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France: 2013 Article IV Consultation

International Monetary Fund. European Dept.
Published Date:
August 2013
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Recent Economic Developments and Outlook

A. A Hesitant Recovery

1. Following an initial recovery in 2010–11, the economy flat lined in 2012, and registered two quarters of negative growth in 2012Q4 and 2013Q1. While the French economy weathered the crisis relatively well compared to peers, its subsequent performance has proven fairly muted, reflecting the sizeable fiscal consolidation undertaken since 2010 and a failure of confidence to recover. Output remains below pre-crisis levels, with an estimated output gap of -1.8 percent in 2012.

Real GDP


Sources: Haver; Staff calculations.

2. Private consumption, the main driver of growth in the pre-crisis period, recovered strongly in 2010 but has since lost steam owing to faltering income growth. In the face of weak employment growth and rising taxes, household real disposable income contracted by nearly 1 percent in 2012. Its impact on consumption was offset only in part by a decline in the household saving rate. In 2012 investment also stalled because of low business confidence related to domestic policy uncertainty and the weak outlook. Since mid 2012, policy uncertainty has been on the rise in France, in contrast to the European trend. Only exports and government consumption contributed positively to growth (Figure 1).

Figure 1.Demand Components: Crisis and Rebound

(Contributions to GDP growth)

Source: WEO; and Staff Calculations.

Policy Uncertainty and Economic Outcomes

3. After considerable stickiness, inflation has declined at a rapid pace since August 2012 in response to the slack in the economy (Figure 2). Downward pressure on core inflation reflected in part lower telecommunication prices linked to the entry of a fourth mobile telecommunication operator. Despite disinflation pressures and the steady rise in unemployment, wage growth has remained remarkably stable, at around 2 percent year-on-year in 2012. The low sensitivity of wages to labor market conditions, captured by a relatively flat Phillips Curve, results in part from the indexation of the minimum wage, which acts as a reference for wage agreements.

Figure 2.France: Inflation Developments

Source: INSEE, Haver Analytics, and Staff calculations,

4. Strong fiscal adjustment in 2012 resulted in a structural budget improvement of 1.1 percent of GDP, which came on top of a similar effort in 2011. However, because of a widening cyclical component, the 2012 deficit declined by only ½ a percent of GDP relative to 2011. At 4.8 percent of GDP, the 2012 fiscal deficit exceeded the level projected in the last staff report by 0.3 percent of GDP owing to lower-than-projected growth and exceptional factors (including recapitalization of Dexia).

France: Main Fiscal Indicators

(2000-2013, in percent of GDP)

Sources: INSEE and IMF Staff projections.

5. With a view to closing the gap relative to the EC’s Excessive Deficit Procedure (EDP), the pace of adjustment was accelerated further under the 2013 budget, with a targeted structural adjustment of 1.8 percent of GDP. Tax measures are expected to contribute 1.4 percentage points of this adjustment, with the rest coming from a reduction of structural spending in relation to GDP. In all, the rapid fiscal consolidation of 2011–13 has relied heavily on revenue measures, with a projected increase in the tax-to-GDP ratio of 3.7 percentage points over 3 years. Over the same period, expenditure growth was also reduced considerably (to an annual real growth averaging 0.6 against trend growth estimated at 1.5 percent), but the ratio of structural spending to potential GDP has declined by only 0.3 percentage points.

6. The external position appears to be moderately weak compared to medium-term fundamentals. Following a trend deterioration, the current account deficit widened further in 2012 (to 2.2 percent of GDP). This was driven by a drop in net investment income, while the trade deficit improved slightly, owing to strong sales in aeronautics and a relatively weak cyclical position.1 From a medium-term perspective, the steady worsening of the current account since the late 1990s reflects a broad-based erosion of the net trade in goods, only partly offset, recently, by a rising surplus in services. The IMF External Balance Assessment suggests medium-sized gaps relative to the current account and real exchange rate “norms,” in the order of 1-3 and 0-5 percent, respectively.2 While external imbalances do not represent an immediate cause of concern, France’s competitiveness gap constrains its export and growth potential. The large deterioration of France’s Net International Investment Position (NIIP) since 2007 (from near balance to around -22.5 percent of GDP) could also affect external sustainability over the medium term. About 55 percent of this deterioration is due to valuation losses, which could be reversed in a stronger global recovery.

