We wish to thank staff for a quality report that provides an in-depth analysis of the strengths of the French economy—and the challenges it faces—at a pivotal time in its history. We are also grateful for the Selected IssuesX, which we found most interesting. The discussions with the team were warmly appreciated by the French authorities, in addition to providing useful input for their own assessments. As the authorities themselves explained during the mission, they are hopeful that the IMF can more widely disseminate cross-country analyses and experiences. The French authorities set great store by the surveillance exercise, as evidenced by their decisions to implement two of the resulting recommendations: the ending of the monopoly over the distribution of the livret A accounts and the establishment of a unified regulatory authority in charge of competition issues.
“France is on the move,” IMF staff asserted in the Concluding Statement for the 2007 Article IV Consultation. The government’s strategy is to free productive capacities. To achieve this goal, the government has embarked upon a reform process distinguished by one clear objective and three characteristic features: its scope, its method, and its speed of implementation.
- -Objective: raise France’s potential growth by 1 percent over time.
- -Scope: achieve a “critical mass” of reforms so as to maximize synergies. France is implementing a comprehensive structural reform strategy aimed at raising productivity, increasing the employability of individual workers, and enhancing the attractiveness of France’s economy.
- -Method: move quickly while allowing adequate time for collective bargaining, consensus and avoiding deadlocks.
- -Implementation: once decisions have been reached, the authorities will press ahead quickly with the structural reforms. A sizable number of reforms have already been carried out, as staff has pointed out. I would like to touch upon some of these reforms.
Improve labor market mobilization
The reform of overtime rules, adopted last August, is producing a supply-side effect. A mere 3 months after its adoption, by November 2007, 50 percent of firms with more than 10 employees had reported already using the new system. In addition, special pension plans have been reformed, with particular reference to contribution periods and indexation rules, which have been aligned with the rules governing reformed pension plans. In 2008, the full set of financing parameters of pensions will be examined with a view to reducing medium- and long-term financing requirements. The merger of UNEDIC and ANPE, a reform that has been on the table for over twenty years, will foster a more effective matching of supply and demand, while improving labor market flexibility. And as Fund staff have pointed out, the decision to forego any hike in the SMIC (minimum wage) in July 2007 will make it easier for employers to hire unskilled workers. Furthermore, the agreement reached between 8 out of 9 employers’ and workers’ unions on January 11, 2008 will increase the flexibility of the labor market and improve the employment rate. This agreement relaxes the requirements for terminating employer-employee relationships in exchange for the introduction of an occupational and social safety net for workers in addition to the preservation of their acquired rights. Negotiations have begun in other areas, in which the employers’ and workers’ unions are expected to reach agreement by March 31, 2008. I am referring in particular to the strengthening of vocational training and negotiations with respect to working hours.
Increase competition in the market for goods and services. The law adopted last December, rightly described as “particularly promising” by staff (Box 2), frees wholesale margins and passes savings on to customers. According to forecasts, this key measure should decrease the CPI by 1½ to 2 points. Other reforms have already been decided upon, with implementation beginning in early 2008: the liberalization of ports and rail freight, and the over-the-counter sale of pharmaceutical products. Finally, a draft law is expected in the Spring to take up the recommendations of the Attali commission.
Strengthen R&D. The London protocol has been ratified. This will allow French firms to reduce patent costs while at the same time increasing the international comprehensibility of patents. The research tax credit (implemented on January 1, 2008) modifies the eligible tax base with the aim of encouraging long-term innovation efforts. It is one of the most attractive settings in Europe. The GDP increment associated with the latter reform will be in the range of 0.3 and 0.5 point of GDP after 10 years. Furthermore, the universities were reformed in August 2007.
France is drawing inspiration from successful foreign experiences. When discussing foreign experiences, it is vital to take full account of those factors—monetary conditions in particular—that are key to the successful implementation of the accompanying reforms. The annex and the box on the Canadian experience could be amended in that regard.
Last but not least, reflecting France’s commitment to the surveillance exercise, the authorities recently adopted two decisions long recommended by the IMF. First, last December, the Prime Minister announced the ending of the monopoly on the distribution of livret A accounts, which should take effect by January 1, 2009 at the latest, as called for by the Fund (paragraph 41). Moreover, on January 23, 2008 the President of the Republic announced his support for the Attali Commission’s proposal to establish a unified competition authority, in accordance with IMF recommendations (paragraph 19).
The short-term outlook is reasonably good. Naturally, France is not immune from the slowdown in the global economy. Consequently, the government has indicated that for 2008, France’s growth forecast will be around 2 percent. The most recent INSEE economic outlook survey, published in mid-December 2007, projected a growth carry-over of 1.7 percent by mid-2008, i.e., well above Fund staff’s estimates.
The French economy performed well in 2007. In particular, job creation has been robust: more than 230,000 new jobs appeared in the business sector during the first three quarters of 2007, in contrast to 190,000 for all of 2006. The unemployment rate at the end of the third quarter was 8.3 percent (down from 9.8 percent at end 2005). Furthermore, short-term economic indicators are on track. The business climate in the manufacturing sector has thus remained buoyant throughout 2007 in France. This is attributable in particular to the recovery of the automobile industry and the ongoing dynamic performance of the aviation sector.
