IMF Survey: France: Recovering Well But Public Debt a Challenge

IMF News, July 30, 2010

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Recovery is "well under way" but the outlook remains uncertain, "clouded by lingering concerns about the European sovereign debt crisis and possible spillovers in the euro area as well as domestic policy challenges."
IMF projection for GDP growth:
- "1.4 percent in 2010"
- "1.6 percent in 2011"
Factors weighing on demand:
- Persistently high unemployment
- Imminent fiscal consolidation in France and its main trading partners
- Some relief from the recent depreciation of the euro
Early rebound characteristics:
- France exited the recession in the second quarter of 2009
- Relative resilience attributed to a fairly resilient financial sector, large social safety nets, timely and decisive government intervention, and a comparatively less open economy

Policy focus shift: from crisis management to strengthening foundations of the economy
- Emphasis on following through with fiscal consolidation
- Strengthening financial stability
- Implementing growth-oriented structural reforms
To achieve a stronger and sustainable recovery, IMF economists recommend pursuing the above policy directions

Fiscal impact of crisis:
- General government deficit rose to "7 percent of GDP" in 2009
- General government gross debt reached "about 78 percent of GDP" in 2009
Fiscal objective under the Stability and Growth Pact:
- Reduce the overall fiscal deficit to "3 percent of GDP by 2013"
Authorities’ response:
- Recently announced a raft of fiscal consolidation measures involving all levels of government
- Major pension reform announced to reduce the pension system deficit over time
- Gradually raising the legal retirement age from "60 to 62 years"
- Gradually raising the legal minimum age of full pension entitlement from "65 to 67 years"
IMF recommendations for fiscal adjustment:
- Focus on measures with the least detrimental impact on economic activity, such as entitlement reforms in the pension and healthcare systems
- Base consolidation on realistic macroeconomic forecasts
- Enhance credibility through an appropriate fiscal rule
- Maintain efforts to control local government spending and constrain central government and social security expenditures

Banking sector resilience:
- Tier 1 capital ratio rose from "8.7" in 2008 to "10.2" in 2009
- Euro area average Tier 1 capital ratio was "9.1"
Ongoing risks and conditions:
- New risks from a fragile recovery and concerns about European sovereign debt
- Private credit growth remains sluggish, especially in the corporate sector, driven more by depressed credit demand than by short supply
- Nonperforming loans have risen; weak growth may further pressure loan quality
- Funding pressures could intensify if European turbulence continues
EU-wide stress test outcomes:
- The four major banking groups participating represent "about 80 percent of the French banking system"
- All French banks passed the stress test and showed strong capacity to withstand the assumed level of stress
- Publication of stress test results and full disclosure of sovereign exposure improve transparency and market assessment
Regulatory and supervisory reforms:
- National supervisory arrangements reformed, unifying banking and insurance and strengthening consumer protection
- Crucial next step: set up the national systemic risk board to enable close cooperation with the envisaged European Systemic Risk Board
- France should remain engaged in international regulatory reform processes and participate in macroeconomic impact studies and follow-up work

Rationale: fully implementing the authorities’ ambitious structural reform agenda is essential to recoup output loss from the recession and strengthen the recovery
Priority reform areas and recommendations:
- Moderate wage costs, increase competition, and promote innovation to improve competitiveness and benefit from world trade expansion
- Focus urgently on job creation and improving market efficiency
- Labor market activation and training policies
- Continue minimum wage moderation to establish a motivating pay scale for young and low-skilled workers
- Improve incentives for continued work by senior workers (including effective job-search requirements) alongside pension reform
- Further deregulation of product markets to enhance economic efficiency and raise welfare
- Follow the EU Services Directive to achieve further liberalization, including in professional services

IMF Survey: France: Recovering Well But Public Debt a Challenge, July 30, 2010