge helped strengthen external position.

### Outlook — Modest Growth with Risks
- Staff projection: real GDP to grow by 1.5 percent in 2016.
- Headline inflation projected marginally above zero in 2016; expected to rise to around 1 percent in 2017.
- Potential output growth projected to rise from around 1 percent in 2015 to 1½ percent by 2021.
- Level of output projected to be around 8 percent below the hypothetical pre-crisis trend line by 2021.

- Downside risk scenarios (staff estimates, see appendices for details):
  - Global financial stress and severe downturn:
    - Could reduce French output by 3 percent cumulatively in real terms relative to baseline and raise unemployment by about 1½ percentage points by 2021.
  - Protracted stagnation in the euro area:
    - Could push France’s real output down by 1¾ percent cumulatively by 2021 relative to baseline, and raise unemployment by over ½ percentage points.
  - Confidence losses due to domestic/regional politics (extended strikes, social unrest, strengthening populist forces) could hurt investor and consumer confidence and hinder reforms.
  - British referendum risk: France’s direct banking system exposure to the UK estimated at about 10 percent of GDP.
- Potential spillovers: protracted stagnation or political tensions in France could adversely affect the euro area via aggregate demand and confidence effects; failure to deliver on fiscal consolidation and reforms could weaken credibility of EU economic governance.

### Policies — Tackling Unemployment and Debt
- Two central challenges:
  - (i) support more rapid creation of new private sector jobs;
  - (ii) ensure public finance sustainability via more efficient government spending growth.
- Progress to date:
  - Reduction in taxes under the Pacte de Responsabilité et de Solidarité (PRS) and the Crédit d'Impôt pour la Compétitivité et l'Emploi (CICE).
  - Competition-enhancing structural reforms under the Macron law.
  - El Khomri law (in parliament) to increase scope for company-level labor agreements and reduce judicial uncertainty around dismissals.
  - Efforts to contain spending growth at all levels of government while easing taxes.
- Further required actions:
  - Deep reforms to make government spending much more efficient to rebuild fiscal buffers, safeguard services and social protections, and allow alleviating the high tax burden.
  - Additional growth-friendly measures: reform unemployment insurance, strengthen training, support creation of new enterprises, further deregulate regulated professions.
  - Protect health of the financial sector in a modest growth and low margin environment.

### A. Fiscal Policy on Knife’s Edge — Trends and Projections
- Structural fiscal adjustment:
  - Fell from an annual average of 1 percent of GDP in 2011–13 to 0.3 percent in 2014–15.
  - Projected to be around zero in 2016−18.
- In 2016, real structural primary spending expected to continue to increase by more than 1¼ percent.
- France projected to just barely meet the EDP deficit target of 3 percent of GDP in 2017 without further efforts.
- Structural adjustment over 2015–18 projected to average 0.1 percent of GDP (well below the EC’s recommendation).
- Without further efforts, France will not reach the structural balance objective within the five-year projection horizon.
- Debt projected to peak close to 98 percent of GDP in 2017 and decline only slowly thereafter.

### Fiscal Risks and Downside Scenarios
- Two major risks: implementation shortfalls and growth shocks.
- Implementation risk example:
  - If real structural primary spending continued growing at its current pace, structural deficit would rise to 3.1 percent of GDP by 2021 versus baseline projection of 1.2 percent of GDP.
- Growth-shock scenarios simulated:
  - Protracted stagnation for the euro area.
  - Severe global recession with financial stress.
- Staff recommendation in both scenarios: let automatic stabilizers work, with consequences:
  - 2017 Excessive Deficit Procedure (EDP) objective would be missed.
  - Debt would climb to well above 100 percent of GDP.
- Coordinated euro-area fiscal stimulus could prevent sharper near-term deterioration but would delay achieving medium-term structural objectives and could raise long-term debt levels as stimulus is withdrawn.

### Baseline and Downside Projections (selected figures from staff projections)
- Staff Baseline (2015–2021) — Fiscal Balance; Structural fiscal balance; Expenditure; Gross debt; Real GDP growth:
  - Fiscal Balance: -3.6, -3.3, -3.0, -2.6, -2.2, -1.6, -1.1
  - Structural fiscal balance: -2.0, -2.0, -2.0, -2.0, -1.8, -1.5, -1.2
  - Expenditure: 57.0, 56.5, 56.2, 55.6, 55.2, 54.6, 54.1
  - Gross debt: 96.1, 97.1, 97.9, 97.8, 97.3, 96.0, 94.0
  - Real GDP growth: 1.3, 1.5, 1.5, 1.7, 1.7, 1.8, 1.8
- Stagnation scenario (2015–2021):
  - Fiscal Balance: -3.6, -3.3, -3.2, -3.1, -3.0, -2.8, -2.7
  - Structural fiscal balance: -2.0, -2.0, -2.2, -2.3, -2.4, -2.3, -2.3
  - Expenditure: 57.0, 56.5, 56.3, 56.1, 56.0, 55.8, 55.7
  - Gross debt: 96.1, 97.1, 98.4, 99.4, 100.5, 101.3, 101.9
  - Real GDP growth: 1.3, 1.5, 1.3, 1.4, 1.3, 1.4, 1.4
- Severe downturn scenario (2015–2021):
  - Fiscal Balance: -3.6, -3.3, -3.4, -3.8, -3.9, -3.9, -3.9
  - Structural fiscal balance: -2.0, -2.0, -2.2, -2.4, -2.5, -2.5, -2.7
  - Expenditure: 57.0, 56.5, 56.5, 56.8, 56.9, 56.9, 56.9
  - Gross debt: 96.1, 97.1, 99.2, 102.4, 105.6, 108.8, 111.6
  - Real GDP growth: 1.3, 1.5, 1.0, 0.8, 1.1, 1.2, 1.4

### Fiscal Strategy and Recommended Consolidation Path
- Use the current upturn to rebuild fiscal buffers by sustaining efforts to slow spending growth.
- Anchor consolidation by limiting general government spending growth to the rate of inflation (as envisaged in the government’s latest Stability Program from 2017 onwards).
  - Implies an annual structural adjustment of about ½ percent of GDP.
  - Would help reach the medium-term target of structural balance in four years.
  - Assuming a fiscal multiplier of 1:
    - Headline deficit would fall to about ½ percent by 2021.
    - Public spending and debt would be respectively 1.2 and 1.8 percent of GDP below the baseline.
    - Adjustment would reduce on average growth by 0.3 percentage point per year through 2020, allowing for further tax reductions starting the same year.
- Near-term measures to limit impact on growth by addressing inefficiencies and targeting:
  - (i) slowing recruitment and limiting the wage drift;
  - (ii) tightening budget constraints for local governments (e.g., tightening of the caps on local taxes and borrowing);
  - (iii) enhancing means testing of social benefits;
  - (iv) further curtailing the growth in health spending;
  - (v) saving any additional windfall from lower interest rates or excess revenues.

### Deep Spending-Efficiency Reforms — Key Proposals and Potential Savings
- Rationale: efficiency-oriented reforms underpin adjustment while limiting growth impact and protecting the social model.
- Specific reform areas and figures:
  - Wage bill: wage bill is 13 percent of GDP.
  - Social benefits: if redistributive efficiency of social benefits were at the EU average, France could achieve the same reduction in income inequality at a fiscal cost lower by 3.5 percentage points of GDP.
  - Pensions: further increase effective retirement age and rationalize special regimes.
  - Public health care: public health care amounts to 8 percent of GDP; proposed measures include further enhancing use of generic medicines, rationalizing hospital services and costs, and strengthening cost effectiveness evaluations.

### Labor Market — Structural Unemployment and Recommended Reforms
- Unemployment:
  - Number unemployed (April 2016): 3.5 million.
  - Unemployed for more than one year: almost 2.5 million.
  - Unemployment rate hovered around 10 percent for four years.
  - Unemployment rate projected to converge with NAIRU to around 8½ percent over the medium term.
- Structural rigidities: centralized labor agreements for over 700 branches; long judicial dismissal procedures; easy access to unemployment and welfare benefits; relatively high minimum wage; sizeable labor tax wedge; steady growth in real wages and unit labor costs since 2000.
- Staff recommendations (selected, verbatim proposals):
  - Reform unemployment insurance rules:
    - (i) lengthening the minimum contribution period to qualify for unemployment insurance from the current four months;
    - (ii) unifying the maximum unemployment benefit period to two years;
    - (iii) changing the formula for calculating unemployment benefits to balance treatment of part-time work and alternating short-term contracts;
    - (iv) introducing “degressivity” of unemployment benefits.
  - Enhance job search support and tighten rules for accepting suitable job offers and strengthen enforcement.
  - Change minimum wage formula to limit indexation to inflation while unemployment is high.
  - Further improve education and professional training to better match skills to labor market needs.
- Product market reforms to boost job creation:
  - Ease regulations for start-ups and the self-employed, enhance data transparency, streamline qualification requirements for regulated professions (as envisaged in the “Sapin II” law).
  - Reduce barriers to competition for regulated professions other than legal professions; further liberalize retail trade (including reviewing zoning restrictions).
  - Enhance efficiency of the “Business Simplification” process with additional monitoring from a new unit in the Ministry of Economy.