These welcome developments are expected to continue in 2008 and to support France’s industrial production and exports. In spite of the increase in inflation through end-2007, household consumption is expected to remain strong in early 2008, benefiting from the steady improvement in the labor market in 2007 and measures adopted last summer. Furthermore, despite tighter interest rates, consumer credit remained dynamic at end-2007. The relatively low level of household indebtedness (68 percent of gross disposable income), mainly at fixed rates, and a real estate market unhampered by risks identified in other countries, are two other positive factors going forward.
With respect to the impact of the financial crisis on French firms, as analyzed in the Selected Issues, we share the view that French firms continue to perform favorably.
However, we wish to point out that in view of the selection bias in the study, its conclusions are relevant to the sole listed companies.
France’s economy is more resilient to a global slowdown than other comparable economies, given the manner in which its growth is structured, contrary to the claims made by staff, particularly in the Selected Issues. Although the analytical method proposed by staff is appealing, it will require further verifications and additional econometric support if it is to be truly convincing, particularly with regard to the suggested policy recommendations.
The authorities have indicated their intention to pursue their fiscal consolidation effort through 2010, cyclical conditions permitting. The timetable and arrangements for this adjustment are consistent with the government’s economic strategy, which is designed to achieve sustainable improvements in government finance, focusing on two key areas.
First, the implementation of structural reforms is designed to boost potential growth. Available research (IMF studies in particular) shows that current and proposed reforms will raise potential growth by 1 percent over time.
Second, the government is embarked upon an unprecedented drive to control public expenditure. Specifically, the framework for expenditure control (stabilization in volume terms) has been broadened, particularly to include withholdings from revenue (in favor of regional governments and the European Union). In light of those expenditures for which increases are automatic (pensions, debt outlays), compliance with the expenditure framework will necessitate volume reductions in other government expenditures. The decision not to replace one out of every two civil servants will represent a key component of this effort, as adopted in the 2008 budget law (except for national education, where the ratio will be one out of three). Lastly, the government has made a commitment to parliament to identify a tax expenditure supervision tool, as a complement to the expenditure framework. The 2008 budget will be rigorously implemented.
The objectives of public expenditure control are credible. First, the broad review of public policy (RGPP) is under way. As a result of this review, staff reductions should be accompanied by organizational changes and streamlining. This exercise is being led at the very highest levels of government and the main decisions will be taken in the Spring. Then, in 2009, a three-year government budget will be adopted to supplement the RGPP, in order to align the timetable of the reforms with the budget process. This multi-year approach will make it possible to strengthen the beneficial reforms introduced by the budget framework law (LOLF).
We are in broad agreement with the main message in the Selected Issues regarding the French tax system. However, the claim that the fundamental changes of the kind seen elsewhere have yet to appear in France is unduly harsh. Staff’s message (i.e., the need for a comprehensive approach) is consistent with the wide-ranging review of the tax and social contribution system (RGPO) currently being pursued by the authorities. However, the reforms that are already in place should not be overlooked. For example, the maximum marginal rate of the income tax in France is now one of the most competitive. Moreover, France is at the forefront of efforts to achieve tax neutrality—for example, through the phase- out of double taxation on equity securities for businesses. Finally, although the nominal rate of corporate income tax remains high, France has lately been focusing its corporate income tax reduction efforts on the reform of the taxe professionelle, as acknowledged in Box 4.
Like staff, we believe that France’s financial markets have weathered the recent financial turbulence well. The impact of the crisis in France has affected different banking groups in different ways, depending on their operational structure; yet, as IMF staff make clear, the impact was softened by the solid performance in the first half of 2007 and strong diversification of services and products, as well as the limited direct and indirect exposure of major French banks to the subprime market. In particular, the overall solvency of the French banking system remains satisfactory. With regard to the difficulties encountered by mutual funds (paragraph 29), the staff report should specify that the amounts associated with funds that have undergone closure or temporary trading suspension account for less than 0.5 percent of total assets under management.
The existing supervision model, which is relatively straightforward, has proven its worth in the face of recent financial upheavals. In fact, in managing this crisis, close cooperation between supervisory authorities and central banks has proven to be instrumental in enhancing the effectiveness and credibility of government policy. France’s supervision mechanism allows the supervisory authority to give the Bank of France prompt notification of factors influencing bank behavior, which is essential in times of crisis. Furthermore, market information, data on payment systems, as well as the statistics gathered by Bank of France staff enable policymakers to make a more informed assessment of the dynamics of the crisis. All in all, the close links between the two institutions allow for a better understanding of the financial system’s vulnerability to credit and liquidity risks, and this partnership enhances their capacity to assess the situation properly. This is particularly important for understanding indirect risk—for example, risks associated with contagion effects.
One of the largest French banks, Societe generale, has been the victim of a huge fraud. I would like to make four comments. First, depositors and savers were protected; there was no panic. Second, the bank’s capital will be restored to levels higher than those preceding the fraud, thereby ensuring its financial soundness. Third, the stability and integrity of financial markets have been preserved. Last but not least, there has been no recourse to government money. The Minister of Economy has already submitted a report to the Prime Minister. In particular, the authorities are seeking to strengthen internal controls of financial institutions, to toughen regulations governing internal oversight of operational risk, to focus more intently on the detection of internal fraud as a key component of internal supervision, and to ensure the wholehearted involvement of senior and middle management of banks in risk control.
Even before the financial crisis, the French authorities were committed to improving the competitiveness of Paris as an international financial center, as Fund staff make clear (cf. paragraph 31). They have pursued vigorous and coordinated action with professionals in order to bolster France as a firmly established, strong and well-structured financial center.