Information about Europe Europa
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International Monetary Fund
Published Date:
February 2008
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I. Background

1. While reforms have advanced in recent years, France’s economic performance has remained comparatively weak. In its conclusions of the Article IV consultation last year, the Executive Board observed that France “has changed more than is commonly perceived,” but that “much remains to be done.” This continues to be the case. Reform progress has been gradual and piecemeal, growth has stalled below other major industrial economies, unemployment—though falling—has remained high, and export growth has been weak. A growing consensus has emerged that a more aggressive reform strategy is required to move the country onto a higher growth path—a consensus reflected in President Sarkozy’s explicitly reformist platform.

2. GDP growth has been modest due to supply–side weakness. GDP has risen by less than the euro area average for nine consecutive quarters (2005Q3–2007Q3), with France not participating in the revival of European growth since 2004, prompting political emphasis on a “growth deficit.” For 2007, growth is expected to be 1.9 percent, down from 2.0 percent in 2006 (Figure 1 and Table 1). Growth has been sustained by domestic demand, with the external sector persistently negative. The main contribution to growth has come from private consumption, reflecting steady increases in real disposable income. With domestic demand growth outstripping supply, imports have surged, with a net external drag on growth of some ½ percent of GDP per annum over the past five years.

Figure 1.France: Economic Developments 1/

(Percent change)

Sources: Global Insight/DataInsight and IMF, WEO.

1/2007 data are estimates.

2/ Contribution to growth of GDP.

Table 1.France: Main Economic Indicators, 2003–12(Annual percentage change; unless otherwise indicated)
Demand and supply in constant prices 1/
Gross domestic product1.
Private consumption2.
Public consumption2.
Gross fixed investment2.
Business investment1.
Residential investment2.
Public investment5.
Stockbuilding 2/-
Total domestic demand1.
Foreign balance 3/-0.6-0.7-0.6-0.4-0.2-
Exports of goods and NFS-
Imports of goods and NFS1.
GDP deflator1.
Consumer prices (average) 3/
Consumer prices (end of period) 4/
Employment and wages
Unemployment 5/
Productivity 6/
Unit labor costs (whole economy)
Output in manufacturing1.
Hourly labor compensation in manufacturing2.
Unit labor costs in manufacturing-1.80.7-2.5-0.9-0.5-0.5-0.5-0.5-0.5-0.5
Personal sector
Real disposable income 7/
Savings ratio 8/15.815.815.315.515.915.815.715.415.415.4
Output gap 9/-0.9-0.5-0.8-0.9-1.1-1.6-1.6-1.3-0.8-0.4
Rate of growth of potential output2.
Balance of payments
Trade balance (in billions of euros)2.9-3.8-23.0-30.0-38.7-58.0-61.1-63.6-65.8-68.9
(in percent of GDP)0.2-0.2-1.3-1.7-2.1-3.0-3.0-3.0-3.0-3.0
Current account (in billions of euros)13.08.5-15.7-22.5-36.6-58.6-61.7-63.7-65.3-67.7
(in percent of GDP)0.80.5-0.9-1.3-2.0-3.0-3.1-3.0-3.0-3.0
Terms of trade-0.5-0.5-1.8-0.30.0-
Nominal effective exchange rate 10/106.1107.6107.7108.1110.0
Real effective exchange rate 10/100.9103.3101.5101.2102.1
Public sector accounts 11/
General government balance 12/-4.1-3.6-2.9-2.5-2.4-2.7-2.6-2.3-1.9-1.4
Central Government balance 12/-3.9-3.2-3.0-2.6-2.1-2.3-2.1-1.8-1.4-1.0
Social Security balance 12/-0.6-0.9-0.2-0.3-0.4-0.3-0.5-0.5-0.5-0.4
Structural balance 12/13/-3.4-3.1-2.7-1.9-1.6-1.7-1.6-1.5-1.4-1.2
Primary balance-1.3-0.9-
Gross debt 12/62.964.966.764.264.164.664.864.463.662.5
Sources: Banque de France ; data provided by the authorities; and IMF staff estimates.

Data from the INSEE quarterly national accounts system.

Change as percentage of previous year’s GDP.

Harmonized CPI.

For 2007, year–on–year October.

In percent of labor force; harmonized index.

GDP over total employment.

Personal disposable income deflated by the implicit deflator for private consumption.

In percent of household disposable income.

In percent of potential GDP.

Index; Base 2000=100; for 2007, average to October.

In percent of GDP.

Maastricht definition.

Data for 2005 and 2006 exclude the EDF and La Poste pension fund transfers, respectively (0.5 percent and 0.1 percent of GDP).

Sources: Banque de France ; data provided by the authorities; and IMF staff estimates.

Data from the INSEE quarterly national accounts system.

Change as percentage of previous year’s GDP.

Harmonized CPI.

For 2007, year–on–year October.

In percent of labor force; harmonized index.

GDP over total employment.

Personal disposable income deflated by the implicit deflator for private consumption.

In percent of household disposable income.

In percent of potential GDP.

Index; Base 2000=100; for 2007, average to October.

In percent of GDP.

Maastricht definition.

Data for 2005 and 2006 exclude the EDF and La Poste pension fund transfers, respectively (0.5 percent and 0.1 percent of GDP).

Real GDP growth

(over same quarter of previous year)

3.Export growth has slowed in recent years, heightening concerns about competitiveness. Real export growth has lagged behind the euro area average since 2003, generating a drop in market shares for French exports, both worldwide and within the EU and the euro area (Figure 2). With strong import growth, France’s current account balance has deteriorated from a surplus of 1.4 percent of GDP in 2002 to a projected deficit of 2.0 percent of GDP in 2007 (Table 2); current account and trade balances with the euro area have also deteriorated. 1 The ratio of exports to GDP has risen by 2 percentage points versus a surge in import penetration of 5.1 percentage points of GDP.

Figure 2.France: External Sector Developments

Sources: IMF; DOT and WEO.

Table 2.Balance of Payments(Percent of GDP)
200220032004200520062007 1/
Balance on current account1.40.80.5-0.9-1.3-2.0
Balance on goods and services1.71.10.5-0.7-1.2-1.6
Balance of trade (f.o.b., c.i.f.)0.30.1-0.3-1.3-1.5-1.6
Of which to:
Euro area-0.3-0.3-0.4-1.0-0.9
Extra euro area0.60.30.1-0.4-0.7
Exports of goods and services26.925.525.926.226.728.9
Exports of goods21.020.120.420.621.523.3
Exports of services5.
Imports of goods and services-25.2-24.5-25.4-26.9-27.9-30.5
Imports of goods (f.o.b.)-20.5-19.9-20.7-21.9-23.1-25.4
Imports of services-4.7-4.6-4.8-5.0-4.8-5.1
Income, net0.
Current transfers, net-1.0-1.1-1.1-1.3-1.2-1.0
Balance on capital account0.0-
Balance on financial account-1.51.0-0.8-
Direct investment, net-0.1-0.6-1.2-1.9-1.5-1.3
Portfolio investment, net-0.70.4-3.2-0.8-3.3-1.9
Other investment, net-
Reserve assets0.3-0.1-0.20.4-0.50.0
Errors and omissions, net0.1-
Sources: IMF, WEO; and the authorities.

Staff estimates.

Sources: IMF, WEO; and the authorities.

Staff estimates.

Table 3.High Frequency Financial Indicators
Change since:
Jan 22, 2008Jan 2, 2008Oct 1, 2007Jul 2, 2007Apr 2, 2007Jan 2, 2007
Financial institution equity prices 1/
BNP Paribas66.7-9.3-14.5-23.7-14.5-21.3
Credit Agricole19.7-13.8-28.3-33.9-32.7-38.8
Societe Generale82.5-15.6-30.8-39.6-35.7-37.2
Credit default swap spreads 2/
BNP Paribas57.032.032.548.351.051.0
Credit Agricole80.439.455.971.572.974.4
Societe Generale77.047.052.867.670.270.7
Stock indices
CAC 404843-12.8-16.1-19.7-14.2-13.8
Euro stoxx 503754-13.5-14.9-16.0-10.4-10.2
Interbank interest rates 3/
Government interest rates 3/
3 month4.040.000.03-
10 year4.08-0.20-0.33-0.48-0.040.13
Money market risk spread 4/29.00-33.50-49.1028.4033.3024.50

In Euro’s.

Basis points, 5 years.

Percent; and change in percentage points.

Basis points; 3 month interbank rate minus 3 month Treasury Bill..

In Euro’s.

Basis points, 5 years.

Percent; and change in percentage points.

Basis points; 3 month interbank rate minus 3 month Treasury Bill..