### Financial Sector — Banks’ Resilience, Risks, and Recommendations
- Balance-sheet and market indicators:
  - Four G-SIBs strengthened capital and liquidity buffers; raised capital adequacy to fully loaded Basel III ratio.
  - Total exposure to emerging markets: 8 percent of total foreign claims.
  - U.S. dollar money market funding: $160 billion in 2015.
  - Non-performing loans (NPLs): around 4 percent.
  - Corporate debt: about 125 percent of GDP in gross terms (reduced to 69 percent of GDP after adjusting for inter-company lending and firms with group treasury operations in France, as of 2015).
  - Household debt: 85 percent of gross disposable income and 55 percent of GDP.
- Main challenges in a low-growth, low-rate environment:
  - Fee and commission income, as share of total assets, below non-EU peers.
  - Regulated savings rates above market rates.
  - High share of fixed rate mortgages refinanced at very low rates.
  - Profitability improving but fragile; margins under pressure from flattening yield curve.
- Supervisory priorities and regulatory evolution:
  - Monitor search-for-yield behavior and potential loosening of lending standards.
  - Further study significant increase in corporate debt.
  - Monitor commercial real estate prices (potential overvaluation in greater Paris).
  - Continue adapting regulated savings rates to market conditions.
  - TLAC and MREL implications: additional capitalization and resolution planning; interim resolution plans under preparation after BRRD passage in August 2015.
- Staff policy recommendations (selected):
  - Continue cost reduction and diversification efforts by banks while monitoring for risk-taking.
  - Supervisors vigilant on commercial real estate and corporate debt increase.
  - Continue efforts to complete the Banking Union (including EDIS) and enhance bank data transparency.
  - Carefully calibrate MREL at the EU level to ensure resolvability of failing banks.

### Box 2 — How to Increase Public Expenditure Efficiency (summary)
- Benchmarking methodology (Hallaert and Queyranne): three-step comparison to Germany, Italy, and the United Kingdom; assess outcomes; analyze input mix.
- Aggregate findings:
  - Most savings achieved by rationalizing social benefits and the wage bill (about 90 percent of the difference in the expenditure ratio between France and the EU average and comparators).
  - If redistributive power of social benefits was at EU average, same reduction in income inequality could be achieved at a fiscal cost lower by 3.5 percentage points of GDP.
- Sectoral reform options (selected figures):
  - Wage bill: 13 percent of GDP; nearly one quarter of public spending.
  - Health: over 8 percent of GDP; outcomes similar to comparators with lower spending.
  - Public investment: at European average; should focus more on maintenance than expansion given infrastructure quality.
- Implication: shift from containment to deeper efficiency reforms increases chance of sustainable consolidation while protecting the French “social model.”

### Appendix I — Growth Shock Scenarios (overview and outcomes)
- Stagnation scenario (demand shock triggering prolonged stagnation):
  - Raises real corporate interest rate by about 0.5 percent cumulatively by 2021.
  - Reduces real investment by around 2.3 percent on average, annually, during 2017–21.
  - Assumed decline in TFP growth by 0.1 percentage point each year in 2017–21.
  - France’s growth: around 1.4 percent in 2017 and gradually to 1.5 percent by end of projection period.
  - Real GDP reduced cumulatively by 1.7 percent by 2021 relative to baseline.
  - Consumption cumulative: -1.8 percent relative to baseline.
  - Unemployment: 0.6 percentage points higher and employment 0.6 percent lower than baseline by 2021.
  - Inflation increases very slowly to 1 percent by end of forecast horizon.
- Severe downturn scenario:
  - Combines near-term global slowdown with investment demand shock; outside euro area real growth lower by ½ percentage point in 2017 relative to April 2016 WEO.
  - Reduces real investment in France by 2.2 percent on average annually during 2017–18 and by 6½ percent on average annually thereafter.
  - Real GDP 3 percent lower in cumulative terms relative to baseline by end of forecast period.
  - Consumption 2.9 percent lower in cumulative terms; employment 7½ percent lower in cumulative terms; unemployment 1½ percentage points higher.
  - Inflation falls to zero; near-term growth falls slightly below one percent before recovering.
- Link to DSA stress tests:
  - Stagnation scenario: real GDP growth reduced on average by 0.3 percentage point each year over 2016–21; debt-to-GDP reaches 101.9 percent in 2021.
  - Severe downturn scenario: real GDP growth reduced on average by 0.6 percentage point each year over 2016–21; debt-to-GDP reaches 111.6 percent in 2021.

### Public Debt — Baseline DSA: Key projections and indicators (selected figures, percentages as presented)
- Nominal gross public debt (percent of GDP): 2014: 76.9; 2015: 95.3; 2016: 96.1; 2017: 97.1; 2018: 97.9; 2019: 97.8; 2020: 97.3; 2021: 96.0; projection for 2021: 94.0.
- Public gross financing needs (percent of GDP): 2014: 8.4; 2015: 8.1; 2016: 8.9; 2017: 8.9; 2018: 9.2; 2019: 8.7; 2020: 7.9; 2021: 6.8; 2021 final: 4.4.
- Real GDP growth (percent): 2014: 0.9; 2015: 0.6; 2016: 1.3; 2017: 1.5; 2018: 1.5; 2019: 1.7; 2020: 1.7; 2021: 1.8; longer-run: 1.8.
- Inflation (GDP deflator, percent): 2014: 1.5; 2015: 0.5; 2016: 0.6; 2017: 0.7; 2018: 0.7; 2019: 1.0; 2020: 1.1; 2021: 1.3; 2021: 1.5.
- Nominal GDP growth (percent): 2014: 2.4; 2015: 1.2; 2016: 1.9; 2017: 2.3; 2018: 2.2; 2019: 2.7; 2020: 2.9; 2021: 3.2; 2021: 3.4.
- Effective interest rate (percent): 2014: 3.6; 2015: 2.4; 2016: 2.1; 2017: 2.0; 2018: 1.8; 2019: 1.8; 2020: 1.9; 2021: 2.0; 2021: 2.1.
- Primary deficit (percent of GDP): 2014: 2.0; 2015: 1.9; 2016: 1.7; 2017: 1.5; 2018: 1.4; 2019: 1.0; 2020: 0.5; 2021: -0.1; 2021: -0.7; cumulative: 3.6.
- Primary (noninterest) revenue and grants (percent of GDP): 2014: 50.3; 2015: 53.3; 2016: 53.3; 2017: 53.1; 2018: 53.0; 2019: 52.9; 2020: 52.9; 2021: 52.9; 2021: 52.9; cumulative: 31.7.
- Primary (noninterest) expenditure (percent of GDP): 2014: 52.3; 2015: 55.2; 2016: 55.0; 2017: 54.6; 2018: 54.5; 2019: 53.9; 2020: 53.4; 2021: 52.8; 2021: 52.2; cumulative: 21.3.
- Automatic debt dynamics (percent of GDP): 2014: 0.9; 2015: 1.1; 2016: 0.2; 2017: -0.2; 2018: -0.4; 2019: -0.8; 2020: -0.9; 2021: -1.1; 2021: -1.2; cumulative: -4.7.

### Risk Assessment Matrix — Key risks and policy responses (selected)
- Tighter or more volatile global financial conditions:
  - Relative likelihood: Medium; Impact: Medium.
  - Policy response: Ensure banks reduce reliance on wholesale funding; fiscal and monetary responses depend on shock nature.
- British voters choose to leave the EU:
  - Relative likelihood: High; Impact: Medium.
  - Policy response: Work with European partners to minimize disruption.
- Structurally weak growth in key economies:
  - Relative likelihood: High/ Medium; Impact: Medium.
  - Policy response: Continue and deepen structural reforms to lift output growth and reduce structural unemployment.
- Weak implementation of fiscal and structural policy commitments:
  - Relative likelihood: Medium; Impact: Medium.
  - Policy response: Maintain commitment to reforms.
- Financial imbalances from protracted low interest rates:
  - Relative likelihood: Medium; Impact: Medium (over medium term).
  - Policy response: Monitor lending standards and risks; monitor life insurance sector and act as needed.
- Dislocation in labor flows, sharp rise in migrant flows:
  - Relative likelihood: High; Impact: Low/Medium.
  - Policy response: Adopt proactive integration policies including active labor market policies, language and skill training.

### External Sector — Assessment, Vulnerabilities, and Policy Recommendations (selected)
- NIIP: deteriorated to around 17 percent of GDP in 2015Q3 from near balance before the crisis.
- Gross asset position (2015): 295 percent of GDP.
- Public external debt: about 19 percent of gross liability position.
- Current account history and projection:
  - Moved from surplus near 4 percent of GDP in late 1990s to estimated deficit of 0.2 percent in 2015.
  - Cyclically-adjusted deficit estimated at -0.8 percent of GDP in 2015.
  - Current account projected to deteriorate marginally to 0.5 percent of GDP in 2016; medium-term projection close to balance.
  - Staff assesses 2015 cyclically-adjusted current account to be ½ to 2½ percent of GDP below its norm.
- Real exchange rate assessment:
  - ULC-based REER: 9.3 percent cumulative appreciation over last 10 years; ULC-based REER appreciated close to 2 percent as of June 2016 relative to 2015 average.
  - CPI-based REER: depreciated 4 percent in 2015 relative to 2014 average; as of April 2016 had appreciated 1 percent relative to 2015 average.
  - Staff assesses 2015 REER to be 3–9 percent overvalued (EBA Level REER regression model estimates 4.6 percent overvaluation; EBA Index REER model estimates undervaluation of -5.4 percent).
- Policy responses: wage moderation (especially minimum wage), labor market reform, productivity-enhancing reforms (competition and regulatory simplification), gradual fiscal deficit elimination to correct external imbalance.

