## France: Staff Concluding Statement of the 2021 Article IV Mission

_IMF News, November 9, 2021_

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## Bibliographic details
- Published: November 9, 2021

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### Mission summary and key messages
- France experienced one of the deepest COVID shocks in Europe but has seen a strong recovery supported by robust policy measures and high vaccination rates.
- Continued downside risks justify a supportive fiscal stance in 2022 focused on investment to raise medium-term growth and reduce scarring.
- From 2023 onward, France should pursue gradual expenditure-based fiscal consolidation to rebuild buffers and put public debt on a firmly declining path, while protecting critical investments for the green and digital transitions.
- Reforms are needed to boost international competitiveness, productivity growth, worker skills, and equitable opportunities for youth.
- The financial sector has performed well through the crisis, but vigilance is warranted.

### Economic outlook and near-term risks
- Vaccination and public-health measures:
  - 88 percent of adults vaccinated.
  - Measures cited include vaccine or test-linked health pass for participation at most public venues and compulsory vaccination for certain jobs.
- Recent economic performance:
  - Output contracted by 8.0 percent in 2020.
  - Economy nearly regaining its pre-crisis level by 2021Q3.
  - Investment recovering more quickly than consumption and already exceeds its pre-crisis level.
  - Employment is robust and the unemployment rate has remained relatively stable.
- IMF staff forecasts and projections:
  - Revised up the 2021 GDP growth forecast to around 6¾ percent in 2021.
  - 2022 growth expected to moderate to 3.7 percent.
  - Headline inflation projected to increase to about 2 percent this year but drop to 1.7 percent by next year.
  - Unemployment rate forecast to decrease to 7.8 percent in 2021.
- Risks to the outlook:
  - Downside risks: increasingly virulent strains, waning vaccine effectiveness, persistent supply-chain bottlenecks, and disorderly transformations causing inefficient labor and capital allocation.
  - Upside risks: faster rundown of accumulated savings or stronger demand recovery in hard-hit sectors.

### Fiscal policy for the recovery and medium-term consolidation
- Crisis support and current stance:
  - Total envelope for crisis and recovery measures for 2020–22 about 28 percent of 2020 GDP.
  - Authorities have begun to scale down and focus support as the crisis ebbs.
- 2022 policy guidance:
  - A moderately expansionary fiscal stance is warranted; additional stimulus should be targeted on supply-side measures to boost potential growth.
  - Support investment policies in France Relance and NextGen EU; France 2030 could boost innovation but its governance should include significant independent private sector component.
  - Fiscal policy should remain flexible and provide targeted additional relief if downside risks materialize.
- Energy-price response and social protection:
  - IMF staff view recent inflation from energy prices as largely transitory and support targeted and temporary transfers to vulnerable households (e.g., revalorisation du chèque énergie).
  - Advise against broad-based transfers and long-lasting price-control measures; cut in electricity taxes, cap on gas prices, and indemnité inflation should remain strictly temporary.
  - Further expansion of the chèque énergie would be appropriate if energy prices rise further.
- Medium-term fiscal consolidation path:
  - Under unchanged policies, fiscal deficit would remain above 3 percent of GDP and debt-to-GDP would keep increasing.
  - Recommend gradual adjustment to reach pre-crisis medium-term objective (MTO) of a 0.4 percent of GDP structural deficit before the end of the decade.
  - This target would require a cumulative fiscal effort of about 4¾ percentage points of GDP over seven years, assuming no further major shocks.
  - Suggested profile: average annual reduction in the primary structural deficit of around 0.6 percent of GDP over 2023-26 and around 0.8 percent of GDP per year in the medium-term until the MTO is met.
- Composition of adjustment:
  - Concentrate on reducing the growth rate of current public expenditure while allowing room for needed investment (e.g., France Relance, NextGen EU).
  - Pursue planned reforms in pensions, unemployment insurance, and the civil service.
  - Trim tax expenditures that hinder climate objectives, reduce overlaps between levels of government, and simplify/unify social support schemes to improve targeting and incentives.
  - Future revenue from higher carbon pricing could help finance environmental investments and compensation for vulnerable households.
- Fiscal rules and oversight:
  - IMF staff calculations: a limit on expenditure growth of 1.7 percent per year (compared to 2.4 percent under the baseline) would achieve the recommended adjustment path.
  - Fiscal rule should be multiyear at the general government level, include a mechanism to monitor deviations, and strengthen the Fiscal Council (HCFP).
  - France should not wait for European action to implement its own fiscal rule.

### Financial sector stability and macroprudential policy
- Banking sector performance:
  - Banking sector withstood the crisis well and provided ample credit, reflecting healthy capital and liquidity positions and policy support.
  - Widespread corporate defaults have not materialized, but some delayed, sector-specific solvency risk could emerge as emergency supports phase out.
  - Banks should monitor asset quality, proactively engage with viable but challenged corporates (drawing on options including the prêt participatif), and deploy provisions and capital buffers as needed.
  - Monitor conglomerate intragroup transactions and consider concentration thresholds to limit risk from highly indebted firms.
  - Adjust incentives to reduce extraordinary contingent liabilities of the State as recovery firms.
- Macroprudential stance:
  - Broadly appropriate but may require tightening if debt-driven asset valuation risks increase.
  - Support timely re-activation of the counter-cyclical capital buffer—possibly in 2023—conditional on the recovery unfolding at least as quickly as under staff’s projections.
  - Risks from the real estate market require continued vigilance: real estate price growth accelerated in 2020; household debt to income remains elevated.
  - If trends continue, fine tuning borrower-based measures or deploying complementary measures may become appropriate.

### Structural reforms, labor market, competitiveness, and the green transition
- Labor market and skills:
  - Short-time work scheme prevented large-scale employment losses and preserved employment relationships.
  - Labor market conditions tightening, vacancies rising, while long-term unemployment remains high.
  - Policies should alleviate skills shortages by combining job-search assistance with training programs.
  - Support programs in the 2022 budget: contrat d’engagement for youth out of work and education; mesures pour le développement des compétences et l’insertion dans l’emploi to boost training.
  - Address educational disparities and strengthen school-to-work transitions to distribute growth dividends equitably.
- Competitiveness and product markets:
  - France stabilized export performance but further improvement is needed.
  - Recommend product market reforms to ease regulation and entry barriers in non-tradable service sectors.
  - Foster innovation via human capital investment and funding for basic research, including in sectors at the technological frontier.
  - Properly designed France 2030 program could contribute.
- Climate policy and green transition:
  - IMF staff welcome authorities’ push for carbon neutrality; objective enshrined in French law since the 2019 Climate and Energy Law.
  - EU’s “Fit for 55” policies increase ambition toward EU carbon neutrality by 2050.
  - Recommend additional and strengthened green policies, including adequate carbon pricing with mitigating measures for low-income households.
  - Leverage French firms in automobiles, power generation, and aeronautics to establish technological lead in green energy generation and zero emission transportation.
  - Worker training and skills matching are critical to facilitate the green transition without employment losses.

*France: Staff Concluding Statement of the 2021 Article IV Mission (November 9, 2021).*

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## References

- [France and the IMF](http://www.imf.org/external/country/FRA/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2021/11/09/mcs-france-staff-concluding-statement-2021-article-iv-mission_