France - Current Account by Components

(In percent of GDP)

Source: IMF Balance of Payments; and Staff calculations.

France - NIIP by Components

(In percent of GDP)

7. The declining exports performance is reflected in a steady loss of market shares, both globally and relative to peers. This trend deterioration is confirmed by a number of related indicators: (i) sizeable declines in the share of manufacturing production and employment; (ii) a deterioration of cost competitiveness, with wages outpacing productivity growth since the early 2000s, and unit labor cost levels standing above Germany since the mid-2000s, and more recently losing ground to the euro area periphery countries; (iii) a low and narrowing of profit shares in value added.

Figure 3.France: External Developments in Euro Area Comparison

Source: Haver Analytics, IMF (DOTS), AMECO, ECB statistical warehouse, BACH database; and Staff calculations

8. Financial stability risks have abated considerably, but banks’ profitability is relatively low and they remain exposed to wholesale funding. Banks achieved their deleveraging objectives in 2012, and are well positioned to meet Basel III capital requirements (Figure 4). In the twelve months ending in 2012Q3, the four largest banks reduced assets by 2.4 percent and risk-weighted assets (RWA) by 7.2 percent through disposal of legacy assets, non-core assets (such as trade and project finance), and subsidiaries in periphery countries. Combined with capital increases (through retained earnings), these actions led to a 1.5 percentage points average improvement in their core Tier 1 ratios.3 Liquidity risk has diminished by lessening reliance on US dollar and short-term wholesale funding and building up liquidity reserves, including borrowing from the European Central Bank (ECB).4 Liquidity buffers of French banks covered 137 percent of short-term wholesale funding at end-March 2013 and asset encumbrance remains low (ranging from 20 to 60 percent). However, while two of the largest banks already meet the target of 100 percent coverage, the Basel III liquidity coverage ratio (LCR) for the system as a whole still falls short of regulatory requirements and funding profiles are more vulnerable than those of peers. Continued access to stable sources—even under difficult market conditions—including private placements, retail sales, and covered bonds is a mitigating factor. Banks completed between 50 and 67 percent of their planned issuance programs by April 2013.

Figure 4.Financial Sector Developments

Wholesale Funding Ratios, 2012

(Percent of total liabilities)

Sources: SNL Financial; and IMF staff calculations.

1/ Average of a group of peers in Europe sharing the same business profile.

Select European Banks: Fully Loaded Basel III Pro-Forma CET1 Ratio

(Percent Q1 2013)

Source: SNL and banks’ reporting.

9. Monetary easing by the European Central Bank (ECB) has been transmitted to domestic lending rates with no evident credit crunch effect from deleveraging. Banks’ financing conditions improved markedly in 2012, reflecting their swift progress in meeting new solvency requirements and the positive effect of measures adopted by the ECB. The global rise in interest rates since the May 2013 trough has raised bank funding costs by about 30 basis points, but bank yields remain lower than pre-crisis.5 Banks passed on the benefit of lower funding costs to customers: rates on small business loans have fallen below 3 percent, although recently they have been rising in real terms because of declining inflation expectations (Figure 4). Existing margins for the quick disposal of non-core assets enabled banks to achieve their deleveraging goals while preserving positive domestic credit growth, although those margins have shrunk. While housing loans and non-financial corporations (NFC) loans continue to expand, consumer credit is contracting. Low credit expansion appears to reflect subdued loan demand and increased reliance on market financing by NFCs rather than a tightening of credit conditions (Figure 5).

Figure 5.France: Bank Lending to the Non-Financial Private Sector

French Bank Yields


Sources: Bloomberg and IMF staff calculations.

B. Outlook, Risks and Spillovers

10. Supported by a recent improvement in leading indicators, the recovery is projected to unfold gradually in the second half of 2013. Given the impact of fiscal consolidation and low confidence, real GDP would still contract by 0.2 percent this year, but then grow by 0.8 percent in 2014, under the added stimulus of improved external conditions and supportive monetary policy. The projected decline in the households’ saving rate (to 15.2 percent in 2013 from 15.6 percent in 2012) should help stabilize consumption in the face of a further fall in disposable income. The decline of the saving rate is predicated on an improvement in confidence, but also reflects the fact that tax increases have fallen mostly on higher income households who have a higher capacity to adjust their saving rate to smooth consumption (Figure 6).

