Public Information Notice No.  12/146

Public Information Notice: IMF Executive Board Concludes 2012 Article IV Consultation with France

December 21, 2012

On December 20, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with France.¹

Background

The growth outlook for France remains fragile reflecting weak conditions in Europe. While market tensions have recently eased, the path towards a resolution of the euro area crisis remains uncertain and fiscal consolidation throughout Europe will continue to depress demand. In this environment, growth is expected to slow markedly from 1.7 percent in 2011 to 0.2 percent in 2012, and to recover only very gradually to 0.4 percent in 2013. With job creation remaining subdued, unemployment is expected to rise further.

The recovery of the French economy is also hampered by a loss of competitiveness which is reflected in a steady loss of export market share and low profit margins relative to European partners, which in turn affects the ability of enterprises to invest and innovate. The competitiveness gap owes largely to impediments in the functioning of labor and product markets (especially services) accumulated over time. To begin to address these problems, the government has announced a reduction of employers’ social security contributions (to reduce labor costs), and has indicated that it would seek to make the labor market more adaptable based on the result of ongoing negotiations between the social partners.

The sizable fiscal consolidation which started in 2010 is continuing. The overall budget deficit is projected to come down from 7.5 percent of GDP in 2009 to 4.5 percent in 2012. The 2013 budget targets a further reduction of the deficit to 3 percent of GDP, with a view to reaching a balanced budget position over the medium term. Adjustment is heavily frontloaded and about equally divided (over the medium term) between revenue and expenditure measures. Based on the IMF’s more conservative growth outlook, the 2013 budget would result in a deficit of 3.5 percent of GDP.

Financial stability concerns, which arose in connection with euro area tensions and dollar liquidity problems in 2011, have abated considerably. French banks have moved aggressively to improve their solvency ratios and funding structures; and they are well positioned to comply ahead of schedule with internationally-set capital requirements. However, banks remain heavily reliant on wholesale funding, which could become a vulnerability in the event of renewed market stress.

Executive Board Assessment

Executive Directors welcomed the resilience of the French economy in withstanding relatively well the euro area crisis and enjoying a safe haven status. They noted, however, that economic growth remains sluggish and the near-term outlook is subject to downside risks. The main challenge going forward would be to further strengthen the recovery, while addressing the competitiveness gap vis-à-vis trading partners and safeguarding financial stability. In this context, Directors underscored the need to properly calibrate fiscal policy and remove structural rigidities that constrain competitiveness and growth.

Directors commended the authorities for their commitment to fiscal discipline in line with the euro-area stabilization strategy, and for the transposition of the EU Fiscal Compact into French law. They noted that the adoption of the fiscal responsibility law and creation of the Fiscal Council would strengthen credibility by anchoring fiscal policy to a balanced position over the medium term. Many Directors stressed that adherence to the EU’s fiscal target in 2013 would be crucial to preserve credibility and market confidence, and advised that contingency measures be prepared should downside risks materialize. Other Directors encouraged the authorities to refrain from additional fiscal tightening in the event of slower-than-expected growth in 2013. Directors called for a rebalancing of fiscal adjustment over the medium term toward additional expenditure containment in a growth-friendly manner, stressing the adverse supply side effects of the high tax ratio.

Directors underscored the need to address the competitiveness gap through deep labor and product market reforms. They welcomed the authorities’ recent decision to lower social security contributions, and recommended wage moderation as a supporting measure. They also welcomed the ongoing negotiations among social partners to improve the functioning of the labor market, and encouraged the authorities to move forward with the ambitious labor market reform. Directors also observed that greater competition in the services sector would help lower production costs and enhance the benefits of the labor market reform. They called on the authorities to open the services sector to more competition, while acknowledging the need for careful sequencing of the various reforms.

Directors noted the Financial System Stability Assessment’s findings that the French financial system has been resilient to shocks and that financial stability risks have receded. They commended the authorities’ strong regulatory and supervisory regime, and welcomed moves to boost financial oversight further, including at the European level. Directors welcomed the rapid improvements in bank capitalization and funding structures in the aftermath of the crisis. Nevertheless, they observed that banks remain exposed to the risk of financial stress owing to their still-significant reliance on wholesale funding and exposure to periphery euro-area countries. To stimulate deposit mobilization by banks, Directors encouraged further tax reform to create a level playing field and remove disincentives against bank deposits.