### Appendix V — Main Recommendations of the 2015 Article IV and Authorities’ Actions (selected)
- Fiscal policy:
  - Fund recommended an ambitious pace of fiscal adjustment and comprehensive expenditure reviews at all government levels.
  - Authorities: fiscal adjustment strategy fully expenditure-based; structural adjustment slowing to near zero in 2016; annual targeted expenditure reviews integrated in budget preparation; indicative targets for local governments’ spending growth specified from 2016.
- Structural reforms:
  - Fund recommended flexibility in firm-level agreements, minimum wage reform, stronger job search incentives, liberalize regulated professions, remove barriers to competition in services.
  - Authorities: El Khomri law in parliament; Macron law adopted summer 2015 with most measures implemented.
- Financial sector:
  - Fund recommended monitoring financial risks and continuing to strengthen capital and liquidity buffers; review guaranteed interest rates for regulated savings.
  - Authorities: monitoring in context of SSM; Livret A rate reduced to 0.75 percent in August 2015.

### Short-term Outlook and Brexit Implications (staff preliminary assessment)
- Market reaction to June 23 UK vote: sharp currency movements and declines in equity valuations; France’s banks’ equity prices declined; CDS spreads rose modestly.
- IMF staff preliminary revision post-Brexit:
  - Real GDP growth 2016: "close to 1½ percent".
  - Real GDP growth 2017: "about 1¼ percent" (staff report projection was "1½ percent").
  - Inflation: average annual inflation "now projected to come in just below 1 percent in 2017".
  - Fiscal impact: expected modest under baseline assumptions; slower growth partly offset by savings from lower interest rates; risks to near-term fiscal targets increased.
  - Policy advice reiterated: major efforts needed to secure durable reduction in unemployment and public debt; requires further measures to boost job creation and private sector growth and deeper reforms to make public spending more efficient at all levels of government.

*Source: IMF Staff report — "1. Key Structural Reforms" and associated appendices (France).*

### 1. Key Structural Reforms ________________________________________________________________________ 25

### 1. Key Structural Reforms

### Context—Recovery and Reforms
- Gradual reform progress against political resistance:
  - Since 2013, the government advanced supply-side reforms, including services liberalization and income, labor, and corporate tax cuts.
  - Fiscal consolidation strategy shifted from tax increases to spending restraint.
  - The El Khomri reform of the labor code faced strong opposition; the government used a constitutional procedure to move a modified version through the lower house, triggering a confidence vote, followed by union-led strikes and fuel blockades.
  - Political climate and social dialogue appeared increasingly tense approaching the May 2017 Presidential elections.
- Recovery underway, but job creation still limited:
  - Real GDP grew 1.3 percent in 2015, the fastest pace in four years.
  - Recovery driven primarily by private consumption and supported by corporate investment pickup.
  - Net external demand remained weak; unemployment rate hovered around 10 percent.
  - Core inflation was 0.6 percent in May 2016, below the euro area average.
- Continued credit growth despite volatility:
  - Bank credit growth around 4 percent in 2015 for both households and companies, well above the euro area.
  - Larger firms increased bond market financing; access to credit does not appear to be a major hurdle for France’s SMEs.

### Key fiscal and external outcomes (findings)
- Fiscal results and debt:
  - Overall fiscal deficit fell to 3.6 percent of GDP in 2015, overperforming authorities’ projection of 3.8 percent of GDP.
  - Real primary spending continued to grow faster than GDP; policy measures explained less than a third of the deficit improvement.
  - 10-year bond yield averaged 0.8 percent in 2015.
  - Public debt reached 96.1 percent of GDP at end-2015.
- External position and competitiveness:
  - Current account deficit narrowed to less than 1/4 percent of GDP in 2015.
  - Staff assessment: current account was 1/2 to 2 1/2 percent of GDP lower than cyclically-adjusted norm; real exchange rate 3 to 9 percent overvalued (Appendix IV).
  - Competitiveness impaired by solid real wage growth despite declining productivity growth, regulatory barriers, and a high tax burden.
  - A weaker euro, low oil prices, and cuts in the labor tax wedge helped strengthen external position somewhat.

### Outlook—Modest Growth with Risks
- Growth projections and drivers:
  - Staff projection: real GDP to grow by 1.5 percent this year.
  - Recovery supported by strong consumer spending, pickup in investment, and easing structural fiscal drag.
  - Headline inflation projected to remain just marginally above zero in 2016; expected to rise to around 1 percent in 2017.
  - Potential output growth projected to rise from around 1 percent in 2015 to 1½ percent by 2021.
  - Level of output projected to be around 8 percent below the hypothetical pre-crisis trend line by 2021.
- Risks and scenarios (downside risks listed; see appendices for details):
  - Global financial stress and severe downturn:
    - Could reduce French output by 3 percent cumulatively in real terms relative to baseline and raise unemployment by about 1½ percentage points by 2021 (Appendix I).
    - Could imply a substantial loss in profitability for globally systemic banks.
  - Protracted stagnation in the euro area:
    - Could push France’s real output down by 1¾ percent cumulatively by 2021 relative to baseline, and raise unemployment by over ½ percentage points.
    - Would erode banks’ profitability and lending capacity.
  - Confidence losses due to domestic or regional politics:
    - Extended strikes, social unrest, or strengthening populist forces ahead of the 2017 Presidential elections could hurt investor and consumer confidence and hinder reforms.
    - British referendum risk: France’s direct banking system exposure to the UK estimated at about 10 percent of GDP.
- Potential spillovers:
  - Protracted stagnation or political tensions in France could adversely affect the euro area via aggregate demand and confidence effects.
  - Failure to deliver on fiscal consolidation and reforms could weaken credibility of EU economic governance.
  - French banks, given size and interconnectedness, could create adverse effects if forced to retrench from retail operations abroad, trade and project finance, and correspondent banking activities.

### Policies—Tackling Unemployment and Debt
- Policy challenges:
  - Two central challenges: (i) support more rapid creation of new private sector jobs and (ii) ensure public finance sustainability via more efficient government spending growth.
- Progress to date:
  - Reduction in taxes under the Pacte de Responsabilité et de Solidarité (PRS) and the Crédit d'Impôt pour la Compétitivité et l'Emploi (CICE).
  - Competition-enhancing structural reforms under the Macron law.
  - El Khomri law (in parliament) to increase scope for company-level labor agreements and reduce judicial uncertainty around dismissals.
  - Efforts to contain spending growth at all levels of government while easing taxes.
- Further required actions:
  - Deep reforms to make government spending much more efficient to rebuild fiscal buffers, safeguard services and social protections, and eventually allow alleviating the high tax burden.
  - Additional growth-friendly measures to improve labor market functioning: reform unemployment insurance, strengthen training, support creation of new enterprises, and further deregulate regulated professions.
  - Protect health of the financial sector in a modest growth and low margin environment.

### A. Fiscal Policy on Knife’s Edge
- Trends and projections:
  - Structural fiscal adjustment fell from an annual average of 1 percent of GDP in 2011–13 to 0.3 percent in 2014–15, and is projected to be around zero in 2016−18.
  - In 2016, real structural primary spending expected to continue to increase by more than 1¼ percent, reflecting inflation shortfalls, decision to end the public sector wage-scale freeze, and increased security-related spending.
  - Despite favorable financing conditions, France projected to just barely meet the EDP deficit target of 3 percent of GDP in 2017 without further efforts.
  - Structural adjustment over 2015–18 projected to average 0.1 percent of GDP, well below the EC’s recommendation.
  - Without further efforts, France will not reach the structural balance objective within the five-year projection horizon.
  - Debt projected to peak at close to 98 percent of GDP in 2017 and decline only slowly thereafter.

*Source: IMF Staff report — "1. Key Structural Reforms" (France).*

### 14.      Fiscal dynamics could easily derail. The fiscal strategy faces two major risks:

### _cr16227 - 14.      Fiscal dynamics could easily derail. The fiscal strategy faces two major risks:

### Fiscal risks and downside scenarios
- Two major risks to the fiscal strategy: implementation shortfalls and growth shocks.
- Implementation risk example: if real structural primary spending continued growing at its current pace, the structural deficit would rise to 3.1 percent of GDP by 2021, versus a baseline projection of 1.2 percent of GDP.
- Growth-shock scenarios simulated by staff (see Appendix I): 
  - A protracted stagnation for the euro area.
  - A severe global recession with financial stress.
- Staff recommendation in both scenarios: let automatic stabilizers work, with consequences:
  - The 2017 Excessive Deficit Procedure (EDP) objective would be missed.
  - Debt would climb to well above 100 percent of GDP (see Appendix II).
- If coordinated euro-area fiscal stimulus is pursued in response to a large shock:
  - It could prevent a sharper near-term deterioration in growth and debt dynamics (depending on fiscal multipliers and intra–euro area spillovers).
  - It would further delay achieving medium-term structural objectives and could raise long-term debt levels as stimulus is eventually withdrawn.

