Press Release No. 15/328

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with France

July 10, 2015

On July 8, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with France.

A solid recovery is underway. The economy is expected to expand by 1.2 percent this year, supported by an accommodative external environment. Sharply lower oil prices, a depreciated euro, low interest rates on account of quantitative easing (QE), and the recovery in other euro area countries should underpin household consumption, lift export growth, and eventually foster a rebound in investment. Combined with a slowdown in fiscal consolidation, this should allow the output gap to narrow gradually, although unemployment is projected to decline only slowly. After falling to near zero, inflation is set to accelerate this year as euro depreciation and QE feed more fully into prices, and the effect of the oil price decline wears off. Short-term risks are evenly balanced, depending in part on the strength of the euro area recovery.

Structural rigidities continue to weigh on medium-term prospects. Potential output growth is fundamentally weaker than before the crisis, reflecting lower productivity growth and crisis legacies. Rising government spending has pushed up public debt and the tax burden. An extended period of solid wage growth despite declining productivity growth has eroded competitiveness, shrunk profit margins, and reduced firms’ capacity to invest and innovate. Labor market rigidities are hampering job creation and feeding high structural unemployment. Longstanding bottlenecks, including extensive regulation and barriers to competition in services, are hindering innovation, investment, and productivity growth. These rigidities could come to undermine medium-term growth, especially if reform implementation falters or external shocks materialize, such as lower growth in advanced countries or financial market volatility.

To address these medium-term challenges, the authorities have embarked on a range of reforms to raise economic growth, reduce unemployment, and consolidate the fiscal position. The Pacte de Responsabilité et de Solidarité and the CICE tax credit have reduced the labor tax wedge substantially. The Macron and Rebsamen laws are intended to liberalize services and improve the functioning of the labor market. The fiscal strategy, set out in the current multi-year budget law and the 2015 Stability Program, aims to bring the headline deficit below 3 percent of GDP by 2017, with a gradual adjustment based exclusively on spending containment.

Executive Board Assessment²

Executive Directors welcomed France’s recovery which, supported by an improved external environment, appears to be gathering momentum. Directors noted, however, that the need for further fiscal adjustment calls for a delicate balancing act in the period ahead and entrenched structural rigidities in the labor and product markets continue to restrain medium-term prospects. Accordingly, they encouraged the authorities to persevere with their efforts to rein in public spending, revive job creation, and remove bottlenecks to growth.

Directors commended the authorities for switching the focus of fiscal consolidation to expenditure measures. They considered that the pace of fiscal adjustment should be ambitious enough to safely achieve the medium-term fiscal targets, including a firmly declining path for the debt ratio, without unduly detracting from the recovery. Directors recommended that the adjustment be underpinned by structural measures, identified through comprehensive expenditure reviews at all levels of government.

Directors underscored the need for broad-based labor market reforms to return to pre-crisis rates of job creation. They welcomed progress in narrowing the labor tax wedge, recent measures to reduce legal uncertainty concerning dismissals, and plans to improve the social dialogue. To reduce unemployment more rapidly, Directors recommended allowing more flexibility in firm level agreements on hours and wages, reforming the minimum wage, and strengthening job search incentives for those receiving unemployment or welfare benefits.

Directors encouraged the authorities to maintain the momentum on product market reform. In particular, they agreed that further liberalizing regulated professions, dismantling bureaucratic hurdles to small enterprises, and removing barriers to competition in services will raise productivity and boost potential growth.

Directors noted that, while France’s banks are reasonably well placed to adapt to the Banking Union, the low interest rate environment may put pressure on margins for both banks and insurance companies. They stressed the need for close monitoring of financial risks and continued strengthening of bank capital and liquidity buffers in line with evolving regulatory requirements. They also recommended reviewing guaranteed interest rates under the regulated savings schemes and tax incentives on financial savings products.