Table 4.France: Vulnerability Indicators, 2001–07(In percent of GDP; unless otherwise indicated)
External indicators
Exports (annual percentage change, in U.S. dollars)-0.42.519.718.47.210.713.5Q3
Imports (annual percentage change, in U.S. dollars)-
Terms of trade (annual percentage change)0.52.6-0.5-0.5-1.8-0.3-0.9Q3
Current account balance1.
Capital and financial account balance1.61.30.1-0.1-0.9-0.8
Of which
Inward portfolio investment (debt securities, etc.)
Inward foreign direct investment0.
Other investment liabilities (net)
Total reserves minus gold
(In billions of U.S. dollars, end-of-period)31.728.430.235.327.842.751.8october
Euros per U.S. dollar (period average)1.1181.0630.8860.8050.8040.7970.703october
Market indicators
Financial markets
Public sector debt (Maastricht definition)56.958.862.964.966.764.265.3Q3
3-month T-bill yield (percentage points, end-of-period)
3-month T-bill yield in real terms (percentage points, end-of-period)1.90.8-0.2-
U.S. 3-month T-bill1.
Spread with the U.S. T-bill (percentage points, end-of-period)
5- to 8-year government bond (percentage points, end-of-period)
10-year government bond (United States)
Spread with U.S. bond (percentage points, end-of-period)
Yield curve (10 year - 3 month, percentage points, end-of-period)
Stock market index (period average)268.0202.6166.5196.9228.00.0305.4november
Real estate prices (index, 2000=100, period average)106.1118.7135.7156.7172.8190.6188.12006:Q2
Credit markets (end-of-period 12-month growth rates)
Credit to the private sector6.
Bank credit to households6.
Housing loans6.38.09.913.615.015.015.1May
Bank credit to nonfinancial enterprises3.32.8-
Sectoral risk indicators
Household sector
Household savings ratio15.816.915.815.815.315.5
Household financial savings ratio6.
Real estate household solvency ratio (index, 2000=100) 1/99.1101.997.989.491.091.0
Corporate sector
Profitability of business sector (financial margin)38.537.837.937.637.137.6
Investment ratio18.317.317.017.317.618.1
Savings ratio16.615.215.914.713.611.7
Self-financing ratio83.781.187.479.172.060.1
Banking sector
Share of housing loans in bank credit to the private sector29.431.032.834.736.636.636.3May
Share of nonperforming loans in total loans5.
Ratio of nonperforming loans net of provisions to capital12.612.611.
Liquid assets to total short-term liabilities152.5157.0153.7155.1148.1148.1
Return on assets 2/
Return on equity 2/
Regulatory capital to risk-weighted assets12.111.511.911.511.310.9
Sources: Banque de France ; IMF, International Financial Statistics; Bloomberg; FNAIM; and Commission Bancaire.
1/This index combines the effect of real disposable income, repayment conditions for loans, real estate prices, and interest subsidies.
2/All credit institutions aggregated data on a parent–company basis.
Sources: Banque de France ; IMF, International Financial Statistics; Bloomberg; FNAIM; and Commission Bancaire.
1/This index combines the effect of real disposable income, repayment conditions for loans, real estate prices, and interest subsidies.
2/All credit institutions aggregated data on a parent–company basis.
Table 5.France: General Government Accounts, 2000–07 1/ (In percent of GDP)
General government
Tax revenue44.143.843.142.843.143.844.244.0
Of which
Income tax3.
Corporate tax2.
Nontax revenue6.
Of which
Health expenditure6.
Other social transfers5.
Balance 2/-1.5-1.6-3.2-4.1-3.6-2.9-2.5-2.4
Primary balance1.41.4-0.2-1.3-0.9-
Structural balance 3/-2.2-2.1-3.1-3.4-3.1-2.7-1.9-1.6
Central government balance 2/-2.5-2.5-3.7-3.9-3.2-3.0-2.6-2.1
Social security balance 2/0.50.4-0.2-0.6-0.9-0.2-0.3-0.4
Local government balance 2/
Other central government agencies balance 2/
Gross debt 2/57.356.958.862.964.966.764.264.1
Interest payments2.
Sources: INSEE; and IMF staff calculations.

Data for 2001–02 exclude the proceeds from the sale of UMTS licenses, which amount to about 0.1 percent of GDP. Annual national accounts.

Maastricht definition.

Data for 2005 exclude the EDF pension fund transfer (0.5 percent of GDP).

Sources: INSEE; and IMF staff calculations.

Data for 2001–02 exclude the proceeds from the sale of UMTS licenses, which amount to about 0.1 percent of GDP. Annual national accounts.

Maastricht definition.

Data for 2005 exclude the EDF pension fund transfer (0.5 percent of GDP).

Real export growth


4. While unemployment has declined, labor market performance remains weak(Figure 3). The (EU harmonized) unemployment rate has fallen 1 point over the past year (to 7.9 percent), mirroring the decline in the euro area (to 7.2 percent). However, unemployment remains stubbornly above the EU average and is particularly acute among younger workers (near 20 percent). At the same time, the employment rate is among the lowest in Europe. While employment creation has improved since 2004, it remains under 1 percent per year. Growth of the minimum wage (SMIC) has sharply outstripped general wages (and productivity), pricing many low–end workers out of the market.

Figure 3.France: Labor Market Indicators

Sources: OECD; Datastream; and IMF staff calculations.

Real GDP and employment growth

(annual percent change)

5.Inflation was muted through the summer, but has since spiked. Core inflation has edged up since early 2006, but remains at 1.7 percent, below the euro area average. Headline inflation fell sharply in 2006 and early 2007 to a 1.2 percent annual rate in August. Since then, however, the sharp increase in food and energy prices pushed headline inflation to 2.8 percent in December. Notable in the good performance of French inflation through the summer has been the role played by measures to liberalize product markets. The authorities estimate that laws easing restrictions on large stores and retail sales margins helped lower inflation by ½ percentage point since mid–2004, with most of this effect since 2006. Unit labor costs have been climbing, as productivity gains have lagged wage inflation. French labor costs rose 3.2 percent in the year to Q3 2007 (versus 2.5 percent for the euro area)

Headline and core inflation

(6 month moving average)

6. Monetary conditions have tightened since 2006. The monetary conditions index (MCI) has moved sharply upward since early 2006, reflecting ECB tightening and, more recently, euro appreciation. Moreover, risk premia on lending have increased due to the fallout from the financial turbulence (Figure 4). While long–term interest rates have risen moderately, short–term rates have spiked in recent months. In contrast, the fiscal stance has eased.

Figure 4.France: Monetary Condition

Sources: Datastream/Thomson Financial; European Comission; and IMF, IFS and WEO.

1/ The monetary conditions index is a weighted average of the real effective exchange rate and the short–term real interest rate, with weights, 1 and 2.5, respectively. A higher index implies tighter conditions (using underlying CPI).

II. Outlook

7. Financial turbulence has had little impact on the domestic economy to date, with limited effects on French banks, but global spillovers stand to dampen growth. Banks’ performance has continued to be solid, and exposure to the U.S. subprime market appears limited. Credit default swap spreads have risen, but somewhat less than for some other major European banks (Figure 5), and no bank has yet experienced the type of difficulties seen elsewhere. French banks are generally well–capitalized and there is no domestic subprime market as such. While real estate prices have risen markedly and may be somewhat overvalued, French households are much less indebted than their U.K. or U.S. counterparts, and the share of variable rate mortgages is low. This low leverage of French households may soften the impact of any weakening of the real estate market. Nevertheless, the turmoil is expected to dampen growth in 2008 via effects on partner country demand as well as generally tighter credit conditions. Lending standards have been tightened by French banks, but less so than elsewhere in the euro zone. 2 Tighter conditions in 2006–07 may also trim growth in 2008–09, given the lags in monetary transmission.

Figure 5.France: Financial Market Developments

Source: Thomson Financial/Datastream.

1/ AXA, BNP Paribas, Credit Agricole, and Societe Generale.

8. For 2008, staff forecasts growth of 1.6 percent, weaker than anticipated earlier and below official projections. 3 The spike in oil prices, the rise in the euro, and weakening economic prospects in partner countries will be a drag on growth, offsetting the stimulus from the 2007–08 tax cuts. 4 Domestic demand will continue to sustain output, with the external sector contributing negatively. Downside risks predominate, notably concerning the depth and persistence of the financial market turmoil and its effects on other advanced economies. On the upside, rapid reform progress could help sustain confidence and growth. The authorities maintain the budget forecast of growth of 2–21/2 percent for 2008. Core inflation is expected to remain around 11/2 -13/4 percent, but headline inflation may rise due to pressure on food and energy prices

Real GDP Growth: Risks to the Forecast

The chart includes the following risks to the baseline projections of growth (1.9 percent in 2007 and 1.6 percent in 2008):

• persistent tightening of financing conditions;

• 10 percent euro appreciation;

• 1 percent drop in foreign demand;

• boost in domestic confidence reflecting steady progress in reform agenda;

• a US recession and a disorderly unwinding of global imbalances.

They are weighted by the staff’s subjective probability assessment of their occurrence.

9.The staff baseline for medium–term trend growth is just under 2.2 percent annually—close to the authorities’ 2.1 percent. Growth is forecast to remain somewhat below potential in 2009 due to the aftereffects of slower global growth and tighter monetary conditions. Thereafter, staff projects growth to accelerate, with scope for an increase in potential output growth through structural reform. Staff projects 1 percent total factor productivity growth annually in the medium term. Relatively high fertility, strong immigration, and lower mortality should attenuate the effects of aging of the labor force. Staff estimate that the incentive effects of reduced taxation on overtime and other measures of the 2007–08 fiscal package might marginally boost growth, but more far–reaching, simultaneous reforms could boost long–run GDP by much more—up to 10 percentage points over 10 years. 5

III. Policy Discussions

10.The government’s policy agenda is centered on implementing comprehensive structural reforms to generate higher growth, raising employment and purchasing power. Labor market reform is central to the government’s program, as is captured in the slogan “work more to earn more.” Key initiatives are also underway in product and services markets, as well as broad tax and expenditure reviews. Policy discussions centered on these initiatives, with staff stressing the need for ambitious efforts and a focus on the country’s supply deficiencies. The supply–side focus was prompted by some early (mainly demand–oriented) measures and the emphasis on increasing households’ purchasing power, where there is sharp political pressure for action. Fiscal policy was also central to the discussions, with differences of view over the perceived trade–off between fiscal adjustment and structural reforms, and the related “adjustment pause” in 2008, but full agreement on the importance of rethinking the state’s role in the economy in order to secure expenditure–based consolidation in the medium term.