### Baseline and downside projections (selected figures from staff projections)
- Staff Baseline (2015–2021):
  - Fiscal Balance: -3.6, -3.3, -3.0, -2.6, -2.2, -1.6, -1.1
  - Structural fiscal balance: -2.0, -2.0, -2.0, -2.0, -1.8, -1.5, -1.2
  - Expenditure: 57.0, 56.5, 56.2, 55.6, 55.2, 54.6, 54.1
  - Gross debt: 96.1, 97.1, 97.9, 97.8, 97.3, 96.0, 94.0
  - Real GDP growth: 1.3, 1.5, 1.5, 1.7, 1.7, 1.8, 1.8
- Stagnation scenario (2015–2021):
  - Fiscal Balance: -3.6, -3.3, -3.2, -3.1, -3.0, -2.8, -2.7
  - Structural fiscal balance: -2.0, -2.0, -2.2, -2.3, -2.4, -2.3, -2.3
  - Expenditure: 57.0, 56.5, 56.3, 56.1, 56.0, 55.8, 55.7
  - Gross debt: 96.1, 97.1, 98.4, 99.4, 100.5, 101.3, 101.9
  - Real GDP growth: 1.3, 1.5, 1.3, 1.4, 1.3, 1.4, 1.4
- Severe downturn scenario (2015–2021):
  - Fiscal Balance: -3.6, -3.3, -3.4, -3.8, -3.9, -3.9, -3.9
  - Structural fiscal balance: -2.0, -2.0, -2.2, -2.4, -2.5, -2.5, -2.7
  - Expenditure: 57.0, 56.5, 56.5, 56.8, 56.9, 56.9, 56.9
  - Gross debt: 96.1, 97.1, 99.2, 102.4, 105.6, 108.8, 111.6
  - Real GDP growth: 1.3, 1.5, 1.0, 0.8, 1.1, 1.2, 1.4

### Fiscal strategy and recommended consolidation path
- Use the current upturn to rebuild fiscal buffers by sustaining efforts to slow spending growth.
- Anchor consolidation by limiting general government spending growth to the rate of inflation (as envisaged in the government’s latest Stability Program from 2017 onwards).
  - This implies an annual structural adjustment of about ½ percent of GDP.
  - Would help reach the medium-term target of structural balance in four years.
  - Assuming a fiscal multiplier of 1:
    - The headline deficit would fall to about ½ percent by 2021.
    - Public spending and debt would be respectively 1.2 and 1.8 percent of GDP below the baseline.
    - The adjustment would reduce on average growth by 0.3 percentage point per year through 2020, allowing for further tax reductions starting the same year.
- Near-term measures to limit impact on growth by addressing inefficiencies and targeting:
  - (i) slowing recruitment and limiting the wage drift;
  - (ii) further tightening budget constraints for local governments (e.g., tightening of the caps on local taxes and borrowing);
  - (iii) enhancing means testing of social benefits;
  - (iv) further curtailing the growth in health spending; and
  - (v) saving any additional windfall from lower interest rates or excess revenues.

### Deep spending-efficiency reforms (key proposals and potential savings)
- Rationale: Efficiency-oriented reforms underpin adjustment while limiting growth impact and protecting the social model; staff study shows such reforms could yield significant savings.
- Specific reform areas:
  - Streamline the large civil service and limit wage drift at all levels of government; wage bill is 13 percent of GDP.
  - Increase targeting of social spending by expanding means-testing (notably for family and housing allowances); illustration: if redistributive efficiency of social benefits were at the EU average, France could achieve the same reduction in income inequality at a fiscal cost lower by 3.5 percentage points of GDP.
  - Further increase the effective retirement age and rationalize special regimes to make pension liabilities more manageable.
  - Slow growth in public health care costs (public health care already amounts to 8 percent of GDP) by:
    - further enhancing use of generic medicines;
    - rationalizing hospital services and costs; and
    - strengthening cost effectiveness evaluations.

### Authorities’ views on fiscal strategy and reforms
- Authorities committed to expenditure-based fiscal consolidation and keeping general government spending broadly flat in real terms (as in the 2016 Stability Program for 2017–19).
- They acknowledged structural fiscal adjustment is slowing and real spending is continuing to increase, noting the spending ratio partly reflects tax credits.
- Authorities view slowdown in adjustment as necessary to preserve the recovery and expect the public ratio would soon start declining.
- They agreed strong spending control and additional measures are required in 2017 and expressed confidence the headline deficit would come in below 3 percent of GDP.
- They appreciated staff’s study on expenditure efficiency and reiterated objective to gradually reduce France’s spending and tax ratios, stressing tight budget constraints across government levels and continuation of targeted annual spending reviews.
- On euro area fiscal governance, authorities indicated support for simplifying rules to increase transparency and predictability.

### Labor market: structural unemployment and recommended reforms (selected figures and policy items)
- Unemployment has hovered around 10 percent for four years; in April 2016:
  - Number unemployed: 3.5 million.
  - Unemployed for more than one year: almost 2.5 million.
- Unemployment rate projected to converge with NAIRU to around 8½ percent over the medium term.
- Structural rigidities cited: centralized labor agreements for over 700 branches; long judicial dismissal procedures; easy access to unemployment and welfare benefits; relatively high minimum wage; sizeable labor tax wedge; steady growth in real wages and unit labor costs since 2000.
- Reforms already taken: PRS and CICE reduced labor tax wedge for low-wage earners; Rebsamen law; Macron law (labor arbitration reform); new hiring subsidy for lower wage earners in small firms; new training program for the unemployed; El Khomri law to increase company-level labor agreements.
- Staff recommendations to support a job-rich recovery (specific proposals):
  - Reform unemployment insurance rules to strengthen work incentives, including:
    - (i) lengthening the minimum contribution period to qualify for unemployment insurance from the current four months;
    - (ii) unifying the maximum unemployment benefit period to two years;
    - (iii) changing the formula for calculating unemployment benefits to balance treatment of part-time work and alternating short-term contracts;
    - (iv) introducing “degressivity” of unemployment benefits.
  - Enhance job search support for unemployment and welfare recipients while tightening rules for accepting suitable job offers and strengthening enforcement.
  - Change the minimum wage formula to limit indexation to inflation while unemployment is high.
  - Further improve education and professional training to better match skills to labor market needs.
- Additional product market reforms to boost job creation and growth:
  - Ease regulations for start-ups and the self-employed, enhance data transparency, streamline qualification requirements for regulated professions (as envisaged in the “Sapin II” law).
  - Reduce barriers to competition for regulated professions other than legal professions, further liberalize retail trade (including reviewing zoning restrictions).
  - Enhance the efficiency of the “Business Simplification” process with additional monitoring from a new unit in the Ministry of Economy.

*IMF staff report excerpt as provided in the source content.*

### 25.      France’s big banks have buttressed their balance sheets since the global financial crisis,

### France’s big banks have buttressed their balance sheets since the global financial crisis,

### Balance-sheet improvements and recent performance
- The four global systemically important banks (G-SIBs) have strengthened their capital and liquidity buffers in line with tighter European regulations and global standards.
- Banks have reduced leverage and reliance on wholesale funding since the crisis, and have raised capital adequacy to the fully loaded Basel III ratio.
- Total exposure to emerging markets remains moderate at 8 percent of total foreign claims.
- U.S. dollar money market funding was $160 billion in 2015; banks rely on U.S. dollar funding to finance U.S. dollar assets, including deposits at the US Fed.
- Non-performing loans (NPLs) are around 4 percent.
- Profitability is improving but remains fragile; margins are under pressure from a flattening yield curve.
- Staff analysis: wholesale funding, leverage, and profitability have been associated with greater equity price responses to shocks for the group of thirty G-SIBs, though not observed for all French banks.

### Main challenges in a low-growth, low-rate environment
- Key vulnerabilities for France’s G-SIBs in a protracted low growth/low interest rate environment:
  - Fee and commission income, as share of total assets, below non-EU peers (temporarily boosted by mortgage refinancing in 2015).
  - Regulated savings rates above market rates.
  - High share of fixed rate mortgages that have been refinanced at very low rates, posing profit challenges if policy rates and funding costs rise.
- Staff empirical findings: low inflation and growth historically associated with smaller spreads, slower credit growth, and deteriorating credit quality.
- Under staff’s illustrative downside scenarios, the profitability of France’s G-SIBs would decline appreciably assuming no change in business models; initial diversification and asset quality could mitigate the impact.

### Financial sector adaptation and supervisory priorities
- Banks are diversifying into asset management, private banking, and insurance to offset margin pressures.
- Risks: potential loosening of lending standards or engagement in riskier activities (search for yield) that could worsen portfolio quality.
- Supervisory priorities and macroprudential monitoring:
  - Vigilance for risks related to search for yield.
  - Further study of the significant increase in corporate debt since the crisis, which reached about 125 percent of GDP in gross terms (much lower when intra-group debt is consolidated).
  - Careful monitoring of commercial real estate prices in certain locations; recent publications indicate potential overvaluation in greater Paris.
- Regulated savings rates should continue to be adapted to reflect market interest rate conditions.

