Transcript

Washington, D.C.
Wednesday, February 20, 2008

P R O C E E D I N G S

MS. GAVIRIA: Good day. Welcome to this conference call on the IMF 2007 Article IV Consultation with France. I'm Angela Gaviria and I'm with the External Relations Department. Before I introduce the speakers, I would like to remind you that the documents related to this conference call, which include the staff report and the Public Information Notice in English and French, as well as video clips in both languages, were posted this morning at 7 a.m. under embargo in our Media Briefing Center. Now, let me turn to the speakers. With me are Alessandro Leipold, Deputy Director in the European Department and Mission Chief for France; and Jeffrey Franks, Division Chief in the European Department. Alessandro will make some introductory remarks, and then they both will be happy to take your questions. Alessandro?

MR. LEIPOLD: Thank you very much. I'm Alessandro Leipold, Deputy Director of the European Department and Mission Chief for France. The reason for this conference call is that the Executive Board of the IMF on Friday concluded its annual surveillance discussion of the French economy, and before I take your questions I would like to highlight three main points.

First, there's a strong sentiment that with the government's ambitious reform agenda, France is on the move. This agenda tackles a wide range of deep-seated rigidities, and includes structural reforms that target labor market rigidities and reforms that look at tackling widespread constraints on competition, particularly in services markets. It was felt that these reforms together can generate a large payoff with greater opportunities for all.

The Fund's Executive Directors were unanimous, in fact, in seeing such reforms, rather than any short-term boost to households' incomes, as the best and most durable way to raise households' purchasing power, which, as you know, is, at present, at the center of the policy debate in France. So they, and indeed we, look forward to this Spring's Loi de Modernisation, which should implement many of the Attali Commission's recommendations, which we share. Directors also recommended other initiatives, among which we would like to see steps directly tackling remaining rigidities, such as the 35-hour work week constraints without recourse, as has been habitual, to the public purse and public money to circumvent such restrictions.

Second, let's face it, there are headwinds from a more testing international environment. They are strong, and they are clouding the near-term growth outlook. Consequently, our growth projection, as for the Euro Area as a whole is now some half of a percentage point lower than it was in the October 2007 World Economic Outlook. For France, we now project GDP growth of 1.5 percent in 2008, and here I would just make, in passing very quickly, an observation that if you want our latest numbers, you should look at the table that is in the supplement that was issued for the staff report among all the documents that you have.

So, it's evident that the current conjuncture presents significant challenges to policymaking. For fiscal policy, Directors agreed that the 2008 budget contains several commendable initiatives to restrain spending, including a notable reduction in public employment. They noted, however, that there is a pause in fiscal consolidation. With the general government deficit that we project at around 2-3/4 percent of GDP in 2008, near the Maastricht limit, most Directors agreed with staff that there is no fiscal space for further discretionary stimulus.

Going forward, all Directors stressed the need for France to pursue a medium-term fiscal policy that, as the Managing Director has put it, is all about saving for a rainy day. But how do you save for a rainy day? By moving steadily toward France's medium-term objective of budget balance throughout the cycle, on a regular path of underlying adjustment.

Third, a few words on the financial system and the recent subprime turbulence. The assessment is that the French system has weathered the recent market turmoil comparatively well and that repercussions in the real economy have so far been limited. Indeed, bank losses to date imply manageable effects in spite of the heavy loss incurred, for example, by Societé Générale. Well-capitalized banks, limited exposure to the U.S. subprime market and a comprehensive supervisory framework have contributed to this resilience. But, of course, as you all know, global market conditions have yet to return to normal, and there is the possibility of further spillovers from other countries, and particularly from other market segments, so continued vigilance is paramount.

All in all, to conclude, we have an assessment of the Fund's Executive Board that holds considerable promise for France, even at this relatively uncertain juncture, if the announced reforms are implemented in a timely and ambitious manner, and if fiscal consolidation is resumed. In staffs' view, the international experience shows that the two actions mutually reinforce each other, and France will greatly benefit from such joint pursuit.

I'll be happy to take questions.

QUESTIONER: You said 1.5 percent forecast for this year, and that's mentioned earlier in the report. But later in the report and in the table in the back you say 1.6 percent.  So, I'm wondering if you could clarify which is the forecast.

MR. LEIPOLD: Yes, unfortunately our documents are not that easy to wade through. If you look at what was put out, there's also something called a supplement to the staff report, and in that table, Table 1, the GDP growth rate for 2008 is 1.5 percent, and for example, the general government balance is a deficit of 2.8 percent of GDP. That is the table that you will want to look at. I hope you can find it.

QUESTIONER: Given some of the not just economic headwinds but political headwinds that President Sarkozy seems to be facing now, what's the risk to the economy if he doesn't, if he's not able to push through his program as currently advertised?

MR. LEIPOLD: Well, political headwinds are something that are a bit beyond our expertise to evaluate. All I can say is that Fund research has generally shown that reforms, and this may seem somewhat paradoxical perhaps, tend to be carried out more in difficult times than in easy times, so if one just looks at it from that angle, there may be actually a better chance of the reforms going through, but that's really difficult to say. I think the point is that in terms of commitment and will, there is little indication of flagging will and, as you know, the government has endorsed most of the recommendations of the Attali Commission and intends to put forward a comprehensive bill in the Spring, taking them up; it is also pursuing other initiatives as regards, for example, the liberalization of the retail sector and translating into law the agreement reached by social partners in the labor market. So, there's a whole raft of initiatives here, and we trust that once decisions have been reached the authorities will press ahead with the reforms. We have no reason to doubt that at the moment.

QUESTIONER: You talk about the possibility of spillovers from other countries and other markets. Could you be a bit more specific about that. What are you worried about there, especially as regards other countries?

MR. LEIPOLD: Actually, the reference to other countries is made more in passing. Frankly, the concern is more in spillovers from other markets. The spillovers from other countries, specifically from the U.S. subprime sector, have already occurred. What we are more worried about at this point is that the crisis is spreading from the subprime market to other markets; and, in particular, in the case of France, there is concern that if the current downgrading of monoline insurers, bond insurers, would continue, this could affect some French banks, and one could expect further write-downs.  We will obviously know more about this once the full-year results are reported in the coming days. Today we had the final results from BNP, which were relatively reassuring, as they confirmed record profits of 7.8 billion euros. There will be other results coming down the road, and we'll just have to watch that. But, frankly, where the current concern is, is more spillovers from other market segments, from the subprime to other market segments, and in the specific case as regards monolines.

MS. GAVIRIA: If there are no more questions, we conclude the conference call here.  I would like to mention that the video clips in English and French are available in broadcast quality at thenewsmarket.com where you can download those at no cost. Thank you all for participating, and goodnight.

MR. LEIPOLD: Thank you.