Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with France

November 1, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 06/127
November 1, 2006

On October 25, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with France.1


After stagnating in the first half of 2005, economic activity rebounded strongly, supported by robust domestic demand. The uptick in neighboring countries' GDP growth buttressed exports, following three years of weakness despite buoyant global demand. From a longer-term perspective, France's relative performance has, however, lagged the ongoing global expansion, as indicated by the decline in its ranking in terms of per capita GDP from 12th to 16th position during the past five years.

All components of domestic demand contributed to the upswing. Falling unemployment, real increases in minimum wages, and low interest rates supported consumption and investment in housing. Fixed capital formation strengthened with the revived cyclical upturn. The external sector detracted from growth over the past five years, and together with adverse terms-of-trade effects, led to a shift in the current account into deficit. Structural factors, including labor market rigidities, limit the economy's ability to rapidly adjust to developments in trade partners and take advantage of robust global growth.

The staff projects GDP growth to remain broad-based, averaging 2.5 percent in 2006 and 2.3 percent in 2007, reflecting the slowdown in global growth. Headline inflation is trending down in line with falling energy prices, and staff projects it to decline to 1.8 percent in 2007 from an average of 2 percent in 2006. In line with improved demographic trends and reflecting the impact of ongoing structural reforms, the staff has raised its potential growth outlook to 2.2 percent for the next five years, after which it will be dampened as a result of population aging.

The 2007 draft budget targets a reduction in the general government deficit to 2.5 percent of GDP from 2.7 percent of GDP in 2006 and 2.9 percent of GDP in 2005. Following a structural improvement of about 0.8 percentage point of GDP in 2005, the staff estimates the structural balance to improve by 0.5 percentage point of GDP in 2006. Structural adjustment is achieved through expenditure restraint at the central government level and in health care. The net tax burden remains roughly constant in 2006, but is expected to decline by 0.3 percent of GDP in 2007, largely due to tax relief favoring work income, investment, and a variety of smaller tax cuts in other areas.

In the financial sector, housing credit expanded strongly, bank profitability increased, and nonperforming loans declined. Supervisors urged banks to strengthen loan standards and watch exposure to hedge funds and credit derivatives. New mortgage market instruments have been established.

On structural reforms, the authorities are emphasizing the need to raise public awareness of the benefits of structural reforms. Labor supply is being promoted by the increase in earned income tax credit and the reduction in marginal income tax rates, while labor demand is benefiting from targeted reductions in social security contributions and the introduction of a new labor contract for small enterprises (Contrat nouvelle embauche, CNE). A reorganization of employment services is designed to improve labor market matching. Following the withdrawal of a proposed new labor contract for the young (Contrat première embauche, CPE) in light of social protests, a council on employment (Conseil d'orientation pour l'emploi, COE) was created to establish a common diagnosis of the causes of unemployment and foster public debate on its remedies. In product markets, divestiture from commercial activities has continued, including in the energy sector.

Executive Board Assessment

Directors commended the French authorities for their skillful macroeconomic management in recent years and welcomed the significant progress in fiscal consolidation and structural reform. Noting that France has changed more than is commonly perceived, Directors supported the authorities' emphasis on building consensus, which has been instrumental in promoting reform. However, much remains to be done. Directors encouraged the authorities to continue with a steadfast pursuit of their consensus-building approach to advance the key reforms needed to increase potential growth, durably reduce unemployment, prepare for an aging population, and allow the economy to benefit fully from globalization. Equally, Directors urged the authorities to maintain the steady pace of fiscal consolidation until the general government budget is balanced.

Directors saw the near-term economic outlook as positive, with growth becoming more vigorous and broad based, while improved demographics and structural reforms have brightened the medium-term outlook. Falling unemployment, rising wages, and tax cuts have supported private consumption, and inflation has remained low, while favorable financing conditions and high capacity utilization are bolstering investment. Although exports have strengthened noticeably since mid-2005 following a few years of lackluster performance, the current account deficit has continued to widen. The real effective exchange rate appears to be fairly valued, and Directors did not see an immediate competitiveness problem. However, they noted the lack, until recently, of a more dynamic response of exports to the global expansion. This underscores the importance of flexibility-enhancing structural reforms, which will also be helpful in addressing the risk of a disorderly unwinding of global imbalances.

Directors supported the authorities' emphasis on informing, educating, and consensus-building to foster public support for economic reforms. They observed that this approach has worked well in the area of public finances, with broad consensus on the need to curb deficits and debt, and that this consensus now needs to be extended to labor and product market reforms. Directors encouraged the authorities to exploit synergies and balance various interests by advocating reforms covering several areas, and giving consideration to their proper sequencing. Directors saw three issues as standing at the top of the agenda: further fiscal adjustment through expenditure restraint; further labor market reform by reducing the judicial uncertainty surrounding permanent contracts and widening the differentials between out-of-work benefits, the minimum wage, and the median wage; and further product market reform through deregulation of the services sector and progressive disengagement of the state from commercial activities.

Directors urged the authorities to continue to make significant progress with fiscal consolidation by maintaining the pace of adjustment of recent years. They welcomed the prospect that the 2006 deficit outcome appears set to come in below the budget target, bolstering the credibility of fiscal policy. For 2007, Directors welcomed the intention to reduce central government expenditures by 1 percent in real terms and to sustain the decline in health-spending growth, but observed that pension and local government spending remains buoyant. Directors were of the view that stronger adjustment in 2007 would be desirable to maintain an evenly-paced path toward balance.