### Regulatory evolution and resolution planning
- New global requirements such as Total Loss-Absorbing Capacity (TLAC) will require further capitalization improvements for France’s G-SIBs.
- French authorities have proposed legislation to introduce a new class of senior debt subordinated to existing senior debt to improve clarity of bank resolution and fulfill TLAC requirements, and to add a cap on European Minimum Requirements for Own Funds and Eligible Liabilities (MREL) requirements.
- Additional regulatory initiatives could imply further capital needs or adjustments, including revisions to:
  - Treatment of risk-weighted assets and banks’ use of internal models.
  - Standards on market risk, operational risk, interest rate risk, sovereign debt holdings.
  - Net stable funding ratio and leverage ratio (still to be finalized at EU and BCBS levels).
- After BRRD passage in August 2015, interim resolution plans for the four G-SIBs are under preparation.

### Macro-financial indicators and vulnerabilities (selected figures)
- U.S. dollar money market funding: $160 billion (2015).
- Exposure to emerging markets: 8 percent of total foreign claims.
- Non-performing loans (NPLs): around 4 percent.
- Corporate debt: about 125 percent of GDP in gross terms (reduced to 69 percent of GDP after adjusting for inter-company lending and firms with group treasury operations in France, as of 2015).
- Household debt: 85 percent of gross disposable income and 55 percent of GDP (similar to the euro area average).
- Banks’ need to adapt: further cost cutting, branch closures, deleveraging, and possible consolidation within the euro area.

### Staff appraisal — implications and policy recommendations
- The financial sector is more resilient than before the crisis but must continue adapting to modest growth and very low interest rates.
- Recommended policy and supervisory actions:
  - Continue cost reduction and diversification efforts by banks, while monitoring for risk-taking associated with search for yield.
  - Supervisors should remain vigilant and monitor commercial real estate and the increase in corporate debt.
  - Continue adapting regulated savings rates to market interest rate conditions.
  - Continue efforts to complete the Banking Union (including EDIS) and enhance bank data transparency to reduce systemic risks.
  - Carefully calibrate MREL at the EU level to ensure resolvability of failing or likely-to-fail banks that would apply a bail-in strategy.

*Source: IMF staff analysis, extracted from the provided chapter on France’s financial sector.*

### Box 2. How to Increase Public Expenditure Efficiency

### Box 2. How to Increase Public Expenditure Efficiency

### Overview and recent policy context
- Fiscal consolidation that started in 2011 was initially supported by revenue-raising measures but is now intended to be fully expenditure-based.
- Identifying areas for savings has proved difficult; there is no clearly articulated consensus on the areas where spending is too high or inefficient.
- Spending measures have mainly relied on across-the-board savings to limit nominal spending growth, focusing on central government spending and the health sector, while local governments and social security funds spending have continued to grow faster than GDP.
- The government has recently initiated some steps for structural savings (e.g., family allowances, health, and pensions).

### Benchmarking methodology (Hallaert and Queyranne)
- Three-step benchmarking to identify scope for greater expenditure efficiency while maintaining or improving social and economic outcomes:
  - First: compare the level of public expenditure to other European countries with focus on Germany, Italy, and the United Kingdom.
  - Second: assess social and economic outcomes in each spending area against performance in European peers.
  - Third: analyze the input mix to understand what components are responsible for the level of spending and for the quality of outcomes.

### Aggregate fiscal and efficiency findings
- Shifting from containment to deeper efficiency-oriented reforms could yield significant fiscal savings.
- Most savings could be achieved by rationalizing social benefits and the wage bill, which explain about 90 percent of the difference in the expenditure ratio between France and the EU average as well as the average for Germany, Italy, and the United Kingdom.
- If the redistributive power of social benefits was at EU average, France could achieve the same reduction in income inequality at a fiscal cost lower by 3.5 percentage points of GDP.

### Key sectoral findings and reform options
- Wage bill
  - The wage bill accounts for 13 percent of GDP and almost one quarter of public spending.
  - Recent efforts have focused on a wage-scale freeze, but low inflation has limited the effectiveness of this approach.
  - Employment reduction (notably at the local level) and limiting the wage drift would promise greater scope for efficiency gains.
- Welfare and pensions
  - France has the largest social spending in Europe and the second highest tax-to-GDP ratio, but the reduction in inequality due to transfers is only slightly above the EU average.
  - Social protection benefits mostly the elderly due to a generous pension regime.
  - Additional pension reforms, together with a further increase in means-testing of family-related spending, could support consolidation and make room for more resources to address child and youth poverty.
- Housing
  - Spending on housing is higher in France than in other European countries but outcomes do not appear much better than in other EU countries.
  - Potential for higher means-testing and lower institutional fragmentation and duplication.
- Health
  - Health spending is over 8 percent of GDP, high by EU standards.
  - Health outcomes are good but similar to comparator countries whose health spending is lower.
  - Possible reforms building on the National Health Strategy of 2014: further improving generics market penetration, rationalizing hospital services and streamlining costs, and strengthening cost-effectiveness evaluations to decide which services should be covered by public insurance.
- Unemployment benefits and labor market policy
  - The unemployment benefits system, which accounts for about two-third of labor market policy spending, is comparatively generous.
  - The reform of the unemployment benefit under negotiations is expected to lead to fiscal saving and reinforce work incentive.
- Education
  - Allocation of resources in education is less efficient than in many European countries, particularly at the secondary level.
  - Organizational reforms could improve education quality and social outcomes: better allocating teaching resources to the neediest, rationalizing inefficient spending (especially in secondary education), and improving targeting of vocational education and training for those who have difficulties getting a job.
- Public investment
  - Public investment spending is at the European average and should focus more on maintenance rather than expansion given France’s high quality and quantity of infrastructure.
  - Rationalizing local and state-owned enterprises investment would avoid duplication.

### Implications for fiscal consolidation and social model
- A shift from containment to broader and deeper efficiency-oriented reforms would increase the chance of success and the sustainability of the ongoing fiscal consolidation, while protecting the French “social model”.
- Most fiscal gains arise from addressing the wage bill and social-benefit design (which explain about 90 percent of the expenditure gap).
- Targeted reforms (means-testing, pension adjustments, health cost-containment, unemployment benefit reform, education resource allocation, and investment prioritization) are identified as concrete levers to improve efficiency without necessarily worsening social outcomes.

*International Monetary Fund — Box 2. How to Increase Public Expenditure Efficiency*

### Appendix I. Growth Shock Scenarios

### Appendix I. Growth Shock Scenarios

### Overview
- Describes shocks simulated for the euro area to generate the “stagnation” and “severe downturn” scenarios used in the fiscal policy section.
- Shocks are in line with those contemplated in the Selected Issues Paper for the 2016 Euro Area Article IV.

### Stagnation scenario (demand shock triggering prolonged stagnation)
- Trigger:
  - Drop in investor confidence due to lower growth expectations or slow progress in reforms.
  - Pushes down equity prices and raises the real corporate interest rate by about 0.5 percent, cumulatively, by 2021.
- Investment and productivity:
  - Reduces real investment by around 2.3 percent on average, annually, during 2017–21.
  - Assumed decline in the annual growth rate of total factor productivity by 0.1 percentage point each year in 2017–21.
- Output and consumption:
  - France’s growth falls to around 1.4 percent in 2017 and only gradually increases to 1.5 percent by the end of the projection period.
  - Real GDP is reduced in cumulative terms by 1.7 percent by 2021 relative to the baseline.
  - Consumption grows significantly less rapidly in cumulative terms than in the baseline (-1.8 percent).
- Labor market:
  - Unemployment is 0.6 percentage points higher and employment 0.6 percent lower than in the baseline by 2021.
- Inflation:
  - Inflation remains slightly positive but well below a rate consistent with the ECB’s objective, increasing only very slowly to 1 percent by the end of the forecast horizon.
- External environment:
  - External environment outside the euro area unchanged from the April 2016 WEO baseline of an uneven, fragile global recovery.
  - The euro area environment, excluding France, suffers similar stagnation (euro area GDP growth assumed to fall to an average of 1.1 percent over 2017–21).

### Severe economic downturn in the short term followed by stagnation
- Trigger and global conditions:
  - Combines a near-term global slowdown with an investment demand shock in France and the euro area due to weaker confidence and financial stress.
  - Outside the euro area, real growth is lower by ½ percentage point each year in 2017, relative to the April 2016 WEO.
- Investment and cost of capital:
  - Sharp drop in investor confidence reduces real investment in France by 2.2 percent on average, annually, during 2017–18 and by 6½ percent on average, annually thereafter, also due to an increase in the real cost of capital.
- Supply side:
  - Potential growth declines slightly as a result of lower investment and some financial disintermediation.
- Inflation expectations and TFP:
  - Assumed to behave as in the stagnation scenario.
- Output, consumption, employment, and unemployment by end of forecast period:
  - Real GDP is 3 percent lower in cumulative terms relative to baseline.
  - Consumption is 2.9 percent lower in cumulative terms relative to baseline.
  - Employment is 7½ percent lower in cumulative terms relative to baseline.
  - Unemployment is 1½ percentage points higher.
- Inflation outcome:
  - Inflation falls to zero.
- Near-term growth:
  - France’s growth would fall slightly below one percent in the near term before recovering over the medium term.

