IMF Executive Board Concludes 2019 Article IV Consultation with France
July 24, 2019
On July 22, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with France. This also included a discussion of the findings of the Financial Sector Assessment Program (FSAP) exercise for France. [2]
Growth is expected to stay moderate in the near term, reaching 1.3 percent this year and 1.4 percent in 2020, after slowing last year on the back of decelerating global growth and reduced slack. The labor market continued to improve, with strong job creation leading to a further reduction in the unemployment rate. Inflation spiked in 2018 because of rising oil prices and tax hikes but has since moderated and is projected to reach 1.2 percent this year. The fiscal deficit declined to 2.5 percent of GDP at end-2018, while public debt continued to remain elevated, at around 98 percent of GDP.
Last year, the government revamped vocational training and professional development to foster labor market participation, especially for low-skilled workers, following key labor tax and labor code reforms enacted in its first year in office. A recent business environment reform has also been enacted, which should spur competition, innovation, and productivity growth. Regarding fiscal policy, the government is providing substantial tax relief to boost households’ purchasing power. Some expenditure savings are expected to emerge in the context of planned reforms of the civil service, pensions, and unemployment benefits. As to the financial sector, to address a buildup of systemic risk from corporate leverage, the authorities further raised the countercyclical capital buffer, after having activated it last year, along with lowering the large exposure limit of banks to large indebted companies.
In the medium-term, growth is expected to gradually converge toward its
long-run potential of around 1½ percent, supported by a recovery of
domestic and external demand and ongoing structural reforms. Still, risks
have risen, related to a disorderly Brexit, trade tensions, a softening of
activity in the euro area, and a slowdown in the domestic reform agenda.
Executive Board Assessment [3]
Executive Directors noted that France’s growth slowed last year but remained relatively resilient compared to peers, while labor market conditions continued to improve. The growth outlook remains solid, but downside risks have risen, related to global trade tensions, an uncertain Brexit outcome, and weaker‑than‑expected growth in Europe. In this context, Directors commended the authorities for their continued progress with structural reforms over the last year supporting jobs and growth. Looking forward, they recommended pursuing and building on the authorities’ reform agenda to address France’s remaining structural challenges: high public and private debt, still high structural unemployment, sluggish productivity growth, and inequality of opportunity. In prioritizing the recommended reforms, Directors highlighted the importance of carefully assessing the tradeoffs and the proper sequencing of structural reforms and fiscal consolidation.
Directors called for a sustained, growth‑friendly consolidation effort to reduce the deficit and put public debt on a firm downward path. In this context, many Directors considered that a strong adjustment would be appropriate to rebuild buffers and not delay achievement of the medium‑term objective under EU fiscal rules. A number of other Directors, however, supported a more gradual consolidation. Directors noted that France has some fiscal space that could be used in a sharp downturn but stressed the importance of carefully balancing the need to support growth and safeguard sustainability.
Directors urged the authorities to anchor their fiscal strategy in durable medium‑term reforms to reduce public spending. In this context, they supported the authorities’ planned civil service, pension, and unemployment benefit reforms, which could help generate some fiscal savings while also improving the efficiency of the public sector. Directors called for complementing these reforms with additional spending measures to reconcile the government’s objectives of frontloading tax relief, making space for priority investment, and putting debt on a sustained downward path.
Directors welcomed recent labor market reforms, including revamping vocational training and professional development and overhauling unemployment benefits, in order to foster labor market participation and enhance opportunities for vulnerable groups. They encouraged the authorities to implement these reforms resolutely, monitor their effects carefully, and stand ready to deepen them if outcomes fall short of objectives. Directors also welcomed the recent reforms that led to an improved business environment and recommended complementing them with further efforts to liberalize regulated professions , retail trade, and the sale of medicines. Directors welcomed France’s voluntary participation in the Fund’s enhanced governance framework on the supply and facilitation of corruption. They also took positive note of the authorities’ commitment to transition France to a low‑carbon economy.
Directors commended the authorities’ progress in bolstering the financial system’s resilience, as reflected in the FSAP review, including by taking a proactive macroprudential response to the buildup of systemic risk from corporate leverage. Directors emphasized the need to continue to monitor systemic risks closely and stand ready to deploy additional macro‑ and micro‑prudential policies as needed. Given the global significance and complexity of France’s financial system, Directors called for further integration of monitoring and oversight at the conglomerate level, strengthening liquidity‑risk management within conglomerates, and ensuring adequate liquidity buffers. Enhanced AML/CFT supervision of smaller banks will also be important.
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France: Selected Economic Indicators, 2017-20 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] Under the FSAP, the IMF assesses the stability of the financial system, and not that of individual institutions. The FSAP assists in identifying key sources of systemic risk and suggests policies to help enhance resilience to shocks and contagion. In member countries with financial sectors deemed by the IMF to be systemically important, it is a mandatory part of Article IV surveillance, and supposed to take place every five years.
[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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