Figure 6:France: High-Frequency Indicators, and Savings’ Countercyclical Role

GDP Contributions by Demand Components

(In percentage points)

Sources: Haver Analytics and IMF staff calculations.

11. Private demand is unencumbered by balance sheet repair issues and can thus respond relatively quickly to an improvement in confidence and profit shares. The financial situation of households and enterprises remains relatively healthy (in an aggregate sense) as measured by debt ratios. Given relatively low profit shares, enterprises are more dependent on external financing than enterprises in Germany, for instance, but should be able to mobilize required financing in an upturn.

12. Low capacity utilization should continue to hold inflation down. The muted increase of the minimum wage this year (0.3 percent in January 2013) and labor market slack should weigh on wage growth. Downward pressures on inflation will be partly offset by the anticipated increase in VAT in 2014 (to finance part of the reduction of the labor tax wedge). In all, headline inflation should ease to around 1½ percent in 2013–14, down from 2 percent in 2012.

13. The authorities’ Stability Program projects a more vibrant recovery and higher growth over the medium term. This reflects stronger contributions from private consumption and exports, which in turn would trigger a faster recovery of investment. The authorities’ scenario is based on the expectation of a faster pick up of employment in 2013, under the impulse of recent labor market measures (reduction of the labor tax wedge and expansion of employment subsidies), which would in turn help sustain consumption. Staff took a more conservative approach on the short-term impact of these measures, but also considered that the drag from fiscal consolidation would remain substantial.

Real GDP by Expenditures: Staff and Authorities’ Projections
Gross domestic product0.0-
Total domestic demand-0.9-0.50.7-0.21.0
Private consumption-0.3-
Government consumption1.
Gross Fixed Investment-1.2-2.21.8-0.81.2
Stockbuilding 1/-0.8-0.20.0-0.40.1
Foreign balance 1/
Exports of GNFS2.
Imports of GNFS-
Source: France Stability Program 2013-17 and staff projections.

Contributions to GDP growth.

Source: France Stability Program 2013-17 and staff projections.

Contributions to GDP growth.

14. The main external risks to the outlook (and related inward spillovers) stem from the precarious growth prospects and from inadequate progress toward a crisis resolution framework in the euro area (see Risk Assessment Matrix). A protracted period of slower growth in Europe would spill over to France through the trade and investment channels, and complicate the pursuit of fiscal consolidation6. By contrast, growth spillover analysis suggests that French output co-moves less with global output shocks than output of Italy, Belgium, Netherlands, or Germany, for instance.7 Reemergence of financial stress could impact French sovereign yields and disrupt funding markets even if France has enjoyed a relatively safe have status. However, exposures of banks have declined relative to the banking spillover analysis carried out for the last Staff Report.8 Higher funding costs and larger-than-expected provisions against Italian or Spanish exposures could, in turn, undermine banks’ earnings. Notwithstanding wholesale funding exposures, banks have ample collateral to access ECB financing.

France - Exports, Business Investment, and Euro Area Growth

(Annual growth rates)

Sources: WEO.

15. By virtue of their size and interconnectedness, French banks could have potentially large outward spillover effects. There is no evidence that deleveraging by French banks has so far created adverse effects on other regions, as banks with stronger balance sheets often stepped in to fill the gap. However, adverse spillovers could occur if French banks were forced into an accelerated retrenchment from corporate and investment banking, from retail operations in Italy and Spain, and from their derivatives business. Staff analysis suggests that financial spillovers to and from French SIFIs are likely to affect mostly other European SIFIs in the U.K., Belgium, the Southern periphery, and U.S. banks.9

16. The main domestic risk is a stalled recovery of private demand. The forecast supposes that the household saving ratio will continue to decline this and next year. However, uncertainty over tax and transfer policies during the remaining consolidation period—and lagged effects from previously implemented austerity—could further delay spending decisions. The recovery could also be held back if structural reforms are inadequately ambitious. A growth failure in France would have significant outward spillovers to its neighbors, particularly small open economies in the euro area, and smaller but still measurable impacts on Italy and Spain.10

17. Risks related to a correction in housing prices are less prominent. Model-based estimates of price misalignment typically range from 10 to 20 percent.11 This said, even after the surge of the last decade, house prices (in nominal terms) do not appear to be out of line with those of other European countries (bottom two panels of Figure 7). Still, prices have been declining: housing activity has slowed markedly and prices have fallen by 1.9 percent in 2013 Q1 from their peak in 2011 Q3 (Figure 7). In the absence of a large confidence shock, the housing valuation gap is expected to close through a very gradual price correction reflecting favorable demographics, a structural undersupply, and low household indebtedness. The macroeconomic impact of such a price correction is expected to be limited given weak wealth effects, reflecting the absence of home equity loans and limited use of real estate as collateral, generally. The impact on banks should be similarly contained owing to underwriting criteria that emphasize debt servicing capacity rather than collateral value.1213 A more abrupt correction in house prices may lead to further compression in banks’ profit margins.

