July 1, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with France.
The economy fared better than most other large euro areas economies through the crisis, reflecting the resilience of private consumption, lack of financial fragmentation, and lower levels of household and corporate debt. Banks’ financial position has also been strengthened. But after two years of near stagnation unemployment remains high. A loss of competitiveness has also weighed on growth, and compressed profit margins have constrained investment.
The outlook is for a gradual recovery, with GDP growth projected at 0.7 percent in 2014 and 1.4 percent in 2015, based on stronger external and domestic private demand, reflecting gains in real disposable income and improved profit margins. Inflation is expected to remain subdued at around 1 percent. These trends should allow the private sector to become a source of net job creation this year.
Fiscal adjustment has been very substantial over the past three years, but the deficit was still 4.2 percent in 2013. The authorities’ program targets continued adjustment with a view to closing the structural fiscal deficit over the medium term, based on a program of expenditure containment. It also contains supply side measures, including tax reductions to reinvigorate investment and job creation.
Executive Directors noted that the French economy has shown resilience during the global financial crisis, but the pace of recovery has been slow. Going forward, Directors welcomed the authorities’ economic strategy outlined in the Stability Program and the National Reform Program, noting that the policies and objectives are well aligned. They concurred that an ambitious adjustment and reform agenda is critical to address structural imbalances, guard against future shocks, address the employment and competitiveness gaps, and boost the economy’s growth potential. In view of the implementation risks of this ambitious agenda, Directors considered that the strategy needs to be backed by comprehensive upfront measures in the fall budget, and could be boosted by deeper structural reforms.
Directors endorsed the authorities’ plan to undertake a steady and more moderate pace of fiscal adjustment, focusing on expenditure measures. They welcomed the progress made in reducing the fiscal deficit during difficult economic times. Looking ahead, they noted that the proposed pace of adjustment strikes an appropriate balance between the need to restore fiscal space and support recovery. Further, they considered that anchoring the adjustment on expenditure addresses the structural weakness of public finances, and urged the authorities to rely on structural measures to ensure a permanent slowdown in spending growth. Recognizing that these measures could be politically difficult to implement, they welcomed the authorities’ resolve to remain steadfast in pursuing the reform program, as there is little room for deviation if both tax cuts and deficit reduction are to be pursued simultaneously.
Directors welcomed the supply-side measures to revive investment and job creation, and encouraged further reforms to labor and product markets. They supported the renewed focus on fighting rents as a guiding principle to spur reform, and called for stronger effort to open protected sectors to greater competition. Directors encouraged the authorities to build on the labor market reforms taken since 2012 and to make the labor market more adaptable. They stressed the importance of enhancing the scope for enterprise-level negotiation based on a more cooperative social dialogue. Directors welcomed the efforts deployed to reduce unemployment among the low skilled, but also suggested that the minimum wage could be set with a view to increasing their job opportunities.
Directors observed that the economy and public finances are better shielded from banking shocks thanks to the efforts made by banks to build stronger liquidity and capital buffers and to an improved bank resolution framework. However, they noted that the regulatory framework is still evolving, and that additional adjustment will be needed on the part of banks to meet prudential requirements. Directors encouraged the authorities to ensure that banks’ key financing role is not constrained during this process, and to facilitate it by leveling the playing field in the taxation of financial instruments.