A. France’s External Sector Weakness

11.Competitiveness—as measured by the real effective exchange rate—has deteriorated, but the appreciation fails to fully explain France’s poor export performance. France’s real effective exchange rate has risen by 4½ to 12 percent since 2002, depending on the deflator used—due to euro appreciation and to higher French labor cost growth (Figure 6, panel 1). Within the euro area, competitiveness deteriorated against Germany, but improved against other countries; on balance, it strengthened modestly. Wages have increased faster in France, only partially compensated by higher productivity growth (Figure 6, panel 5). According to CGER–based estimates, France’s competitiveness gap remains modest—in a range of 1 to 9 percent (Figure 6, panel 6)

Figure 6.France: Competitiveness and External Performance

Sources: INSEE; IMF, IFS; Eurostat; and Haver.

Figure 7.France vs. Germany: Out of Synch ?

Source: IMF, WEO, DOT, and IFS; and OECD; Economic Indicators.

Figure 8.Combining Fiscal Consolidation and Structural Reform–Canada

Sources: OECD, Economic Outlook; and IMF, WEO.

Real Effective Exchange Rates

(ULC based, 2002=100)

12.Broader structural factors underlie faltering export performance. A strengthening euro is no doubt increasingly challenging exporters, but staff viewed structural factors, including high wage increases, supply constraints, and insufficient flexibility in responding to changing global demand as more important constraints on export performance. The authorities acknowledged the structural rigidities, but also saw a widening cost gap chiefly with Germany as a key factor in weakening French export performance within the EU. 6 France’s sector specialization is also unfavorable—with export weakness concentrated in automobiles and small firms. 7 Consequently, strengthening the export capacity of SMEs and increasing investment in R&D were seen as major levers to further export performance in the medium run. While few workers in the export sector are at the minimum wage (SMIC), strong SMIC increases have contributed to wage pressure elsewhere, and have helped boost imports.

B. The Reform Agenda

13.The move to a more forceful reform stance raises several political economy considerations. The authorities have opted to pursue simultaneous reforms across a wide range of areas, breaking with the incrementalist approach of the past. Staff supported this strategy, noting that important synergies exist in contemporaneous action. Properly calibrated, simultaneous reforms—addressing rents in several areas—could help attenuate the political opposition of special interests. 8 A “critical mass” of reforms would also generate faster and larger payoffs in terms of growth, employment, productivity, and lower prices for consumers, thereby garnering consensus. However, staff and the authorities had different views about the interaction between fiscal adjustment and structural reforms. The authorities felt it important to fulfill campaign pledges and provide early tangible benefits to pave the way for reforms whose results take more time. It was in this light that they justified the government’s early tax reduction measures. These measures also addressed a key concern of the electorate—the perception of stagnant or declining real incomes (pouvoir d’achat). While acknowledging the political potency of these arguments, staff’s reading of the data suggests that French incomes have actually risen more than in other euro area countries (Box 1). Staff noted that the emphasis on purchasing power risked obfuscating the true nature of France’s growth difficulties—the weakness of its supply potential—while raising expectations that could not be met. More generally, staff viewed fiscal adjustment and structural reforms as complementary and thus considered the decision to pause fiscal consolidation in 2008 ill–advised.

Box 1:Pouvoir d’Achat: Perception and Reality

In recent opinion polls, French consumers rank eroding purchasing power (pouvoir d’achat) as their greatest economic concern, above unemployment. Yet data show that over the past seven years, real disposable household income has increased in France faster (18 percent) than in the euro area (11 percent), and significantly faster than in most neighboring countries (panel 1). There is thus a wide disparity between a public perception and the national accounts data. 1 Reasons for this disparity may include:

  • Income per head has increased less than the aggregate due to population growth (0.6 percent).
  • While real wages per hour have risen, real wage incomes have stagnated since the 1980s largely due to adecline in paid hours worked.
  • Perceived inflation has been persistently higher than measured inflation since early 2001 (panel 2). Highly visible price increases (e.g for food) may have had a disproportionate impact on perceptions.
  • Strong increases in rents, which are weighted less in the consumer price index (6.1 percent) than in the national accounts (18.6 percent weight in private consumption, including imputed rents by owners).
  • A rising share of non–discretionary spending, such as for housing, financial services, and insurance. Down payments on housing loans, for example, are savings in the national accounts, but many private households regard them as reducing their purchasing power.
  • An unequal distribution of income, leaving certain households financially pressed. Income distribution data (available only through 2004) indicate that real incomes for the lowest and highest deciles of the population rose between 2002–04, but most other deciles were stagnant or declining, resulting in a middle class “squeeze.” As noted in the October 2007 WEO, however, “among the largest advanced economies, inequality appears to have declined only in France.”

Sources: European Commission, Ameco, and EC consumer survey.

1 J. Accardo and others (2007),La mesure du pouvoir d’achat et sa perception par les menages, in L’économie française, 2007. The statistical agency (INSEE) has been charged with elaborating new purchasing power data, and Nobel laureates Stiglitz and Sten have been asked to consider including “quality of life” factors in measuring growth.

Freeing the labor market

14. There was agreement that labor market rigidities are probably the single most significant barrier to higher economic growth and employment. France’s already low labor input declined further in recent years, reflecting both high unemployment and lower working hours among the employed. Main shortcomings in the labor market, as identified by the authorities and the OECD (Figure 3), are: (i) burdensome legal restrictions on hiring, firing, working hours, and functional mobility under permanent contracts, generating inefficiencies and a severe “insider–outsider” divide; (ii) pervasive judicial involvement in labor relations; (iii) inefficiencies and lack of coordination among public job placement and unemployment compensation agencies; (iv) a high minimum wage; and (v) one of the highest tax wedges on employment in the OECD. These distortions in turn weigh heavily on the public purse, as tax breaks attempt to compensate for the rigidity of labor market institutions.

15. The social partners have concluded a 4–month long negotiation on the reform of labor contracts. Changes in the labor framework include an increase in the trial period, a new labor contract that will allow project–linked employment and new incentives to end permanent contracts through amicable separation. Dismissed workers will carry with them rights to complementary health insurance, training and unemployment benefits that reflect the contributions they made while employed. While this agreement should allow increased use of temporary contracts and facilitate separations on permanent contracts, it falls short of a comprehensive reform. Staff noted that studies suggest that reforms making the labor market more flexible at the margin are ineffectual, tending to artificially increase the turnover rate and only modestly affecting job creation, while having potentially harmful effects on welfare. 9

16. The government is undertaking other initiatives to mitigate labor market distortions. The most important among these are a review of the mechanism for setting the SMIC, the merger of the unemployment and job placement agencies, and steps to impart greater flexibility to the 35–hour workweek arrangement. There was agreement that the secular rise of the SMIC has priced young and unskilled workers out of jobs and compressed wages at the bottom end, demotivating effort. To begin correcting these distortions, the government omitted the habitual discretionary increase of the SMIC in 2007 (the so–called coup de pouce), limiting the adjustment to that determined by the indexation formula (a combination of inflation and the increase in the average base salary). While staff saw drawbacks in the formula, it is unlikely to change. The authorities are leaning rather toward a U.K.–style “low pay commission” to provide technical input and de–politicize decisions. The merger of the job placement and unemployment agencies aims to promote a “return–to–work” orientation via a closer, one–stop guidance of job–seekers.

17. The authorities have attempted to make the 35–hour workweek less binding, without formally reversing what is viewed as a social acquis. 10 The main measure to date is the elimination of taxes and social charges on overtime work. While uncertain, estimates suggest that the measure would create relatively few new jobs, at a budget cost of about 0.3 percent of GDP. The authorities highlighted the signaling value of the measure in extolling work effort, providing greater flexibility, and reducing marginal wage costs, while not completely discounting staff criticisms of its shortcomings (windfall effects, operational complexity to avoid probable fraud, and further recourse to the budget to alleviate a distortion). More recently, the president has announced other possibilities to ease the workweek limit, including through majority agreements in individual companies in exchange for wage increases. These steps have met with a mixed reception, given their administrative complexity, especially for smaller firms.

Goods and services markets—raising competition and consumer welfare

18. Staff and the authorities agreed that further goods and services market reforms could significantly boost potential output, competitiveness, and consumer welfare. This emphasis is supported by studies showing that the benefits would be sizeable. 11 The authorities have assigned priority to early reforms in the retail distribution sector, while undertaking preparatory work for the implementation of the EU Services Directive. A careful review of all existing regulations is underway to ascertain their compatibility with the Directive’s provisions. There was agreement that action need not await the Directive’s drawn–out timetable, and could proceed in several areas—notably as regards regulations in retail distribution, hotels, and restaurants, and tightly controlled activities and professions (Box 2).

