France: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, May 22, 2025
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- Published: May 22, 2025
Mission summary
- IMF mission conducted discussions during May 12-22 for the 2025 Article IV Consultation with France; mission led by Manuela Goretti and comprising Florian Misch, Rasmane Ouedraogo, Maryam Vaziri, and Torsten Wezel.
- Key assessment: French economy has demonstrated resilience despite high uncertainty, with disinflation progressing and the labor market remaining robust.
- Main challenges: high and rising public debt, significant domestic and external headwinds to the recovery, and the need to strengthen public finances and pursue structural reforms.
- Authorities’ commitment: bring the deficit below 3 percent of GDP by 2029; mission welcomes this commitment and calls for a credible and well-designed package of measures.
- Financial sector: remains resilient, but supervisory practices must continue adapting to an increasingly complex financial landscape.
- EU dimension: sustained efforts to deepen the European single market are critical to support the economy and strengthen shock absorption.
Economic outlook
- Short-term growth projections:
- Real GDP growth projected to slow to 0.6 percent in 2025.
- Real GDP growth projected to reach 1 percent in 2026.
- Medium- and long-term projections:
- Over the medium term, growth projected to converge to around 1.2 percent.
- Growth projected to decelerate towards its long-term potential of 1 percent.
- Inflation projections:
- Average headline inflation projected at 1.2 percent in 2025.
- Core inflation projected at 1.9 percent in 2025.
- Drivers and risks:
- Projections reflect delayed recovery in private consumption and investment due to weak confidence and fiscal tightening, despite some uplift from monetary policy easing.
- Weaker external demand amid trade tensions, market volatility, and geo-economic uncertainty expected to dampen exports and investment.
- Projections based on April World Economic Outlook global assumptions and do not reflect the latest trade policy announcements.
- Downside risk factors:
- Deepening geoeconomic fragmentation and rising trade tensions could disrupt trade and financial flows, tighten financial conditions, reduce domestic demand, and worsen debt dynamics.
- Political fragmentation and social tensions could delay fiscal consolidation and reform efforts, raising fiscal risks.
- Upside scenarios:
- Easing trade tensions and renewed structural reform momentum could improve medium-term growth.
- Stronger consumption if household saving rates ease more rapidly.
- Higher demand in France and Europe—including for defense and for digital and green technologies—could boost investment and exports.
- Deeper EU coordination and integration could strengthen reform outcomes.
Fiscal policy: reducing debt while refocusing spending priorities
- Current fiscal assessment:
- Under staff’s policy baseline (legislated and clearly specified measures only), deficit projected to decline to 5.4 percent of GDP in 2025, in line with the budget target.
- Pending approval of significant additional measures, the deficit would remain around 6 percent of GDP in the medium term, keeping debt on an upward trend until 2030.
- Debt dynamics have weakened significantly after fiscal slippages in 2023 and 2024; debt remains highly sensitive to the real interest rate and growth path.
- Policy recommendation and targets:
- Staff recommends a frontloaded structural fiscal effort of 1.1 percent of GDP in 2026.
- Followed by an average of about 0.9 percent of GDP per year over the medium term.
- The recommended adjustment would allow exit from the excessive deficit procedure by end-2029, as targeted.
- Staff’s debt sustainability analysis indicates the debt-stabilizing primary balance would be reached in 2027 under the recommended path.
- Principles for fiscal consolidation:
- Given France’s already high tax-to-GDP ratio, new tax measures should focus on reducing inefficient tax expenditures and tackling tax avoidance while improving equity.
- Exceptional temporary revenue measures can help kickstart adjustment, but sustained tax-based consolidation of the needed magnitude would hamper business confidence, household consumption, and growth potential.
- Continue monitoring and evaluation of tax expenditure programs to address inefficiencies and generate savings; simplify the tax system to facilitate revenue forecasting.
- Rationalize spending and strengthen efficiency across central government, social security, and local governments—France has the highest spending-to-GDP ratio among EU countries.
- Preserve growth-enhancing investment in key priority areas and mitigate distributional impacts on the most vulnerable.
- Expand spending reviews and minimize overlaps across government entities, including local governments, to streamline spending and reduce red tape.
