Public Information Notice: IMF Concludes Article IV Consultation with France

October 28, 1999

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.

On October 22, 1999, the Executive Board concluded the Article IV consultation with France.1


The economic recovery—which began hesitantly in the mid-1990s—strengthened in the first half of 1998 when internal demand became the driving force in a setting of price stability, strong competitiveness, and falling interest rates. By summer 1998, though, a weaker external environment in the wake of the emerging market crises had started to dampen the upswing. Activity softened as business confidence deteriorated and excessive inventories were worked out. Nonetheless, GDP growth for the year (more than 3 percent) was still the fastest in the decade.

This economic turbulence (trou d'air) lasted through the first quarter of 1999, after which evidence of a renewed momentum in the expansion became more pervasive: consumption remained buoyant, business sentiment and investment plans improved, industrial production emerged from a seven-month lull, order books expanded, and external prospects brightened up.

Since July 1997 the unemployment rate has been declining from an all-time high to 11.3 percent in August 1999, as employment growth (at an annual rate of about 2 percent in 1998 and the first half of 1999) responded to the cyclical recovery, thus providing a powerful boost to household consumption and GDP growth in a virtuous, self-reinforcing circle. An important factor behind the 1998 record job creation was a significant broadening of subsidized employment in noncommercial activities.

The policy mix has been broadly supportive of the upswing. Monetary conditions have eased in the run up to the third stage of EMU and through mid-1999: lower interest rates have supported investment demand and the construction sector, while a depreciating currency has buttressed external competitiveness. Inflation, nonetheless, has remained subdued owing to pervasive wage moderation and favorable movements in commodity prices.

On the fiscal front, the 1998 deficit target of 2.7 percent of GDP was met, although planned reductions in the tax burden could not materialize. The revised 1999 deficit target of 2.2 percent of GDP will be met, in spite of lower-than-anticipated inflation and slippages in healthcare spending. The proposed 2000 budget is broadly in line with the 2000-2002 Stability Program: it foresees a 1.8 percent of GDP deficit for the general government and a small reduction in the tax burden.

On these trends, the latest staff projection for 1999 GDP growth is about 2½ percent, fueled by strong domestic demand. For the year 2000, the staff anticipates growth at about 3 percent.

Executive Board Assessment

Executive Directors commended the authorities for policies that had yielded a remarkable economic performance, and contributed to the resilience of domestic demand in the face of the adverse effects of weakness in emerging markets that had been felt in some European countries. Growth had been sustained at one of the highest levels in the euro area, inflation had been subdued, the budget balance had been maintained within the Maastricht requirements, and employment creation had been significant.

Directors, while supporting the policies that are being followed to reduce unemployment, encouraged the authorities to strengthen their efforts to tackle long-standing structural problems so as to promote further growth and lower unemployment. Many Directors pointed out that the favorable near-term outlook offered a propitious setting for faster fiscal consolidation and deeper structural reforms. They underscored that early implementation of structural reforms, in particular—including in the fiscal area—would be crucial to put the economy on a path of sustained high growth. Directors generally recognized, however, that to ensure the durability and success of ambitious and socially sensitive structural reforms, it would be necessary to garner broad-based consensus. A number of Directors agreed with the authorities that a more rapid pace of consolidation and reforms could, by reducing the extent of social consensus, undermine hard-won private sector confidence. These Directors felt that the present cautious pace of reform was appropriate.

In calling for a faster pace of fiscal reform and consolidation, many Directors considered that, while the general orientation of the authorities' stability program for 2000-2002 was sound, its objectives were unambitious. They indicated that public expenditure plans should have been aimed toward achieving deeper deficit and tax cuts. Accordingly, they urged the authorities to strengthen their consolidation efforts in the upcoming revision of their medium-term plan, with a view to achieving a balanced budget and sizable tax reductions by 2003. This would be all the more appropriate if short-term growth turns out to be more robust than currently projected. They stressed that fiscal adjustment along these lines would not only help provision for the demographic shock ahead, but would also catalyze favorable supply-side responses and more satisfactory job creation. Given the planned evolution of public spending, some Directors suggested that further consideration should be given to the issue of the right balance between cutting deficits and reducing the tax burden.

Most Directors agreed that restraint in public expenditure should be sought at the level of the social security system. From this perspective, they urged the authorities to restore incentives to contain health care spending, and to address the long-term imbalances of the current pension system through further reform. In addition, they saw scope for selectively streamlining the civil service without undermining the high quality of public administration.