Box 2.Key Product and Services Market Reforms

Several reform areas appear particularly promising in their ability to improve economic efficiency, yielding lower consumer prices and greater productivity:

  • Supplier–retailer relations. Heavy–handed regulations originally designed to protect against predatory pricing (codified in the loi Galland) have in practice strengthened the market power of large existing firms, resulting in higher consumer prices. Previous steps to contain prices on national branded products and the 2005/06 reform of the loi Galland yielded positive results. More recently, the government introduced legislation to free wholesale margins, passing savings fully on to consumers.
  • Retail space and openings. Legal entry barriers 1 have reduced new establishment of large retail shops, hotels, and restaurants by almost 60 percent and limited the share of “maxi–discounters” to 13 percent in France, compared to 30 percent in Germany. These barriers strengthen the bargaining position of large retailers against suppliers and protect incumbents from competition. The authorities also intend to ease regulations on retail opening hours and on sales periods.
  • Regulated activities and professions. Pervasive entry barriers include training requirements (certified accountants, notaries, lawyers, architects), licenses (taxi drivers), and restrictions on establishment (medical profession, pharmacies). Partly a result of self–regulation, entry barriers limit the supply of services, providing rents. Accordingly, there is significant scope for reforms, as recognized by earlier reports (e.g. Camdessus,2 and Cahuc and Kramarz 3). The latter includes a list of 75 regulated activities (métiers) and 28 regulated liberal professions.
1 The Lois Royer (1973) and Raffarin (1996) protect small retailers by subjecting the establishment of“grandes surfaces’’(above 300 m2)—including hotels—to special approval.2Le sursaut—Vers une nouvelle croissance pour la France, 2004.3 Cahuc, P. and F. Kramarz, De la précarité a la mobilité: Vers une securite sociale professionnelle, 2004.

19. Moving competition policy to center stage would, in staff’s view, be aided by a unified, independent, and reinforced competition authority. In line with both the OECD and the Attali Commission,12 staff advocated a change in France’s institutional framework for competition policy, modifying its dualistic setup (split between the Conseil de la Concurrence and a Directorate at the Ministry of Economy and Finance), including removing responsibility for merger control from the ministry—an arrangement at odds with international best practice. The authorities concurred that there was scope for greater advocacy vis–à–vis the public of the virtues of competition, but expressed doubts that the French institutional arrangement has compromised policy effectiveness. They pointed to the favorable ratings France has received in comparisons of national competition authorities, and questioned whether a unified authority was a genuinely superior arrangement.

C. Achieving Fiscal Sustainability

The fiscal position and objectives

20. After several years of fiscal adjustment, progress stalled in 2007. Between 2003 and 2006, the structural deficit fell by over 1½ percentage points of GDP, bringing the overall deficit to 2½ percent of GDP in 2006. However, higher revenues contributed most to the adjustment, with the share of general government outlays to GDP remaining broadly unchanged. Strong growth of social security and local government spending largely offset tight control of central government expenditures. This trend continued into 2007 due to slippages in health and pension–related spending. As a result, the general government deficit is estimated to have remained broadly unchanged in 2007 (at 2.4 percent of GDP), implying an underlying adjustment of only ¼ percentage point of GDP—half the SGP–recommended pace for countries and still distant from their medium–term objectives.

22. Despite continued spending restraint, the 2008 fiscal plans entail no underlying adjustment due to the costs of tax–reducing measures. On the positive side, real general government spending growth is limited to 1.4 percent, which would produce a 0.6 percentage point decline in the expenditure–to–GDP ratio (to a still high 52.6 percent of GDP). The budget also incorporates an unprecedented reduction in public employment (by 23,000); improves the coverage of the central government expenditure norm; limits the growth of transfers to local authorities; increases precautionary reserves; and contains further steps to enhance the co–responsibility of health care users and discourage early retirement. However, this expenditure restraint is largely undone by the cost of the tax package (½ percent of GDP). In addition to the tax exemption for overtime hours, the package includes tax credits for mortgage interest—viewed critically by staff due to its demand–side orientation with likely little impact on home ownership or economic growth (as demonstrated by international experience). 13 Indeed, France had removed this deduction in the mid–1990s. More positively, the 2008 budget includes a reformed research tax credit. The authorities project a general government deficit of 2.3 percent of GDP (based on GDP growth of 2¼ percent), resulting in an essentially unchanged structural balance and a marginal reduction in the public debt ratio (to 64 percent of GDP).

23. The 2008 budget appears subject to risks of slippage. The budget’s macroeconomic and revenue assumptions are optimistic, social security overruns remain a major risk (notably in health care), and expected efficiency gains in central government outlays could prove elusive. As a result, staff expects a structural balance deterioration of H percent of GDP and the overall deficit to reach 2.7 percent of GDP, close to the Maastricht limit (Text Table)—perilously so were downside risks to growth to materialize. 14 The authorities thought staff overstated the risks, and viewed the possibility of approaching the Maastricht limit as remote.

Text Table 1.General Government Accounts 2006–12(In percent of GDP; unless otherwise indicated)
Staff Projection
Staff projection (baseline)
Tax revenue44.244.043.743.543.443.443.4
Real spending growth (in percent) 1/
Overall balance 2/-2.5-2.4-2.7-2.6-2.3-1.9-1.4
Structural balance 2/3/-1.9-1.6-1.7-1.6-1.5-1.4-1.2
Structural change (in percent)0.80.3-
Gross debt 2/
Real GDP growth assumption2.
Authorities’ budget plan
Tax revenue44.244.043.743.543.443.443.4
Real spending growth (in percent) 1/
Overall balance 2/-2.5-2.4-2.3-1.7-1.2-0.60.0
Structural balance 2/3/-2.5-2.2-2.1-1.6-1.1-0.60.0
Structural change (in percent)
Gross debt 2/
Real GDP growth assumption2.
Memorandum items (percent change):
Difference in structural adjustment
Authorities’ objective ‒ staff’s baseline0.
Due to: Higher expenditure growth0.
Lower non-tax revenue0.
Sources: INSEE; IMF staff calculations; and 2008 Budget proposal.

Real growth (in percent) adjusted using CPI excluding tabacco prices.

Maastricht definition.

Excludes pension transfers and other one–off measures; assumes a tax revenue–to–GDP elasticity close to unity.

Sources: INSEE; IMF staff calculations; and 2008 Budget proposal.

Real growth (in percent) adjusted using CPI excluding tabacco prices.

Maastricht definition.

Excludes pension transfers and other one–off measures; assumes a tax revenue–to–GDP elasticity close to unity.

23. Views differed on the 2008 fiscal adjustment pause. The authorities considered the 2008 budget to contain positive pro–growth measures and other effects underestimated by staff, particularly in terms of generating goodwill for future, fundamental reforms. Staff, for its part, viewed fiscal consolidation and structural reforms as complementary and pressed that fiscal consolidation be restored as a national priority, as enshrined in last year’s budget documents and in the Pebereau Report on public debt. Experience in other industrial economies (such as Canada—see Box 3—and others15) has shown that contemporaneous fiscal consolidation and structural reforms can generate virtuous cycles of improved competitiveness, higher growth, and healthier public finances. Maintaining a steady pace of fiscal adjustment would promote credibility, eroded by the continuous postponement of the medium–term objective (Text Figure). Staff noted that an adjustment of ¾ percentage point of GDP per year in 2009–10 would bring the fiscal accounts close to balance by 2010.

Box 3.Canada’s Experience: Combining Fiscal Consolidation and Structural Reform

Facing debilitating economic conditions, Canada launched path–breaking fiscal and structural reforms in the mid–1990s. During the 1980s and early 1990s, Canadians saw a marked deceleration in the growth of living standards combined with a chronic deterioration of public finances. Slowing productivity and employment growth led to sub–par economic performance while lax public spending contributed to further policy dislocation and spiraling debt dynamics (Figure 8). In 1994, the government set out a bold economic reform to strengthen Canada’s macroeconomic performance by cutting government deficits, rebalancing the policy mix (with lesser reliance on monetary tightening), and establishing conditions to heighten competition and boost job creation.

A key priority was to eliminate the federal government deficit of over 5 percentage points of GDP based on the following initiatives:

  • A retooling of the budget process to incorporate a transparent budget forecasting framework, including a contingency reserve for debt reduction.
  • An expenditure review of all federal ministries to refocus the role of the government and stress the cost effectiveness and efficiency of public services. A similar approach is guiding France’s recently launched review of public policy.
  • An ambitious state reform including notably a 20 percent cut in the federal civil service; a reduced presence of the government in the economy through selective privatization, and contracting out; and broad deregulation.

Steps to raise economic flexibility and competitiveness complemented the fiscal reforms. Key initiatives included reform of employment insurance and social assistance, pension reform, reduction of internal and external trade barriers, deregulation of major network industries, and cutback of administrative burdens.

The fiscal turnaround after 1994 was remarkable. The federal government outperformed its fiscal targets every single year thereafter and achieved fiscal surplus in 1998, a year earlier than planned. Expenditure cuts allowed federal spending to fall from near 17 percent of GDP in 1994 to about 12 percent in 1998. With the improvement of the fiscal situation, the government enacted one of the largest tax cuts in Canadian history in 2000

The improved macroeconomic framework based on sound fiscal, monetary, and structural policies created the conditions for sustained economic growth. Between 1997 and 2006, Canada enjoyed the highest job creation and output growth among G7 countries.

24. The authorities now aim for fiscal balance by 2012, a date they view as more realistic. They consider balance by 2010—as set out in the end–2006 Stability Program—possible only with appreciably higher growth (~3 percent). They viewed insistence on the same target date for all euro area countries as a conceptually flawed “one–size–fits–all” approach likely to fail in several euro area countries. Such an outcome was seen as more harmful to SGP credibility than France’s approach of a realistic 2012 target based on comprehensive tax and expenditure reviews (see below). Staff responded that the 2010 date per se was not the key issue; rather it was the failure to maintain a consistent adjustment pace and the repeated rescheduling of adjustment commitments that undermined credibility and increased the costs of adjustment (due to higher debt stocks and increased demographic pressure). Staff noted that any successful adjustment would require returning to a path of steady consolidation, achieved in the short–run by stricter spending targets; general pension reform in 2008, building on the reform of the special regimes underway; further healthcare reforms to expand co–payments and reduce underlying spending pressures; and strengthened commitments to restrain local government spending.

