Public Information Notice No. 09/96

Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with France

July 31, 2009

On July 29, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with France.¹

Background

The global financial crisis and the contraction of world trade have pulled the French economy into a severe recession and put its financial sector under strain. Structural features combined with early policy action have helped soften the downturn, which is somewhat less pronounced than in the euro area as a whole. Nonetheless, unemployment has risen steeply since mid-2008, while consumer price inflation has come down rapidly. With the fiscal stance easing in 2008, the budget deficit exceeded the Maastricht ceiling. French banks faced the need to write down toxic assets, and government recapitalization and liquidity measures were required to support the sector. While significant, financial sector losses remained below those in peer countries.

The authorities responded to the deepening of the crisis in 2008 by adopting fiscal and financial sector measures. In response to the crisis automatic stabilizers were allowed to operate fully, with further support provided by a discretionary fiscal stimulus package (above 1½ percent of GDP for 2009-10). The fiscal measures are mostly front-loaded and relatively well diversified, with an emphasis on temporary investment expenditures and various tax breaks. The authorities also undertook a number of measures to recapitalize banks and support liquidity. Those measures have helped to stabilize the financial system and thus far no French bank has come under majority state ownership. France has been playing an active role in promoting international regulatory and supervisory reforms in support of increased cross border cooperation in financial stability.

Important structural reform measures have been taken, or are under review. Progress includes the establishment of a single Competition Authority with enlarged powers, the creation of a unified job placement agency, and the partial liberalization of retail markets. Further action in the areas of pension reform, job creation, and on improving market efficiency and productivity are under debate.

The near-term outlook is challenging with real GDP projected to drop by 3 percent in 2009, followed by a gradual recovery in 2010. The risks to the outlook are mostly tilted to the downside in view of the sensitivity of the French economy to a worse-than-foreseen contraction in the European Union and underlying tail risks, in particular in the financial sector. The steep increase in unemployment could further shake confidence and weaken private consumption. A worsening of the financial crisis would hurt banks’ balance sheets and could further depress credit growth. At the same time, lower trade openness and higher social protection are expected to continue to shelter the French economy relative to its peers.

Executive Board Assessment

Executive Directors noted that the French economy has not been immune from the global crisis. The country is in deep recession, unemployment is rising, and the financial sector is under strain. Nevertheless, France has been somewhat less affected than the euro area as a whole due to its relatively low trade openness and large social safety net. The authorities’ early policy response, together with the economy’s structural features, has helped soften the downturn and stabilize the financial system. Directors commended the size and composition of the fiscal stimulus measures—with full play of France’s sizable automatic stabilizers.

Directors noted that the near-term economic outlook remains challenging, with GDP growth expected to contract by 3 percent in 2009 and to recover only gradually in 2010. Risks are tilted to the downside, and the crisis could also dampen potential output growth, calling for continued progress with the structural reform agenda. Directors recognized, however, that near- and medium-term economic projections are subject to unusual uncertainty at the present juncture.

Directors saw the main challenge to fiscal policy as the provision of short-term stimulus without derailing medium-term fiscal consolidation objectives. A number of Directors considered that some modest additional fiscal action might be needed if downside risks materialize, but should be focused on temporary and investment-based measures given France’s limited fiscal space. A number of other Directors, however, saw no scope for additional fiscal support, in light of the sizable stimulus already in train and the pressing consolidation needs.

Directors stressed that safeguarding medium-term fiscal sustainability and avoiding unsustainable debt dynamics is a key priority for the coming years, and they welcomed the authorities’ determination in this regard. Important steps already taken in this direction are the adoption of a multi-year budgeting framework, zero-growth expenditure at the central government level, and the ongoing reduction in public sector employment. Directors encouraged the authorities to build on these measures by embarking on a resolute medium term consolidation effort. The strategy should be underpinned by realistic growth assumptions, the articulation of specific expenditure savings at all levels of government, and the streamlining of tax expenditures. Directors looked forward to institutional steps aimed at ensuring that efforts by the central government are accompanied by enhanced fiscal responsibility at the local level. With an aging population, continued efforts are necessary to ensure the sustainability of the social security system.

Directors observed that high supervision standards and cautious lending practices have helped French banks weather the financial crisis relatively well. They considered that the government’s intervention in the banking sector has been well-handled, while suggesting that further intervention should not be ruled out. It will be important to continue to closely monitor banking sector risks, in view of potential spillovers from mature markets. Directors underlined that further, preferably EU-wide coordinated, stress tests would help assess the need for any follow-up actions to address capital and liquidity needs. Directors commended the authorities’ leadership in bringing forward international regulatory reforms, particularly on strengthening supervision of EU-wide financial groups, and supported their call for coordination on exit strategies from financial sector support.

Directors called for sustained further progress on France’s reform agenda. They welcomed the authorities’ determination to tackle long-standing structural weaknesses alongside near-term crisis-related efforts, with a special focus on labor and product market reforms. To boost competitiveness and growth, safeguard fiscal sustainability, and raise welfare, Directors recommended efforts to foster job creation—especially for young, low-skilled, and senior workers. This would include continuing moderation in the setting of the minimum wage, activation policies such as job training, and raising the legal retirement age to promote senior employment. Directors welcomed the recent establishment of a single Competition Authority and recommended to draw on the EU services directive for deregulating certain professional services.