### Linkages to Debt Sustainability Analysis (DSA) stress tests (summary from Appendix II)
- Alternative growth shocks used in DSA (as described in Appendix I):
  - “Stagnation scenario”: France real GDP growth would be reduced on average by 0.3 percentage point each year over 2016–21.
    - Under this scenario, the debt-to-GDP ratio would steadily increase reaching 101.9 percent of GDP in 2021.
  - “Severe downturn scenario”: France real GDP growth would be reduced on average by 0.6 percentage point each year over 2016–21.
    - Under this scenario, the debt-to-GDP ratio would steadily increase reaching 111.6 percent of GDP in 2021.

*Prepared by Nicoletta Batini (EUR).*

### 1.3 is the max positive growth rate shock

### _cr16227 - 1.3 is the max positive growth rate shock

### Public Debt—Baseline DSA: Key projections and indicators
- Timeframe and data: As of May 31, 2016; projections presented for 2016–2021 with historical datapoints 2014–2015.
- Nominal gross public debt (in percent of GDP): 2014: 76.9; 2015: 95.3; 2016: 96.1; 2017: 97.1; 2018: 97.9; 2019: 97.8; 2020: 97.3; 2021: 96.0; projection for 2021: 94.0.
- Public gross financing needs (in percent of GDP): 2014: 8.4; 2015: 8.1; 2016: 8.9; 2017: 8.9; 2018: 9.2; 2019: 8.7; 2020: 7.9; 2021: 6.8; 2021 final: 4.4.
- Real GDP growth (in percent): 2014: 0.9; 2015: 0.6; 2016: 1.3; 2017: 1.5; 2018: 1.5; 2019: 1.7; 2020: 1.7; 2021: 1.8; longer-run: 1.8.
- Inflation (GDP deflator, in percent): 2014: 1.5; 2015: 0.5; 2016: 0.6; 2017: 0.7; 2018: 0.7; 2019: 1.0; 2020: 1.1; 2021: 1.3; 2021: 1.5.
- Nominal GDP growth (in percent): 2014: 2.4; 2015: 1.2; 2016: 1.9; 2017: 2.3; 2018: 2.2; 2019: 2.7; 2020: 2.9; 2021: 3.2; 2021: 3.4.
- Effective interest rate (in percent) defined as interest payments divided by debt stock at end-previous year: 2014: 3.6; 2015: 2.4; 2016: 2.1; 2017: 2.0; 2018: 1.8; 2019: 1.8; 2020: 1.9; 2021: 2.0; 2021: 2.1.
- Identified debt-creating flows (cumulative contributions, in percent of GDP): 2014: 3.2; 2015: 3.2; 2016: 1.9; 2017: 1.3; 2018: 1.0; 2019: 0.2; 2020: -0.4; 2021: -1.2; 2021: -1.9; final cumulative: -1.0.
- Change in gross public sector debt (in percent of GDP): 2014: 3.0; 2015: 2.9; 2016: 0.8; 2017: 0.9; 2018: 0.8; 2019: 0.0; 2020: -0.5; 2021: -1.3; 2021: -2.0; final: -2.2.
- Primary deficit (in percent of GDP): 2014: 2.0; 2015: 1.9; 2016: 1.7; 2017: 1.5; 2018: 1.4; 2019: 1.0; 2020: 0.5; 2021: -0.1; 2021: -0.7; cumulative: 3.6.
- Primary (noninterest) revenue and grants (in percent of GDP): 2014: 50.3; 2015: 53.3; 2016: 53.3; 2017: 53.1; 2018: 53.0; 2019: 52.9; 2020: 52.9; 2021: 52.9; 2021: 52.9; cumulative: 31.7.
- Primary (noninterest) expenditure (in percent of GDP): 2014: 52.3; 2015: 55.2; 2016: 55.0; 2017: 54.6; 2018: 54.5; 2019: 53.9; 2020: 53.4; 2021: 52.8; 2021: 52.2; cumulative: 21.3.
- Automatic debt dynamics (in percent of GDP): 2014: 0.9; 2015: 1.1; 2016: 0.2; 2017: -0.2; 2018: -0.4; 2019: -0.8; 2020: -0.9; 2021: -1.1; 2021: -1.2; cumulative: -4.7.
- Real interest rate contribution (in percent): 2014: 1.5; 2015: 1.7; 2016: 1.4; 2017: 1.2; 2018: 1.0; 2019: 0.8; 2020: 0.7; 2021: 0.6; cumulative: 0.5; long-run: 4.8.
- Real GDP growth contribution (in percent): 2014: -0.7; 2015: -0.6; 2016: -1.2; 2017: -1.4; 2018: -1.4; 2019: -1.6; 2020: -1.6; 2021: -1.7; cumulative: -1.7; long-run: -9.5.
- Other identified debt-creating flows (in percent of GDP): 2014: 0.3; 2015: 0.2; 2016–2021: 0.0.
- Residual, including asset changes (in percent of GDP): 2014: -0.2; 2015: -0.3; 2016: -1.1; 2017: -0.4; 2018: -0.3; 2019: -0.2; 2020: -0.1; 2021: -0.1; 2021: -0.1; cumulative: -1.1.
- Sovereign spreads and ratings (selected): EMBIG (bp) and Y CDS (bp) reported; ratings: Moody's Aa2/Aa2; S&Ps AAAA; Fitch AAAA.

### Alternative scenarios and underlying assumptions
- Baseline scenario key assumptions (2016–2021):
  - Real GDP growth: 2016: 1.5; 2017: 1.5; 2018: 1.7; 2019: 1.7; 2020: 1.8; 2021: 1.8.
  - Inflation: 2016: 0.7; 2017: 0.7; 2018: 1.0; 2019: 1.1; 2020: 1.3; 2021: 1.5.
  - Primary balance (in percent of GDP): 2016: -1.5; 2017: -1.4; 2018: -1.0; 2019: -0.5; 2020: 0.1; 2021: 0.7.
  - Effective interest rate: 2016: 2.0; 2017: 1.8; 2018: 1.8; 2019: 1.9; 2020: 2.0; 2021: 2.1.
- Historical scenario assumptions:
  - Real GDP growth: 2016: 1.5; 2017: 0.9; 2018: 0.9; 2019: 0.9; 2020: 0.9; 2021: 0.9.
  - Primary balance: 2016: -1.5; 2017–2021: -2.1 each year.
  - Effective interest rate evolves to 2.6 by 2021.
- Constant Primary Balance scenario:
  - Primary balance maintained at -1.5 from 2016 through 2021.
  - Other variables similar to baseline with effective interest rate reaching 2.2 in 2021.
- Composition of public debt views shown across 2014–2021 (gross nominal public debt in percent of GDP) and public gross financing needs (in percent of GDP) are presented for each scenario.

### Stress tests and shocks
- Stress test types covered: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock.
- Primary Balance Shock scenario (selected yearly values):
  - Primary balance (in percent of GDP): 2016: -1.5; 2017: -2.3; 2018: -1.8; 2019: -0.5; 2020: 0.1; 2021: 0.7.
  - Effective interest rate: 2016: 2.0; 2017: 1.8; 2018: 1.9; 2019: 1.9; 2020: 2.0; 2021: 2.2.
- Real GDP Growth Shock scenario:
  - Real GDP growth (in percent): 2016: 1.5; 2017: -0.1; 2018: 0.1; 2019: 1.7; 2020: 1.8; 2021: 1.8.
  - Primary balance under this shock: 2016: -1.5; 2017: -2.5; 2018: -3.2; 2019: -0.5; 2020: 0.1; 2021: 0.7.
  - Effective interest rate: evolves modestly from 2.0 to 2.2 by 2021.
- Real Interest Rate Shock scenario:
  - Effective interest rate (in percent): 2016: 2.0; 2017: 1.8; 2018: 2.0; 2019: 2.3; 2020: 2.5; 2021: 2.8.
- Real Exchange Rate Shock scenario:
  - Inflation path altered in 2017 to 1.1 while other variables largely as baseline.
- Combined Macro-Fiscal Shock (selected):
  - Real GDP growth: 2016: 1.5; 2017: -0.1; 2018: 0.1; 2019: 1.7; 2020: 1.8; 2021: 1.8.
  - Inflation: 2016: 0.7; 2017: 0.3; 2018: 0.6; 2019: 1.1; 2020: 1.3; 2021: 1.5.
  - Primary balance: 2016: -1.5; 2017: -2.5; 2018: -3.2; 2019: -0.5; 2020: 0.1; 2021: 0.7.
  - Effective interest rate: 2016: 2.0; 2017: 1.8; 2018: 2.1; 2019: 2.4; 2020: 2.6; 2021: 2.9.
- Stress-test outputs include alternative paths for Gross Nominal Public Debt (in percent of GDP), Gross Nominal Public Debt (in percent of Revenue), and Public Gross Financing Needs (in percent of GDP) for 2016–2021 under each shock.