Fiscal reform

25. The government has launched a comprehensive review of public policy to secure better public services and lasting expenditure efficiency and reduction. Building on substantial efforts in recent years to improve fiscal governance and control expenditures (notably via the Organic Budget Law, LOLF), this broader review (RGPP) aims to go beyond marginal improvements in cost and efficiency to achieve a more fundamental improvement in public services and reduce spending as a share of GDP. A review of the extensive role of the state in the economy is key, refocusing on core missions and rationalizing the overlapping functions of multiple levels of local government. The planned merger of the tax and public accounting directorates (DGI and DGCP), modernizing tax administration structure, is a positive example of this rationalization. Finally, the review will serve to place public spending in a strategic framework, with a move to multiyear budgeting for the period 2009–11. Recently, the authorities unveiled the interim findings of the comprehensive audits underway, including some 100 streamlining measures. Staff strongly supported the exercise, noting the positive fruits that effective implementation yielded elsewhere (such as Australia, Canada, and Sweden), while cautioning against expectations of early results.

26. The government has also initiated a general review of the tax system. The review (RGPO) will allow the authorities to reevaluate the type of tax system needed to address the challenges of the globalized economy of the twenty–first century. The review’s objectives of greater stability, a supportive framework for business and investment, and greater use of environmental taxes should guide reform toward a more efficient system. Staff noted that the reform should give prominence to simplification and greater neutrality, producing a system with fewer distortions (deductions, exemptions, and tax credits, see Box 4). A key element should be a sharp reduction in tax expenditures, and the enshrining of the principle that all such tax decisions be taken only in the context of the budget (Loi des Finances). Until then, staff advocated a freeze on further tax expenditures, which are often taken off–budget cycle in response to sectoral pressures—a proposal viewed with favor by the budget authorities. The authorities, while noting the staff’s proposals, saw a tension in the call for stepped–up fiscal adjustment and its concomitant support for tax reform which, they noted, is seldom revenue–neutral.

D. Combining Financial Sector Stability and Efficiency

27. French banks remain sound and well–capitalized, though the recent financial turmoil has weighed on profitability and highlighted the importance of maintaining a strong capital base. Consolidated net income and return on equity of the eight main banking groups rose sharply and the ratio of nonperforming loans continued to decline in 2006 (Table 67). This solid performance continued in the first half of 2007 which, combined with strong capitalization, provided a cushion to absorb the impact of the crisis without jeopardizing solvency. However, growth came mostly from corporate and investment banking, asset management, and foreign markets, with expansion in domestic retail banking weaker. This slowdown in domestic retail earnings and increasing reliance on non–intermediation activities have increased banks’ balance–sheet vulnerability to heightened risk aversion and global liquidity retrenchment. Recent actions by some banks to consolidate off–balance sheet exposures, albeit generally not large, may also drive down banks’ earnings, as may rising risk in corporate credit. 16 In addition, the cooling–off in real estate prices, tightened mortgage lending, and expected sluggish demand raise the risk of a future downturn in the mortgage market.

Table 6.France: The Core Set of Financial Soundness Indicators, 2000–06
Deposit-taking institutions 1/
Regulatory capital to risk-weighted assets11.912.111.511.911.511.310.9
Regulatory Tier I capital to risk-weighted assets9.910.
Nonperforming loans net of provisions to capital12.812.612.611.
Nonperforming loans to total gross loans5.
Sectoral distribution of loans to total loans,of which
Nonfinancial corporation20.819.519.818.918.718.818.6
Households (including individual firms)22.921.722.624.524.926.526.6
Nonresidents (including financial sectors)
ROA (aggregated data on a parent-company basis) 2/
ROA (main groups on a consolidated basis) 3/0.600.450.430.390.530.490.55
ROE (aggregated data on a parent-company basis) 2/
ROE (main groups on a consolidated basis) 3/15.310.89.610.012.713.514.5
Interest margin to gross income33.332.537.535.533.232.428.2
Noninterest expenses to gross income67.766.965.564.463.964.362.4
Liquid assets to total assets19.520.420.721.621.320.518.1
Liquid assets to short-term liabilities138.5152.5157.0153.7155.1150.1146.3
Net open position in foreign exchange to capital
Net open positions in FX (in millions of euros) 4/6,7156,7383,1344,7726,66952754,313
Net open positions in equities to Tier 1
Sources: Banque de France, Commission Bancaire , BIS, and ECB.

These may be grouped in different peer groups based on control, business lines, or group structure.

All credit institutions’ aggregated data on a parent–company basis.

Consolidated data for the seven main banking groups (2005, IFRS).

Impact of the creation of the euro has to be taken into account.

Sources: Banque de France, Commission Bancaire , BIS, and ECB.

These may be grouped in different peer groups based on control, business lines, or group structure.

All credit institutions’ aggregated data on a parent–company basis.

Consolidated data for the seven main banking groups (2005, IFRS).

Impact of the creation of the euro has to be taken into account.

Table 7.France: Encouraged Financial Soundness Indicators, 2000–06 (In percent, unless otherwise indicated)
Corporate sector
Return on equity10.110.711.
Interest paid to financial firms 1/33.337.334.631.528.928.8n.a.
Number of enterprise bankruptcies (thousands)43.642.844.747.048.048.9n.a.
Number of enterprise creations (thousands)272.9271.4269.6292.8320.5317.9n.a.
Deposit-taking institutions
Capital (net worth) to assets4.
International consolidated claims of French banks,of which
(BIS data, as percent of total international claims)
Advanced countries80.481.083.785.084.083.484.9
Developing Europe1.
Latin America and Caribbean2.
Africa and Middle East3.
Asia and Pacific Area3.
Offshore Financial Centers7.
Gross asset position in financial derivatives to capital202244379307373544319
Gross liability position in financial derivatives to capital169217344283359485269
Large exposures to capitaln.a.n.a.
Trading income to total income8.06.22.416.820.023.926.0
Personnel expenses to noninterest expenses55.955.
Customer deposits to total (noninterbank) loans77.381.681.582.880.683.580.5
FX loans to total loans 2/15.115.312.611.210.812.011.4
FX liabilities to total liabilities17.318.415.
Market liquidity
Average daily turnover ratio in the securities market15.
Other financial corporations
Assets to total financial system assets36.235.835.236.638.037.638.1
Assets to GDP152.3149.8142.3151.3168.7188.5207.1
Household debt to GDP34.935.436.437.840.043.045.9
Household debt service and principal payments to incomen.a.n.a.n.a.
Real estate markets
Real estate prices8.87.98.311.715.310.3n.a.
Residential real estate loans to total loans30.831.532.835.237.139.3n.a.
Commercial real estate loans to total loans
Sources: Banque de France ; Commission Bancaire; BIS; and ECB.

In percent of financial firms’ gross operating surplus.

Data cover interbank and customer lending to residents and nonresidents on a metropolitan basis.

Sources: Banque de France ; Commission Bancaire; BIS; and ECB.

In percent of financial firms’ gross operating surplus.

Data cover interbank and customer lending to residents and nonresidents on a metropolitan basis.

Table 8.France: Financial System Structure, 2000-06 (End of year)
Commercial banks362357345333326316313
State-owned 1/8544344
Credit unions and mutuals154148136129127125121
Other credit institutions
Finance companies557524494464427411388
Of which: mortgage institutions3444444
Specialized financial institutions191716151187
Municipal credit institutions22212121212120
Securities firms146144136131124119116
Insurance companies464466456444423415407
Life and retirement127126126125119119115
Commercial banks 2/1110111010109
Securities companies 2/3334322
Assets(In billions of euros)
Commercial banks2,145.02,402.82,359.72,440.42,861.73,719.44,283.9
State-owned 1/22.078.882.175.111.3119.7124.6
Credit unions and mutuals847.7857.4880.8934.71,053.51,127.61,259.0
Other credit institutions
Finance companies411.2473.9507.9536.2432.7405.3476.7
Of which: mortgage institutions50.962.375.991.9107.2125.7148.6
Specialized financial institutions46.446.842.946.940.421.219.6
Municipal credit institutions1.
Securities firms44.151.964.9218.7215.3270.8353.6
Insurance companies (assets)
Life and retirement749.7798.3832.4907.3985.21103.41232.1
Private commercial435.8515.9516.1526.8573.9677.1758.1
Foreign-owned subsidiaries44.250.852.747.745.256.658.9
Branches of foreign banks16.317.119.420.919.726.124.8
Source: Banque de France ; and Ministry of Finance.
1/Including development banks. Nonbank development finance corporations are included separately under “Other credit institutions.”
2/Number of institutions with 75 percent of total assets.
Source: Banque de France ; and Ministry of Finance.
1/Including development banks. Nonbank development finance corporations are included separately under “Other credit institutions.”
2/Number of institutions with 75 percent of total assets.

Box 4.Tax Reform in France: Challenges and Options

The increased complexity of the French tax system has been an unfortunate by–product of a piecemeal approach to tax reform. In recent years, the government has undertaken several initiatives to reduce the tax burden on labor while seeking to accommodate global competitive pressures to lower capital taxation. Some of these, such as the earned income tax credit (PPE), simplification of the personal income tax, or the reform of the taxe professionnelle have brought noticeable improvements to the system. Nonetheless, measures have also been introduced to compensate for other policy distortions, notably in the labor market, degrading the overall coherence of the tax system by creating new distortions and loopholes. The August 2007 tax package is another example of such a piecemeal approach.

