France is Building Resilience Through Bold Reforms

IMF News, February 1, 2023

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After a strong economic recovery from the pandemic, France was hit by an energy shock driven by Russia’s invasion of Ukraine.
Inflation rose and economic activity slowed.
The economy has remained resilient and inflation well below other EU countries due to:
- more limited reliance on Russian gas, and
- a strong policy response—including price controls on gas and electricity, tax reductions on fuel products, transfer payments, and measures to support businesses.
These measures cushioned the energy price shock but have been costly for the government and not well targeted.

Due partly to the support measures, France’s budget deficit has remained high and debt has risen in relation to gross domestic product.
Public debt levels are also increasing relative to euro area peers.
To move the budget closer to balance and set the debt ratio on a declining path, France should undertake gradual but substantial fiscal consolidation over the medium term.
Recommended sequencing and elements:
- Begin by taking advantage of the phase-out of pandemic support to start reducing the fiscal deficit modestly in 2023.
- Follow with steady consolidation underpinned by expenditure reforms.
- Leave space to accelerate green and digital investment while consolidating.

The government has advanced reforms that both boost growth potential and reduce fiscal costs:
- Revised unemployment benefits that will help raise labor supply.
- A comprehensive pension reform that aims to balance the pension system and increase the employment rate of older workers by moving the effective retirement age closer to the EU average.
Other areas for fiscal reform where spending or outcomes diverge from peers:
- tax exemptions,
- social benefits,
- healthcare, and
- subnational spending.
Beyond fiscal adjustments, reforms to boost growth potential include:
- accelerating the green transition,
- improving product and service markets to boost competitiveness, and
- upskilling workers and increasing the efficiency of the educational system.

The banking sector has weathered the crisis well and supported the economic recovery.
Global financial stability risks are increasing.
The authorities recently decided to raise the counter-cyclical buffer, a capital requirement, to increase the cushion against any sudden deterioration of financial conditions.
Continued vigilance will be required to guard against any emerging weaknesses in banks’ lending portfolios.

France is Building Resilience Through Bold Reforms, By the France team, IMF European Department, February 1, 2023.