### Risk Assessment Matrix—Key risks, likelihoods, impacts, and policy responses
- Tighter or more volatile global financial conditions
  - Relative likelihood: Medium
  - Impact: Medium; investors could reassess risk and move to safe havens; French banks exposed to systemic funding closure risk.
  - Policy response: Ensure banks reduce reliance on wholesale funding; fiscal and monetary responses depend on shock nature.
- British voters choose to leave the EU
  - Relative likelihood: High
  - Impact: Medium; elevated financial volatility, contagion potential, political uncertainty could weaken confidence and growth.
  - Policy response: Work with European partners to minimize disruption.
- Structurally weak growth in key advanced and emerging economies
  - Relative likelihood: High/ Medium
  - Impact: Medium; weak demand and low inflation could hurt trade and investment.
  - Policy response: Continue and deepen structural reforms to lift output growth and reduce structural unemployment.
- Weak implementation of fiscal and structural policy commitments
  - Relative likelihood: Medium
  - Impact: Medium; reversal could undermine investment, growth, public debt dynamics, and market confidence.
  - Policy response: Maintain commitment to reforms.
- Financial imbalances from protracted low interest rates
  - Relative likelihood: Medium
  - Impact: Medium (over medium term); corporate leverage, squeezed insurer/lender margins, search for yield and asset bubbles.
  - Policy response: Monitor lending standards and risks; monitor life insurance sector and act as needed.
- Changes in forthcoming regulatory landscape larger than expected
  - Relative likelihood: Medium
  - Impact: Medium (over medium term); banks may need more capital, reducing profitability and credit provision.
  - Policy response: Promote continued restructuring and cost cutting by banks.
- Dislocation in labor flows, sharp rise in migrant flows
  - Relative likelihood: High
  - Impact: Low/Medium; minor immediate fiscal impact; medium-term impact depends on integration speed.
  - Policy response: Adopt proactive integration policies including active labor market policies, language and skill training.

### External sector: assessment, vulnerabilities, and policy recommendations
- Net international investment position (NIIP) and external liabilities:
  - NIIP deteriorated to around 17 percent of GDP in 2015Q3 from near balance before the crisis; valuation losses accounted for almost 20 percent of the deterioration since 2007.
  - Gross asset position in 2015 stood at 295 percent of GDP.
  - Public external debt accounts for about 19 percent of gross liability position.
  - More than three-quarters of French bank exposures are to advanced economies; major emerging market exposures now reach 8 percent of total foreign claims.
  - Assessment: NIIP is negative but size and trajectory do not raise sustainability concerns; vulnerabilities due to external public debt on liability side; stability of French public debt market important for euro-zone financial stability.
- Current account:
  - Background: Current account moved from a surplus near 4 percent of GDP in the late 1990s to an estimated deficit of 0.2 percent in 2015.
  - Cyclically-adjusted deficit estimated at -0.8 percent of GDP in 2015.
  - Projection: Current account projected to deteriorate marginally to 0.5 percent of GDP in 2016; medium-term projection to remain close to balance.
  - Assessment: Staff assesses 2015 cyclically-adjusted current account to be ½ to 2½ percent of GDP below its norm; EBA model estimate about 1¾ percent of GDP weaker than medium-term fundamentals.
  - Policy responses: Gradual elimination of fiscal deficit and competitiveness measures to help correct external imbalance.
- Real exchange rate and competitiveness:
  - Unit labor costs: 9.3 percent cumulative appreciation of ULC-based REER over the last 10 years; ULC-based REER appreciated close to 2 percent as of June 2016 relative to 2015 average.
  - CPI-based REER: depreciated 4 percent in 2015 relative to 2014 average; as of April 2016 had appreciated 1 percent relative to 2015 average.
  - Assessment: EBA Level REER regression model estimates 4.6 percent overvaluation; staff’s CA-gap based assessment suggests 3 to 9 percent overvaluation; EBA Index REER model estimates undervaluation of -5.4 percent. Taking inputs together, staff assesses 2015 REER to be 3–9 percent overvalued.
  - Policy responses: Continued wage moderation (especially of the minimum wage), continued labor market reform, and productivity-enhancing reforms (increasing competition and regulatory simplification) to restore competitiveness.
- Capital and financial accounts:
  - Background: Current account deficit financed mostly by debt inflows (portfolio and other investment); outward direct investment generally higher than inward; derivatives flows have grown since 2008.
  - Assessment: France remains exposed to financial market risks but flow structure does not point to specific vulnerabilities.
- FX intervention and reserves:
  - Background and assessment: The euro has status as a global reserve currency; reserves held by the euro area typically low relative to standard metrics but the currency is free floating.

*Source: IMF staff. (France: Public Sector Debt Sustainability Analysis; Public DSA—Stress Tests; Risk Assessment Matrix; External Sector Report; as presented in the supplied content.)*

### Appendix V. Main Recommendations of

### Appendix V. Main Recommendations of the 2015 Article IV Consultation and Authorities’ Actions

### Fiscal Policy
- Fund recommendations:
  - Follow an ambitious enough pace of fiscal adjustment to safely achieve the medium-term fiscal targets, including a firmly declining path for the debt ratio, without unduly detracting from the recovery.
  - Persevere with the efforts to rein in public spending. Underpin the adjustment by structural measures, identified through comprehensive expenditure reviews at all levels of government.
- Authorities’ actions / Policy Actions:
  - The government continues to follow a fiscal adjustment strategy that is fully expenditure-based. However structural adjustment is slowing down to near zero in 2016.
  - The annual targeted expenditure reviews initiated in 2015 are now fully integrated in budget preparation.
  - Starting in 2016, the indicative targets for local governments’ spending growth (ODEDEL), are specified for each level of local government. However, the bulk of spending control continues to rely on nominal spending growth containment measures.

### Structural Reforms
- Fund recommendations:
  - Allow more flexibility in firm-level agreements on hours and wages, reform the minimum wage, and strengthen job search incentives for those receiving unemployment or welfare benefits.
  - Further liberalize regulated professions, dismantle bureaucratic hurdles to small enterprises, and remove barriers to competition in services.
- Authorities’ actions / Policy Actions:
  - The El Khomri law, currently in parliament, would increase the scope for company-level labor agreements and reduce judicial uncertainty around dismissals.
  - The Macron law was adopted in the summer of 2015, and the vast majority of measures has been implemented.

### Financial Sector
- Fund recommendations:
  - Closely monitor financial risks and continue strengthening bank capital and liquidity buffers in line with evolving regulatory requirements.
  - Review guaranteed interest rates under the regulated savings schemes and tax incentives on financial savings products.
- Authorities’ actions / Policy Actions:
  - The authorities are monitoring financial and regulatory risks in the context of the SSM. Banks have continued to adapt to evolving regulatory requirements.
  - In August 2015, the Livret A savings rate was reduced to 0.75 percent. No further changes have been made since.

*Source: IMF Staff.*

### 2014.  Although the source data are collected by the Ministry of Economy and Finance, INSEE is

### Statement by the Staff Representative on France

### Data and statistical frameworks
- Fiscal data: Source data collected by the Ministry of Economy and Finance; INSEE principally responsible for compilation and dissemination of fiscal data in a framework consistent with ESA.
- Monetary and Financial Statistics: Monetary data for International Financial Statistics based on the European Central Bank’s (ECB) framework; statistics on banking institutions and monetary aggregates prepared monthly and timely; monetary data also disseminated in the quarterly IFS Supplement on monetary and financial statistics.
- External sector: Starting in June 2014, monthly balance-of-payments statistics published using BPM6; back casting of previous periods started with the publication of the Annual report of the balance of payments and the international investment position end June 2014.

### Table of Common Indicators (As of May 2016) — selected entries
- Exchange Rates: Date of Latest Observation 05/16; Date Received 05/16; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Date of Latest Observation 04/16; Date Received 05/16; Frequency of Data Monthly; Frequency of Reporting Monthly; Frequency of Publication Monthly.
- International Investment Position: Date of Latest Observation Q4:2015; Date Received Q1:2016; Frequency Quarterly/Quarterly/Quarterly.
- Reserve/Base Money: Date of Latest Observation 03/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- Broad Money: Date of Latest Observation 03/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- Central Bank Balance Sheet: Date of Latest Observation 04/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- Consolidated Balance Sheet of the Banking System: Date of Latest Observation 04/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- Interest Rates2: Date of Latest Observation 05/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- Consumer Price Index: Date of Latest Observation 04/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- General Government revenue/expenditure/balance/composition of financing3: Date of Latest Observation 2015; Date Received 05/16; Frequency Annual/Annual/Annual.
- Central Government revenue/expenditure/balance/composition of financing3: Date of Latest Observation 03/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- Stock of Central Government Debt: Date of Latest Observation 04/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- External Current Account Balance: Date of Latest Observation 03/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- Exports and Imports of Goods and Services: Date of Latest Observation 03/16; Date Received 05/16; Frequency Monthly/Monthly/Monthly.
- GDP/GNP: Date of Latest Observation Q1:2016; Date Received 05/16; Frequency Quarterly/Quarterly/Quarterly.
- Gross External Debt: Date of Latest Observation Q4:2016; Date Received Q1:2016; Frequency Quarterly/Quarterly/Quarterly.

Footnotes in table (verbatim):
- 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).