Against this background, the announced general review of the tax system is timely. The strategic assessment of the tax system should aim for greater stability, a supportive framework for business and investment, and greater use of environmental taxes. It is the first tax assessment exercise of this scope in France, and provides an opportunity to strategically revamp the system to increase tax efficiency and competitiveness. Fundamental reforms elsewhere in the EU, notably to corporate and capital income taxation, pose challenges for France by offering an attractive regime while safeguarding revenue. Staff sees several areas for reform of the main taxes:

  • The statutory rate of the corporate income tax will soon be the highest in Europe. A lower rate with a broader base could make the system simpler and fairer, deterring the shifting of profits and investment to lower–taxed countries.
  • There is scope for further simplification and base–broadening of the personal income tax; transition issues in moving to mandatory withholding are surmountable.
  • The intended restructuring and streamlining of France’s income support system(minima sociaux) and work–pay initiatives (PPE) could help eliminate the distortions produced by the complexities of the tax–benefit system.
  • The VAT in France is increasingly out–of–step with international best practices. A move to unify VAT rates and broaden coverage could raise as much revenue with a headline rate significantly below the current 19.6 percent, reducing incentives to informality and allowing distributional objectives to be pursued by better–targeted instruments.
  • The “tax shield”(bouclier fiscal) complicates tax administration and represents a second–best solution to limiting the distortions caused by a high tax rate and an overly complex system. Reform should reduce rates, including through the phasing–out of the wealth tax.

The emphasis being placed on environmental issues in reviewing the tax system is welcome.

28. The exposure of the French financial sector to ongoing financial turbulence appears manageable, despite some challenges. 17 Direct exposure to subprime through retail banking in the U.S. is negligible. French banks appear to be in a position to provide liquidity and regulatory capital to their off-balance sheet vehicles if needed. The outstanding amount of asset–backed commercial paper (ABCP) is low (about 3 percent of the U.S. level). French banks run several conduits and one structured investment vehicle (SIV), but exposure to mortgage–backed securities represents only 0.3 percent of total assets, and potential subprime exposure via conduits accounts for less than 2 percent of assets. No banks have taken their conduits onto their balance sheet yet, but Societe Generale announced a US$4.3 billion bail–out of its sole SIV, with an impact of about 5 b.p. on its tier–one capital ratio. French banks’ exposure to Leveraged Buy–Out (LBO) risk also appears manageable. 18 According to the authorities, French banks’ participation in recent ECB’s liquidity operations was disproportionately low compared to their share of euro area assets and liabilities.

29. Some French mutual funds, including notably so–called “dynamic” money market funds, experienced temporary difficulties at the start of the global turbulence. These funds, run by large financial institutions, suffered due to exposure to U.S. subprime mortgages, leading in a few cases to a temporary trading suspension. While the timing of this action—at the height of market jitters—was sensitive (given the potential for confusion between operations on the bank’s own account and those in funds managed by the bank), the decision is seen to have protected investors’ interest and safeguarded equality among investors. The authorities have nonetheless initiated a review of financial product advertising and of the marketing practices of these funds, whose nomenclature could be read as suggesting liquid money market investments.

30. On financial stability issues, the authorities are contributing to initiatives to improve financial supervision and favor greater EU cooperation and regulatory harmonization. Domestically, the authorities see the relative resilience of the French financial system as clear validation of their supervisory model, with the proximity provided by separate banking supervision (and coverage of all credit–granting institutions, the absence of which they view as a determinant of the subprime crisis) ensuring timely information. Internationally, they see the turbulence as demonstrating the need for coordinated initiatives, set out inter alia in the Brown–Merkel–Sarkozy declaration of October 2007. At the European level, the authorities strongly support strengthening the financial stability framework, favor including an EU dimension in the statutory mandates of national regulators, and aim to press the Lamfalussy process forward ahead of France’s EU Presidency in the second half of 2008.

31. The authorities agreed that the financial sector’s contribution to growth could be enhanced, and viewed the “Paris–Place Financière” initiative as contributing to this end. The initiative aims to promote Paris as an international financial center, and envisages steps to attract long–term capital, modernize the legal framework, and improve the tax and regulatory environment. The authorities have also taken advantage of the implementation of MiFID to implement “better regulation” principles. Finally, a commission headed by Michel Camdessus has recommended ending the monopoly of distribution for certain administered savings instruments (notably the Livret A), and the affected Banque Postale has been granted the possibility of offering consumer credit—steps toward gradually phasing out administered loan and savings schemes and reducing the state’s role in the financial sector, as long advocated by the Fund.

IV. Staff Appraisal

32. The government’s reformist intentions provide an historic opportunity to place France onto a sustained higher growth path with greater opportunities for all. An unwavering drive for reforms, entailing a true rupture from the past and complemented by a stronger fiscal adjustment than currently planned, would create a virtuous cycle of higher growth, healthier public finances, and lower unemployment. Aiming for a “critical mass” of simultaneous reforms across different areas exploits the synergies of contemporaneous action and—by addressing rents across several markets—more fairly distributes costs and benefits. Fund staff simulations show that such a strategy would yield appreciably larger and faster growth dividends than a gradual and piecemeal approach. However, to the extent that choices must be made, efforts are best concentrated where current market distortions are the greatest—in the labor market and constraints on competition in services markets—as is indeed being planned.

33. Economic policy should address the root cause of France’s faltering growth performance: the weakness of its supply potential. While there is a widespread public perception that a lack of purchasing power is constraining growth, the sources of France’s growth difficulties lie not in deficient consumer demand, but in rigidities that impede supply and impair export performance. The government rightly aims to address these rigidities, but its emphasis on raising purchasing power—while understandable in political economy terms—blurs the problem and raises unrealistic expectations. An unambiguous focus on the country’s supply deficiencies would impart an overarching internal coherence to the government’s economic strategy.

34. Weak external sector performance adds urgency to the case for structural reforms. While France’s measurable competitiveness gap is modest, its disappointing export performance is testimony of deep–seated rigidities. Broad reforms addressing these rigidities, along with fiscal adjustment, are key to raising future growth and export performance.

35. With one of the lowest labor inputs in the OECD, France indisputably needs to “work more” if it is to “earn more.” The government’s emphasis on work effort is most apposite given the country’s low labor force participation, employment rates, and hours worked. Three areas should receive priority attention. First, the various measures to ease the 35–hour workweek restrictions, including the tax exemption for overtime, do not address the original distortion of the statutory reduction in working time, and as such are complex, second–best responses. It is emblematic of the pernicious nexus between rigid labor market institutions and the budget that—having spent considerable sums to implement the 35–hour workweek—additional public money is now being diverted to circumvent it. Second, the secular rise of the minimum wage needs to be halted. The decision to forego a discretionary adjustment in 2007 is thus welcome, and should be maintained going forward. A “low pay commission” of independent experts to advise on the yearly setting of the SMIC and raise awareness of the impact of a high minimum wage on unemployment and public finances could be helpful. Third, the present, highly limiting juridical framework for labor relations merits comprehensive reform. While the outcome of the recent negotiation on labor contracts is a welcome step towards reducing severe labor market rigidities, since social partners have taken the current limiting framework as given, the agreement may only marginally ease labor market constraints. A superior option would be to ease the restrictiveness of permanent contracts more generally.

36. Further goods and services market reforms could significantly boost potential output and consumer welfare. Placing competition policy at center stage would be aided by replacing the current dual responsibilities for competition policy with a single, reinforced, and independent competition authority, as recommended by the OECD and the Attali Commission. This authority could also be vested with a mandate to be a public advocate for competition. For the benefit of consumers, current reforms of retail distribution should lead to a complete removal of the prohibition of below–cost pricing, allowing full contractual freedom between suppliers and retailers. More generally, the liberalizing opportunity offered by the EU Services Directive should be fully seized.

37. While the 2008 budget contains several commendable initiatives, it implies an inopportune pause in fiscal adjustment, stemming from the tax–cutting provisions. The 2008 budget incorporates several positive features to contain spending, including an unprecedented reduction in public employment. But the resulting expenditure restraint is offset by the tax cuts, which focus largely on demand–side stimuli rather than on increasing productivity and flexibility on the supply side.

38. Fiscal policy should be vigilant to the risk of slippage in the fiscal deficit in 2008 and aim for a return to an ambitious fiscal adjustment path going forward. Risks in 2008 stem primarily from the prospect of lower–than–budgeted growth and from continued spending pressures, most notably in social security. In addition, if growth were to turn down, the deficit could move perilously toward its Maastricht limit, and early corrective action should be taken. From 2009, a structural adjustment path of ¾ percentage points of GDP per year, around which the stabilizers could be allowed to play, would bring the fiscal accounts close–to–balance by 2010, contributing to the credibility of the medium–term objective.

39. The ongoing expenditure and tax policy reviews are most welcome. International experience shows that these exercises stand to yield appreciable results, providing lasting improvements in the fiscal position and in the efficiency of public services. Expectations of early results should however be tempered. In 2009–10, fiscal consolidation should be based on tight spending plans and the recognition that the present state of public finances allows no scope for further tax reductions or for continued recourse to tax expenditures to address distortions or sectoral requests.