Directors supported the authorities' objective of balancing the budget by 2010, as a crucial component of the strategy to deal with population aging. As the recent fiscal consolidation has mainly relied on increases in revenues, Directors strongly welcomed the focus on ambitious medium-term expenditure restraint, while emphasizing the need to make the specific policy choices required to achieve this objective. In particular, Directors stressed the importance of reducing spending growth for social security and local governments.

Directors welcomed the contribution of recent tax reforms to improving incentives and economic efficiency, thanks to their focus on making work pay and on fostering investment. Directors saw merit in further reductions in the tax burden, which should be funded by an additional decline in spending and a broadening of the tax base.

Directors welcomed the full implementation of the new objective-oriented budgeting framework for the central government that has helped strengthen fiscal governance. In this context, they felt that the provision to allocate revenue windfalls to deficit reduction adopted in the last two budgets should become a standard feature. To avoid circumvention of this provision and safeguard the benefits of tight spending control, Directors underscored the need to formally prevent recourse to tax expenditure outside the framework of the budget law. Directors welcomed the reliance on consensus-building institutions to promote fiscal discipline and contribute to the public debate on fiscal policy, and looked forward to further development of this approach.

Directors observed that the financial system is highly profitable, well capitalized, and in a good position to manage increasing risks. They nevertheless urged supervisors to remain highly attentive to the risks of relaxation of loan standards and rising exposures abroad and to less liquid market segments. Directors saw scope for increasing the financial sector's contribution to economic growth. To achieve this objective, administered saving schemes should be phased out, competition and the development of risk capital markets promoted, and the complete integration of Europe's financial markets advanced.

Directors noted that the labor market has become more flexible following recent reforms, while observing that increases in the minimum wage continue to curb labor demand and intensify wage compression. In this context, Directors underscored the need to break the vicious circle between minimum wage increases and the use of budgetary resources to reduce labor costs. Instead, they felt that the focus should be squarely placed on reforms to raise labor market flexibility. Hence, Directors urged the authorities to increase the wedge between the minimum wage and the median wage and between out-of-work benefits and the minimum wage to reward the return to work and career progression. An important step to boost job creation will be to reduce the legal uncertainty surrounding permanent labor contracts.

Directors welcomed the steps toward divestiture of network industries and the reduction in the administrative burden on enterprises. They noted that these reforms would boost output and consumer welfare and that their further pursuit would lend support to labor market reforms. Directors encouraged the authorities to make determined efforts on economic deregulation, divestiture from commercial activities, and further opening up of the services markets to competition.

Directors urged France to contribute actively within the EU to help revive and bring to a successful conclusion the Doha round of multilateral trade negotiations. They welcomed France's commitment to supporting developing countries and the planned increase in its official development assistance.

France: Selected Economic Indicators
(Annual percentage change; unless otherwise indicated)
  2002 2003 2004 2005 2006 1/

Real economy (change in percent)


Real GDP

1.1 1.1 2.0 1.2 2.5

Domestic demand

1.2 1.9 2.8 2.1 2.7

CPI (year average)

1.9 2.2 2.3 1.9 2.0

Unemployment rate (in percent)

8.9 9.5 9.6 9.5 8.9

Gross national savings (percent of GDP)

20.0 19.3 19.1 18.6 18.4

Gross domestic investment (percent of GDP)

19.0 18.9 19.4 20.2 20.3

Public finance (percent of GDP) 2/


Central government balance

-3.7 -3.9 -3.2 -3.0 -2.5

General government balance

-3.2 -4.2 -3.7 -2.9 -2.6

General government gross debt

58.2 62.3 64.5 66.7 64.3

Money and interest rates


Money market rate (in percent) 3/

3.3 2.3 2.1 2.2 3.4

Government bond yield (in percent) 4/

4.9 4.2 4.2 3.5 3.8

Balance of payments (percent of GDP)


Trade balance

0.5 0.2 -0.4 -1.5 -1.6

Current account

1.0 0.4 -0.3 -1.6 -1.9

Official reserves (US$ billion) 5/

28.4 30.2 32.5 27.8 ...

Fund position (as of August 31, 2006)


Holdings of currency (percent of quota)


Holdings of SDRs (percent of allocation)


Quota (SDRs million)


Exchange rates


Exchange rate regime

Participant in EMU

Euro per U.S. dollar (September 28, 2006)


Nominal effective rate (2000=100) 6/

100.4 101.7 106.2 107.6 107.5

Real effective exchange rate (2000=100) 6/ 7/

98.7 99.8 103.5 104.4 102.8

Sources: Data provided by the authorities; and IMF staff estimates.

1/ Staff projections.

2/ Data for 2001-02 exclude the proceeds from the sale of UMTS licenses, which amount to about 0.1 percent of GDP.

3/ Data refer to the interbank rate (as from 1999 onwards). For 2006, data are as of January-September.

4/ Average yield to maturity on public sector bonds with original maturities of more than five years.

The figure for 2006 refers to August.

5/ Excluding gold, end-of-period; eurosystem definition. The figure for 2006 refers to August.

6/ The figure for 2006 refers to August.

7/ Based on relative normalized unit labor costs in manufacturing.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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