- Improve targeting of social benefits (including reviewing eligibility and duration of unemployment benefits) to better target active labor market initiatives.
- Further simplify and harmonize pension schemes while ensuring a balanced system; build on the 2023 pension reform to foster less fragmented and longer careers and enhance sustainability and intergenerational equity of the social security system.
- Enhance monitoring and financial coordination to generate savings at local and national levels.
- Public finance management improvements:
- Authorities’ initiatives to reinforce public finances forecasting and budget controls are welcome.
- March 2025 Action plan aims at enhancing monitoring of tax revenue, fostering greater transparency, and reinforcing the role of the High Council for Public Finances.
- Sustained efforts needed to identify and proactively address fiscal risks and enhance fiscal policy credibility.
- Contingency plans are necessary to ensure pressing priority spending needs, including in defense, are met without compromising public finances.
Macrostructural policies to support jobs and productivity growth
- Challenge and importance:
- Raising weak productivity growth is critical given substantial fiscal consolidation needs.
- The per capita income gap between France and the US has increased since the early 2000s and now exceeds 20 percent, primarily due to lower productivity and employment in France.
- An increase in potential GDP growth of 0.3 percentage points could help reduce public debt by nearly 10 percent of GDP over the long term.
- Policies to harness digital and green transitions:
- France is well-positioned in low-carbon technologies and has potential to become a European hub for Artificial Intelligence.
- Authorities reviewing and rationalizing state aid and R&D tax expenditures to focus on most impactful schemes and better target eligibility criteria.
- Enhance access to finance and reduce financing costs for productive but credit-constrained firms.
- Advance the EU Savings and Investment Union to increase availability of capital and its efficient allocation.
- Market structure and regulatory reform:
- Ease entry barriers and reduce regulatory burden, particularly administrative market entry barriers in some services sectors.
- The Simplification Bill, currently under discussion, would reduce regulatory burden and streamline requirements, especially for small and medium size firms.
- At the EU level, deepen the single market by removing remaining intra-EU trade barriers and harmonizing regulations to help firms achieve economies of scale and incentivize innovation.
- Labor market and inclusion:
- Sustain efforts to promote employment and job quality amid an aging workforce.
- Employment rates have increased but remain low in segments of the population compared to other countries.
- Policy areas: further social benefit reforms to enhance work incentives and reduce career fragmentation (especially for younger and older individuals); raise labor force participation of women (including recent initiatives to support STEM careers); better integrate migrants into the labor market.
- Promote workforce skills and healthy aging to contribute to job quality.
Adapting to a complex financial landscape
- Banking sector resilience:
- Banking sector demonstrated resilience to recent shocks, supported by prudent lending standards and strong precautionary buffers.
- Profitability remains below the EU average, but banks’ solvency and liquidity positions are robust, with adequate buffers.
- Sound prudential measures mitigate housing market risks as property prices stabilize.
- Risks from corporate indebtedness and sovereign exposures remain manageable.
- French banks show resilience under severe geopolitical and recessionary stress test scenarios applied in the IMF’s 2025 Financial Sector Assessment Program (FSAP).
- Macroprudential and supervisory recommendations:
- Continue adapting strong financial oversight and macroprudential toolkit to evolving risks.
- Maintain and update conservative borrower-based limits to reflect evolving risks.
- Continue improving guidance regarding the level of the existing countercyclical buffer and proactively adjust rates as warranted.
- Financial institutions should proactively integrate cyber and climate risks into governance and risk management.
- Non-bank financial interconnections and liquidity:
- Connections between banking system, insurance firms, and domestic funding markets warrant continued close monitoring.
- FSAP stress test indicates investment funds possess sufficient liquidity to withstand large redemption shocks; banks’ liquidity buffers can absorb potential market shocks from associated fixed-income sell-offs.
- Liquidity management tools to contain redemption risks have been widely adopted.
- Scope exists to further strengthen oversight through greater monitoring and data sharing on fund liability structures and closer collaboration among non-bank financial institutions supervisors in France and at the EU level.
Source: IMF staff concluding statement of the 2025 Article IV mission to France, May 22, 2025.