40. The French financial system has weathered the recent financial market turbulence comparatively well so far, but risks remain. The system’s strong capitalization, its modest exposure to the U.S. subprime mortgage market, and a supervisory system that covers all credit–granting institutions have all contributed to this relative resilience. Still, the current environment continues to pose challenges, as market conditions have yet to return to normal, which could further increase banks’ financing costs, reduce their profitability, and induce credit tightening. Continued vigilance will thus be paramount. The authorities’ readiness to include a European dimension in the statutes of national regulators and the impulse they intend to give to the Lamfalussy process are welcome.

41. The contribution that a modernized financial sector can make as a driver of economic growth deserves greater prominence. In this regard, the “Paris–Place Financière” initiative provides an opportunity to modernize France’s financial markets. France’s financial system, while a leader in some sectors, continues to carry the legacy of a heavily regulated and administered past. To improve the efficiency of the banking sector, administered schemes should be phased out and the state’s role in the financial sector reduced. Ending the monopoly on the distribution of Livret A provides opportunities in this direction; in particular, with the Banque Postale being given the possibility to become a full–fledged bank and in due course privatized.

42. It is proposed that France remain on the standard 12–month consultation cycle.

Appendix I. France: Fund Relations

(as of december 31, 2007)

Mission: Paris, November 8-19, 2007. The concluding statement of the mission is available at

Staff team: Messrs. Leipold (Head), Franks, Schule, Nadal De Simone, Luzio, Ms. Xiao (all EUR), and Mr. Keen (FAD).

Country interlocutors: The minister of the economy, finance, and industry; the minister of the budget and the reform of the state; the governor of the central bank; the director general of the treasury; the directors of the budget, taxation, health, social affairs, and labor and their staffs; the economic advisor in the cabinet of the prime minister; the rapporteur of the finance commission of the National Assembly; INSEE; the Commission Bancaire; the Financial Market Authorities; the Council for Economic Analysis; representatives of labor unions, employer organizations, academia, and the financial sector. Mr. Fayolle (Executive Director) or Mr. Claveranne (Alternate Executive Director) attended the meetings.

Fund relations: The previous Article IV Consultation took place on November 1, 2006. The associated Executive Board’s assessment is available at and the staff report at France accepted the obligations under Article VIII and, apart from certain security restrictions, maintains an exchange system free of restrictions.

Data: France subscribes to the Fund’s Special Data Dissemination Standard, and comprehensive economic data are available on a timely basis (Appendix II).

I. Membership Status: Joined December 27, 1945; Article VIII.

II. General Resources Account:

SDR MillionPercent of Quota
Fund holdings of currency10,025.1993.36
Reserve position in Fund713.396.64

III. SDR Department:

SDR MillionPercent of Allocation
Net cumulative allocation1,079.87100.00

IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements: None

VI. Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):


VII. Implementation of HIPC Initiative: Not applicable

VIII. SafeguardsAssessments: Not applicable

IX. Exchange Rate Arrangements:

  • France’s currency is the euro, which floats freely and independently against other currencies.
  • In accordance with EU regulations and the relevant UN Security Council resolutions, certain restrictions are maintained on the making of payments and transfers for current international transactions with respect to the former government of Iraq, the former government of Liberia, Myanmar, certain individuals associated with the previous government of the former Republic of Yugoslavia, and Zimbabwe. Financing of, and financial assistance related to, military activities in the Democratic Republic of the Congo (from October 1, 2003), Somalia (effective January 27, 2003), and Sudan (from January 26, 2004) are prohibited. Restrictions also apply on transfers with respect to the Taliban and individuals and organizations associated with terrorism. The restriction with respect to the Socialist People’s Libyan Arab Jamahiriya has been notified to the Fund under Decision No. 144-(52/51).
  • Measures have been taken to freeze accounts of listed persons and entities linked to terrorists pursuant to the relevant EU regulations and UN Security Council resolutions.

X. Article IV Consultation:

The last Article IV consultation was concluded on October 25, 2006. France is on the standard 12-month consultation cycle.

XI. FSAP Participation and ROSC:

France–Report on the Observance of Standards and CodesOctober 17, 2000
(ROSC): Module I–Fiscal Transparency
Fiscal Transparency—UpdateIMF Country Report
No. 01/196, 11/05/01
Fiscal Transparency—UpdateIMF Country Report
No. 04/345, 11/03/04

Summary: The report found that France has achieved a high level of fiscal transparency and has introduced a number of improvements in coverage and presentation of fiscal information. Notable areas of progress include the development in the final accounts publication to include more complete information on government assets and liabilities as well as disclosure of contingent liabilities. Accounting standards have been changed to reflect accruals principles in a number of areas, and these standards are clearly explained. The staff suggested that further steps could be taken to identify and report quasi-fiscal activities in the budget presentation, provide a more consolidated picture of fiscal activity outside the appropriation process, and improve the reconciliation of stated policies with outcomes at the general government level.

These issues have been addressed in the Loi organique aux lois de finance (LOLF), which has become fully effective on January 1, 2006. In addition to the annual appropriations, the government has to commit to a multi-annual framework, details of which are provided in the economic, social, and financial report attached to the Budget Act. The budget is organized along missions and provides details on the level of appropriations for each mission and performance indicators by which the expected results of the mission will be assessed ex post. The State Audit Office has been given the new assignment of certifying the public accounts, and implementation of accruals-basis accounting has been confirmed. Parliamentary oversight powers have been strengthened.

France–Report on the Observance of Standards and CodesOctober 2000, corrected:
(ROSC): Module II–Transparency in Monetary and Financial2/15/01
IMF Country Report
Transparency in Monetary and Financial Policies—UpdateNo. 01/197, 11/05/01
Transparency in Monetary and Financial Policies—UpdateIMF Country Report
No. 02/248, 11/13/02

Summary: The 2000 ROSC noticed that transparency of financial policies is accorded a high priority by all financial agencies assessed, and they are in observance of the good practices of the Code of Good Practices on Transparency in Monetary and Financial Policies. The major agencies disclose their objectives, their legal and institutional frameworks, and have open processes of policymaking and regulation. The principles of transparency are observed by dissemination of relevant information to the public and in the agencies’ arrangements for internal conduct, integrity, and accountability. However, the staff noted that the framework for supervision and regulation applicable to mutual insurance firms is not as well defined and suggested to improve its transparency. The transparency of monetary policy was not assessed by the Fund team as the Banque de France is a member of the European System of Central Banks and no longer conducts independent monetary policy.

Subsequently, the framework for supervision and regulation applicable to a specific group of mutual insurance firms was modified in a number of steps. In August 2003, legislation created a single supervisory body, the Commission de Contrôle des Assurances, Mutuelles et Institutions de Prévoyance (CCAMIP) by merging the regular insurance supervisor (CCA) and mutualities’ supervisor (CCMIP). Coordination with the banking sector supervisors was strengthened and the powers of the supervisory authorities extended.

France–Report on the Observance of Standards and CodesIMF Country Report
(ROSC): Data ModuleNo. 03/339, 10/29/03
Data Module—UpdateIMF Country Report
No. 04/345, 11/03/04
Data Module—UpdateIMF Country Report
No. 05/398, 11/07/05

Summary: The report found that France is in observance of the Fund’s Special Data Dissemination Standard (SDDS). In particular, the mandate of INSEE and the Banque de France for the production of the six macroeconomic datasets is clearly defined, with the reporting burden and the confidentiality provisions given special consideration notably through the CNIS. Professionalism is central to the statistical operations of the two institutions, internationally and/or European accepted methodologies are generally followed, the degree of accuracy and reliability of the six datasets is remarkable, statistics are relevant and provided on a timely basis, and they are accessible to the public.

The report made a number of suggestions for further improvements: the responsibility of INSEE as the producer of government finance statistics should be clarified; data sharing between the Banque de France and the rest of the French statistical system improved; classification and valuation methods in balance-of-payments statistics reviewed; consistency between the current account of the balance of payments and the goods and services account

in the national accounts improved; the timing of revisions in the quarterly and annual national accounts aligned; and identification of data production units of INSEE facilitated.

France continues to implement several of the 2003 ROSC Data Module recommendations, including by promoting a broader understanding of statistical data revisions, making greater use of firm-level data to improve the measurement of changes in stocks, and intensifying work on portfolio investment income with the objective of starting to record those transactions on an accrual basis.

France–Financial System Stability Assessment (FSSA)IMF Country Report
No. 04/344, 11/03/04
FSAP Assessment and Reports on ROSCsIMF Country Report
No. 04/345, 11/03/04
FSAP AssessmentIMF Country Report
No. 05/185, 06/08/05
Publication of FSAP—Detailed Assessment of Observance ofIMF Country Report
Standards and CodesNo. 05/186, 06/08/0

Summary: The report concluded that France’s financial sector is strong and well supervised. No weaknesses that could cause systemic risks were identified. The strength of the system is supported by the financial soundness indicators and the strong conformity to the supervisory and regulatory standards approved by the Basel Committee, IAIS, IOSCO, FATF, and CPSS.

The degree of observance of the transparency code is high in all relevant areas. The French banking sector has been modernized and restructured over the past two decades and is well capitalized. Systemic vulnerabilities in the important insurance sector are well contained. Securities markets are large and sophisticated.