Directors held the view that tax cuts and tax reform should be critical elements of the authorities' medium-term fiscal strategy. In welcoming ongoing initiatives to shift the burden of taxation away from labor, they noted nonetheless the lack of progress in reforming personal income taxes, and the risk of a misalignment between France's corporate tax rates vis-à-vis those in major partners.

Most Directors acknowledged that the 35-hour workweek initiative appeared to have had a positive impact on the social dialogue, and some believed that its impact on work organization was also positive. However, they expressed concern that the initiative would not contribute much to unemployment reduction, could be costly to the budget, and would worsen the effect of the coming demographic shock. Directors agreed that the initiative should be implemented with maximum flexibility and without undue restraint on permissible overtime or work schedules freely agreed in negotiations at the firm level.

As for other labor market policies, Directors thought that the authorities' approach—especially the reductions in social security contributions on low wages and the fiscal incentives to increase part-time work—had contributed to sustaining labor demand in recent years. In their view, however, employment support programs needed to be streamlined and, more fundamentally, major reductions in structural unemployment would require a careful reevaluation of the root causes of this problem. Crucial actions in this regard would be ensuring greater flexibility in wage determination, strengthening the educational and vocational system in order to reduce the number of low-skilled and inexperienced workers, and broadening programs that offered on-the-job training at wages commensurate with the low productivity of the trainees. In addition, several Directors advised giving high priority to redesigning the system of unemployment compensation and welfare assistance to reinforce the incentives for the jobless and the inactive to seek work. This could be accomplished through tighter eligibility requirements and a more gradual reduction of social assistance upon entering employment.

Directors commended the significant progress on the privatization front, but saw further scope for reducing state involvement in commercial enterprises. Directors took note of ongoing market-driven changes in the financial system. They also observed that supervisory practices were evolving appropriately to meet the challenges of global capital markets. Nonetheless, many Directors advised the authorities to discontinue the practice of setting interest rates on some saving accounts, in order to reap the full benefits of financial integration through enhanced domestic and foreign competition.

Directors praised France's general development assistance and urged that it be kept at a high level despite budget stringency.

Directors noted that France maintains high standards of data provision to the Fund for surveillance, and is a subscriber to the Special Data Dissemination Standard and the Dissemination Standard Bulletin Board.

France: Selected Economic Indicators

1995 1996 1997 1998 1999 1/

Real economy (change in percent)
Real GDP 2.1 1.5 2.3 3.4 2.5
Domestic demand 1.8 0.9 0.9 3.7 2.6
CPI (year average) 1.8 2.1 1.3 0.8 0.5
Unemployment rate (in percent 11.7 12.4 12.5 11.6 11.3
Gross national saving (percent of GDP) 18.6 18.7 19.7 19.9 20.5
Gross capital formation (percent of GDP) 17.9 17.4 17.1 17.2 17.6
Public finance (percent of GDP)
Central government balance -4.2 -3.7 -2.6 -3.0 -2.7
General government balance -4.9 -4.1 -3.0 -2.7 -2.2
Public debt 52.5 55.4 57.8 58.2 58.7
Money and interest rates
M3 (end of year, percent change) 4.3 -3.5 1.6 4.3
Money market rate (in percent) 2/ 6.6 3.8 3.3 3.4
Government bond yield (in percent) 2/ 7.6 6.3 5.6 4.7
Balance of payments (in percent of GDP)
Trade balance (percent of GDP) 0.7 1.0 2.0 1.8 1.3
Current account (percent of GDP) 0.7 1.3 2.8 2.8 2.5
Official reserves (US$ billion) 3/ 26.9 26.8 30.9 44.3 38.6
Exchange rates
Exchange rate regime
Member of euro area 4/
Nominal effective exchange rate
(1995= 100) 5/
100 99.9 96.7 97.2 95.6
Real effective exchange rate
(1995 = 100) 5/ 6/
100 97.2 93.3 93.1 89.9

1/ Staff projections, unless otherwise noted.
2/ September 1999.
3/ Excluding gold, as of June 1999; From 1999, eurosystem definition
4/ While the franc to euro rate was irrevocably fixed on January 1, 1999, the external exchange rate of the euro is market determined. The franc will remain in circulation until 2002, when euro banknotes and coins will be issued.
5/ July 1999.
6/ 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. In this PIN, the main features of the Board's discussion are described.


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