ECONOMIC HEALTH CHECK
Confidence, Competitiveness Key to Boost Recovery in France
August 5, 2013
- Reforms to improve key economic institutions, help investment, job creation
- Slow the pace of deficit reduction, reduce spending rather than increase taxes
- Resilient banks need to adapt to new financial regulations by securing stable funding sources
There are signs the French economy is recovering but a stronger and sustained boost to investment and job creation is needed to reduce unemployment, which reached 10.9 percent in May.
The International Monetary Fund’s latest annual check-up of the French economy predicts the economy will contract by 0.2 percent in 2013 and grow by 0.8 percent in 2014. Weak conditions in Europe, low confidence and sizeable efforts to reduce the government deficit over the past two years have dampened growth.
The slow pace of reforms to make the labor and product markets more competitive has also undermined the economy’s potential to grow, and decrease competitiveness in export markets.
Reforms to boost growth
The authorities have begun to address these challenges, and have given structural reforms an important forward momentum with measures to
• reduce the payroll taxes
• give enterprises greater flexibility to adjust wages and working hours while reinforcing job security
• improve job training and to simplify government regulations.
”Combined with these reforms, an opening of product markets to greater competition, notably in the more protected services sector, would be an important lever of productivity growth and employment creation for the economy,” said Edward Gardner, an assistant director in the IMF’s European Department and head of the mission that conducted the assessment.
By the end of 2013, the government will have completed two-thirds of the effort that began in 2011 to bring deficits to a stable position. Given this track record and the still hesitant recovery, the government should ease the pace of adjustment.
At the same time, the government needs to rebalance efforts and reduce spending rather than increase taxes, which are among the highest by international standards and adversely affect investment and job creation.
Large and internationally interconnected French banks have made significant progress to strengthen their balance sheets, all the while preserving their capacity to lend to the economy.
Financial stability is stronger but the French financial system still needs to adapt fully to new international prudential requirements, notably in terms of funding structures.