Notwithstanding the strengths of the French financial sector, a number of issues emerged from the FSAP, including (i) concentration in banking may have reached a point where further consolidation could intensify concerns over the scope for collusion and long-term stability where many banks could be considered “too big to fail;” (ii) banks’ large and growing portfolios of fixed-rate residential housing loans could represent a longer-term risk in the event of large increases in funding costs and/or a significant fall in real estate prices; (iii) some administered savings schemes and other policy measures give rise to costs and impede financial market innovation. These schemes are not well targeted to achieve intended social goals and are not well aligned with current priorities, such as strengthening the pension system; (iv) the banking system’s rapid accumulation of capital strengthens banks’ resilience. This accumulation is harder to control for mutual banks, given their legal restrictions on remuneration of their members. And, for all banks, it could encourage expansion through expensive takeovers and risky new ventures; (v) the supervisory system of the financial sector is composed of specialized segments. Coordination mechanisms need to be further adapted. Additional steps should be considered in the future as cross-sectoral financial groups become more prevalent; (vi) the consolidation of the French stock and futures markets with others in Europe has increased the importance of effective cooperation across national jurisdictions. Moreover, the authorities face the challenge of adjusting to and effectively implementing the significant regulatory overhaul that took place in late 2003; and (vii) the infrastructure for the clearing and settlement of payments and securities is generally sound and modern. However, there is some room for improvement in the clearing and settlement of retail payments and securities, where the multilateral netting systems lack fully adequate safeguards to ensure timely settlement in case of default.

Appendix II. France: Statistical Issues

The economic database is comprehensive and of high quality, and data provision to the Fund is adequate for surveillance. The authorities regularly publish a full range of economic and financial data, and calendar dates of main statistical releases are also provided. France subscribes to the Fund’s Special Data Dissemination Standard. The transmission of data in electronic form from INSEE (Institut national de la statistique et des études économiques) and the profusion of data from various institutions (Banque de France, INSEE, ministry of finance, ministry of labor and solidarity) have helped to build an infrastructure, in which all data can be easily accessed through the Economic Data Sharing System. A data ROSC mission conducted an assessment of the statistical system in March 2003, and the report was published in October 2003. A factual update to the main report was published in November 2004

France’s monetary and banking statistics methodology conforms with the European Central Bank framework, which provides comparable details as the Standardized Report Forms developed by STA. Statistics for International Financial Statistics on banking institutions and monetary aggregates are prepared on a monthly basis and are timely. Monetary data are also disseminated in the quarterly IFS Supplement on monetary and financial statistics.

France follows the European System of Integrated Economic Accounts 1995 (ESA95). Data for GDP and its expenditure components are available from 1978 onwards. Both annual and quarterly accounts provide reliable information, although estimates from the two accounts differ slightly before the quarterly accounts are revised to be aligned to the annual ones. In national accounts estimates were rebased to 2000 prices.

Government finance statistics have been strengthened recently. Both central and general government data are presented in a more comprehensive fashion than previously and the data for 2006 and 2007 also reflect the various impacts of recent budgetary reform. Although the source data is collected by the Ministry of Economy and Finance, INSEE is principally responsible for the compilation and dissemination of fiscal data in a framework that is consistent with ESA95. INSEE’s website has recently been enhanced; in particular, it includes expenditure tables and government revenues by subsector (central government, miscellaneous central government agencies, local governments, and social security administration).

Balance-of-payments statistics should be interpreted with caution, given large errors and omissions. Greater coherence between the external current account and the rest of the world account in the national accounts is needed. In this regard, work with promising early results has been undertaken on the transportation account.

Appendix II.France: Table of Common Indicators Required for Surveillance(as of december 28, 2007)
Date ofMemo Items:
LatestDateFrequencyFrequencyFrequencyData Quality—Data Quality—
ObservatioReceivedofofofMethodologicalAccuracy and
Exchange Rates11/0712/06/07MonthlyMonthlyMonthly
International Reserve Assets and Reserve Liabilities of the Monetary Authorities110/0711/30/07MonthlyMonthlyMonthly
Reserve/Base Money06/0608/06WeeklyWeeklyWeeklyO, O, LO, LOO, O, O, O, O
Broad Money11/0712/07MonthlyMonthlyMonthly
Central Bank Balance Sheet10/0711/28/07MonthlyMonthlyMonthly
Consolidated Balance Sheet of the Banking System10/0711/28/07MonthlyMonthlyMonthly
Interest Rates210/0712/17/07MonthlyMonthlyMonthly
Consumer Price Index11/0712/18/07MonthlyMonthlyMonthlyO, O, O, OO, O, O, O, NA
Revenue, Expenditure, Balance and Composition of Financing3—General Government4Q2:200710/07QuarterlyQuarterlyQuarterlyO, O, O, OO, O, O, O, O
Revenue, Expenditure, Balance and Composition of Financing3—Central Government507/0509/06MonthlyMonthlyMonthly
Stock of Central Government Debt07/0609/06MonthlyMonthlyMonthly
Stock of Central Government-Guaranteed DebtQ1:200608/06QuarterlyQuarterlyQuarterly
External Current Account BalanceQ2:200711/07QuarterlyQuarterlyQuarterlyO, O, O, LOO, O, O, O, O
Exports and Imports of Goods and ServicesQ3:200712/07QuarterlyQuarterlyQuarterly
GDP/GNPQ3:200712/07QuarterlyQuarterlyQuarterlyO, O, O, OO, LO, O, O, O
Gross External Debt12/31/0506/06MonthlyMonthlyMonthly

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

This information is provided on a budget-accounting basis (not on a national accounts basis).

Reflects the assessment provided in the data ROSC or the Substantive Update (published in October 2003, and based on the findings of the mission that took place in March 2003) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 6, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

This information is provided on a budget-accounting basis (not on a national accounts basis).

Reflects the assessment provided in the data ROSC or the Substantive Update (published in October 2003, and based on the findings of the mission that took place in March 2003) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 6, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.

1Balance of payments data should be interpreted with caution, given the size of the “errors and omissions” item.
2Lending survey data through October indicate that only 10 percent of French banks reported tightening conditions, versus 30 percent for the euro area as a whole.
3The December consensus forecast growth for 2008 is 1.8 percent. Staff forecasts might be reviewed further in the course of the current WEO process, and would be reflected as needed in a Supplement.
4Staff analysis indicates that France’s economy is highly sensitive to global common shocks (especially demand shocks, which seem to originate from the U.S.) and reacts more through changes in employment and productivity than through wage and price flexibility, buttressing the case for structural reforms (Alain Kabundi and Francisco Nadal De Simone, “France in the Global Economy,” IMF Working Paper 07/129).
5Luc Everaert and Werner Schule, “Structural Reforms in the Euro Area: Economic Impact and Role of Synchronization Across Markets and Countries,” IMF Working Paper 06/137.
6It has been apparent for some time that the German and French economies have been out of synch on several dimensions (Figure 7).
7See the background study on non-price competitiveness from a regional perspective, forthcoming.
8The authorities did not see much scope for pursuing proposals (cf. in particular Jacques Delpla and Charles Wyplosz, La Fin des Privilèges: Payer pour Reformer, 2006) to “compensate” stakeholders for the loss of rents created by long-standing public policy.
9See Pierre Cahuc and Stéphane Carcillo, “The Shortcomings of a Partial Release of Employment Protection Laws: The Case of the 2005 French Reform,” IMF Working Paper 06/301. The scope for reform may also be affected by the fact that France is among eight OECD signatories of the ILO Termination of Employment Convention No. 158. In November 2007, an employment contract introduced in 2005, aimed at facilitating hiring and dismissals in small enterprises (the Contrat Nouvelles Embauches—CNE), was found by the ILO as not in observance of the Convention.
10Staff work raises questions about the extent to which workers approve of the mandatory reduction in working hours, which is estimated to have constrained the choice of a significant number of individuals. See Marcello Estevão and Filipa Sá, “Are the French Happy with the 35-Hour Workweek?” IMF Working Paper 06/251.
11Romain Bouis, “évaluation de l'impact macroéconomique de reformes sectorielles a l'aide d'un modèle a deux secteurs,” September 2007, finds an increase in GDP growth of 1.2 percentage points and of 250,000 jobs resulting from structural reforms in financial markets, the distribution sector, and hotels and restaurants (representing about 15 percent of GDP). These results are comparable to those in Everaert and Schule (2006).
12The Commission has been charged with recommending measures to boost France’s growth.
13Edward Glaeser and Jesse Shapiro (“The Benefits of the Home Mortgage Interest Deduction,” NBER Working Paper No. 9284, October 2002) find the mortgage interest deduction to be “a particularly poor instrument for encouraging homeownership.”
14Each 0.2 percentage point in lower growth increases the deficit by roughly 0.1 percent of GDP. Thus, if growth fell to 1 percent in 2008 (a 20 percent probability by staff’s estimate), the deficit could breach the Maastricht limit absent corrective action.
15Sweden’s experience in combining fiscal consolidation and structural reform is illustrated in S. Thakur, M. Keen, B. Horvath, and V. Cerra, Sweden’s Welfare State, International Monetary Fund, 2003. See also A. Annett, “Lessons from Successful Labor Market Reformers in Europe,” IMF Policy Discussion Paper 07/01, which shows that four top EU reformers improved fiscal balances (while cutting labor taxation) during episodes of labor market reform. Germany provides a more recent example.
16An analysis of the impact of the turbulence on the French corporate sector is presented in the selected issues paper “Financing and Risks of French Firms.”
17In Q3 2007, BNP Paribas reported losses from the subprime and structured credit of €230 million, Société Générale €328 million, Natixis €407 million, and Crédit Agricole Group €546 million. These banks all reported overall profits for the quarter, however.
18Senior LBO tranches predominate (85 percent), with a small share of junior tranches (less than 6 percent) on banks’ balance sheets. While there are signs of increasing leverage and longer time to syndicate, the pipeline is estimated to be less than €10 billion and banks are decreasing origination volume.

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