### Short-term macroeconomic outlook and Brexit implications
- Market reaction: United Kingdom vote to exit the European Union on June 23 triggered sharp currency movements and declines in equity valuations, especially in the euro area; equity prices of France’s banks declined broadly in line with other European banks; CDS spreads rose only modestly.
- Channels of impact: UK exit expected to negatively affect euro area economies, including France, through trade, financial, and confidence channels.
- IMF staff preliminary assessment for France (post-Brexit revision):
  - Real GDP growth 2016: "close to 1½ percent".
  - Real GDP growth 2017: "about 1¼ percent", compared to "1½ percent projected in the staff report".
  - Revision rationale: slower pickup in business investment due to heightened uncertainty and financial market volatility; lower import demand from the UK and other European countries.
  - Consumption: impact expected to be limited in the near term.
  - Assumptions: financial market conditions remain orderly; spillovers from France’s banks’ exposures to the UK are contained.
  - Risks: any further tightening of financial conditions is an important source of downside risk.
- Inflation projection: average annual inflation "now projected to come in just below 1 percent in 2017".
- Fiscal impact: expected to be modest under baseline assumptions as slower growth partly offset by savings from lower interest rates; risks to achieving near-term fiscal targets have increased.
- Medium-term outlook: impact of revisions relatively modest absent additional shocks; risks now firmly on the downside, with higher uncertainty around financial conditions and political developments in Europe.
- Policy advice: major efforts needed to secure a durable reduction in unemployment and public debt; requires further measures to boost job creation and private sector growth and deeper reforms to make public spending more efficient at all levels of government.

### Statement by Mr. de Villeroché, Executive Director for France — main points
- Agreement and context:
  - Authorities broadly agree with staff’s overall strategy implemented since 2012.
  - Since the financial crisis, French economy showed resilience; in 2015 recovery accelerated supported by external factors (decline in oil prices, moderate depreciation of real effective exchange rate) and domestic reforms (reduction of labor tax wedge, pro-competition measures, incentives for private investment).
  - Authorities committed to sustainability of public finances and structural reforms, particularly on the labor market.

1. Macroeconomic outlook
- 2015 outturns:
  - Real GDP growth 2015: "1.3 percent" (higher than forecast of "1 percent" in the 2015 Budgetary Plan) after "0.6 percent in 2014".
  - Corporate investment: "+2 percent in 2015".
  - Real exports: "grew by 6 percent in 2015".
- Staff and authorities projections for 2016 and 2017:
  - Staff revised growth projections upward to "1.5 percent for both years", compared respectively with "1.1 percent and 1.3 percent in the last WEO".
  - These staff forecasts are similar to the French authorities’ projections as indicated in the Stability Program and to the latest Consensus Forecasts.
  - Comparable forecasts: OECD "1.4 percent in 2016 and 1.5 percent in 2017"; European Commission "1.3 percent in 2016 and 1.7 percent in 2017".
- Brexit: expected to have a limited economic impact in France through trade channels; assessment of financial and confidence channel impacts remains difficult.
- Medium/long-term supports for growth: institutional framework, world-class infrastructure, sound financial system, well-educated workforce, positive demographic trends, high productivity rate; ongoing structural reforms to boost potential growth.

2. Fiscal policy
- 2015 execution:
  - French public deficit 2015: "3.6 percent of GDP", outperforming Budget bill objective "3.8 percent of GDP".
  - Additional saving measures: "EUR 4 billion" taken during the year to offset negative impact of lower-than-expected inflation.
  - Nominal public spending excluding tax credits increased by "0.9 percent in 2015", described as the lowest in decades.
  - Tax-to-GDP ratio reduced by "0.1 point to 44.7 percent of GDP" due to tax reduction measures for businesses and private households.
  - Authorities dispute staff report finding that consolidation strategy "has not delivered the hoped-for fiscal savings in the context of low growth and inflation."
- Fiscal medium-term consolidation path (Stability Program):
  - Targets: "0.4 point of GDP structural adjustment of public balance in 2016" and "0.5 point of GDP in 2017 and 2018".
  - Under a prudent growth scenario (real GDP growth of "1.5 percent per year in 2016 and 2017"), aim to bring headline deficit below 3 percent in 2017 with a safety margin of "2.7 percent of GDP".
  - Recently announced measures will be financed to meet headline deficit target of "2.7 percent of GDP" in 2017; compensations disclosed in report published July 5 to prepare draft budget bill discussions.
  - Authorities note staff’s finding of structural "fiscal adjustment slowing to around zero" is based on a scenario that does not fully take into account Stability Program measures; difference partly due to staff lower estimate of potential growth ("1.1 percent for 2016 and 2017") versus Stability Program ("1.5 percent").
  - From 2017 to 2019, forecast that growth of public expenditure will be close to inflation.
  - Authorities consider pace of consolidation the right balance between securing sustainability, reducing tax burden, and avoiding a drag on short-term growth.
  - Authorities consider staff overestimates implementation risks of a deviation.

3. Long-term sustainability
- Demographics and pension outlook:
  - Strong demographics, improved older workers’ participation rate, and phasing-in of recent pension reforms place France in a better position than most OECD partners.
  - Pension reform adopted in 2014 and new agreement signed in 2015 on financing of supplementary retirement scheme strengthen position.
  - European Aging Report 2015 projection: public pension spending expected to decrease by "2.8 percent of GDP between 2013 and 2060".
  - Conclusion: financial position of France’s pension system "is no longer a major issue for the long-term sustainability of public finances."

4. Structural reforms
- Objective: reduce unemployment and foster potential growth via reforms to improve cost competitiveness, business environment, product and services markets, labor market functioning, and social inclusion.
- Improving cost competitiveness by cutting the labor tax wedge:
  - Crédit d’Impôt Compétivitié Emploi (CICE): tax credit equivalent to "6 percent of gross wage" targeted on lower wages than "2.5 times the minimum wage"; fully implemented and will amount to "EUR 19 billion labor cost reduction in 2017".
  - Pacte de Responsabilité et de solidarité: amounts to "EUR 20 billion" and includes a reduction in social security contributions implemented since April 2016.
  - Combined measures represent a positive supply shock of "almost EUR 40 billion (close to 2 percent of GDP)".
  - Unit labor cost growth: "+0.8 percent annually on average between 2013 and 2015 after +2 percent between 2000 and 2013 according to Eurostat"; lower than Germany ("+1.9 percent") and euro area average ("+1 percent").
  - Hiring bonus "Embauche PME": targeted on lower wages less than "1.3 times the minimum wage", created in January for new hires made in 2016 in SMEs and recently extended to next year hires.
  - President’s announcements for 2017 include increase of CICE to "7 percent of gross wage", corporate income tax cuts for SMEs, and "EUR 150 million tax cuts for self-employed workers."
- Enhancing business environment and goods and services markets:
  - "Choc de simplification" efforts to reduce red tape.
  - February 3, 2016 measures focused on jobs and innovation, including simplification of applications for the Research Tax Credit (Crédit d’Impôt Recherche - CIR).
  - Growth, Economic Activity, Equal Economic Opportunity Act (Macron law) adopted last summer to enhance competition, open regulated professions, align fees with costs, and extend Sunday/evening work hours; almost all implementing decrees published.
  - Transparency, anti-corruption and Economic modernization Bill before Parliament to ease creation and growth of VSEs and SMEs and streamline qualification requirements for certain self-employed professions.
- Improving labor market functioning:
  - Reforms implemented: 2013 Job Security Act, 2015 Act on Labor-Management Dialogue and Employment (Rebsamen law), and the Macron law.
  - Draft Labor Bill (El Khomri law) before Parliament aims to modernize labor market by promoting social dialogue, providing greater predictability to companies, and making career paths more secure.
    - Decentralization: expand scope for negotiation at firm level; shift responsibility from branch to firm level on work organization and working hours.
    - Collective bargaining reforms to make agreements more effective; reduce number of branches from "700 to 200 over four years."
    - Greater visibility for companies to encourage hiring on permanent contracts: identifies economic difficulties that can justify economic layoffs; decree to set indicative scale for tribunal compensations for unjustified redundancies.
    - New safeguards for employees with little job security and young people: Personal activity account (CPA) to enter into force on "January 1, 2017", allowing workers to accumulate entitlements throughout their career regardless of status, particularly for training or support in setting up a business.
  - Final adoption of the draft law by Parliament "expected in the coming days."

5. Financial sector
- Post-crisis adjustments: French banks significantly increased capital levels and improved liquidity, reduced dependence on short-term wholesale funding, and decreased loan-to-deposit ratios.
- Profitability and asset quality: French banks appear relatively more profitable than European average; AQR led by ECB in 2014 confirmed asset quality and led to one of the smallest adjustments within the euro area; French banks have lower NPL ratios than European average and cost of risk remains under control.
- Challenges and vigilance:
  - Low interest rate environment pressures banks’ profitability; ongoing Basel Committee discussions on further reforms could increase capital requirements.
  - Challenge not specific to France; universal banking model contributes to resilience through diversification and may ease business model evolution.
  - Authorities vigilant that banks strengthen balance sheets as required by regulation and that adaptation does not negatively affect economy’s financing.
- IMF staff selected issues paper:
  - Paper detailed resilience of France’s biggest banking institutions to market volatility.
  - Authorities suggest it could have focused more on interlinkages between financial developments and the real economy.
  - Authorities question comparing France’s biggest banking institutions with other G-SIBs given differences in business models, roles in domestic financing, and regulatory environments.
  - Going forward, authorities agree staff should focus follow-up work on better understanding transmission channels of financial conditions to economic activity.

*Statement by the Staff Representative on France and Statement by Mr. de Villeroché, Executive Director for France (both dated July 11, 2016) — IMF content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16227.pdf_