Figure 7.France: Housing Market Developments

House Price Growth and Consumer Confidence, 2000Q1-2012Q3

Sources: Haver Analytics; Organisation for Economic Cooperation and Development; and IMF staff calculations.

France: Risk Assessment Matrix14
Source of RiskRelative LikelihoodImpact if Realized
Continuing euro area sovereign debt problems and possible re-emergence of financial stress (triggered by stalled or incomplete delivery of national or euro area commitments)MediumHigh
Growth contagion from shocks to peripheral countries

Increased financial segmentation due to uncertainty over euro area viability Accelerated bank deleveraging aggravating crisis
Adverse effects through the trade channel, notably from Spain and Italy.

Fiscal consolidation objectives would become more challenging

Higher interest rates owing to euro viability concerns may affect French yields

Limited losses for French SIFIs from exposure to the periphery

Policy response: euro area monetary policy remains firstline of defense.
Protracted period of slower European growthHighHigh
Slowing demand from European partners

Additional measures needed to achieve medium-term fiscal targets Lower potential growth from higher structural unemployment
Impact from trade links within the EU

But likely mitigated by lower interest rates and automatic stabilizers

Fiscal consolidation objectives would become more challenging

Policy response: fiscal policy response coordinated at European level to support demand where fiscal space isavailable
Stalled recovery of private domestic demandMediumHigh
Private consumption and investment decisions restrained further by ongoing fiscal consolidation and policy uncertaintyStagnation of domestic demand would complicate fiscal consolidation objectives and cause outward slipover effects

Policy response: provide greater clarity of consolidation measures over the medium term and accelerate structural reforms.
Closure of wholesale funding to French banks or significant increase in costs (triggered for instance by distortions from unconventional monetary policy.Low-MediumMedium
ECB support has eased funding conditions and availability of eligible assets seems adequate so farFrench SIFIs structurally dependent on wholesale funding. Significant refinancing needs in 2014 and 2015, but also ample collateral to access the ECB.

Policy response: liquidity support from the ECB, coupled with capital preservation measures on banks if necessary.
Adverse market or rating reaction to adverse growth of fiscal developmentsLow-MediumMedium
Market reaction to an overshooting of the deficit target likely to be muted, but failure to contain spending could undermine confidence and stability in the medium termHigher sovereign yields would complicate fiscal adjustment.

Policy response: provide clarity on measures to meetmedium-term fiscal targets.
Housing price correctionMediumLow
Housing prices supported by strong fundamentals but empirical estimates suggest 10-20 percent overvaluationLimited impact on banks due to sound lending standards, but possibly larger impact in the event of a sudden correction due to a concomitant shock to confidence and employment

Policy response: support gradual price correction by loosening supply constraints.

18. Market concerns about fiscal sustainability appear to have diminished. While headline deficit targets have been missed in the face of a stagnating economy, the strong record of structural adjustment has lent credibility to the authorities’ medium-term commitments. Sovereign yields have increased by nearly 60 basis points since May trough; interest rate assumption underlying the baseline projections had incorporporated an increase of about this magnitude. In any event, with an average maturity of 7 years, sovereign debt dynamics are not very responsive to changes in interest rates, except in the case of a very extreme shock such as the one illustrated in the Debt Sustainability Analysis (Appendix IV).

Policy Discussions

19. Staff Diagnostic: In the face of a trend decline in total factor productivity (TFP) growth since the 1990s, real wage growth in France has been sustained at the expense of the share of income going to profits. This shift in the distribution of value added has helped support consumption, but has also undermined, over time, the capacity of enterprises to innovate and remain competitive in international markets. Meanwhile, the extensive social insurance and redistribution system, which has contributed to the economy’s resilience to shocks, has also become more difficult to sustain since the income base from which it is financed lost buoyancy. The related pressures to correct a long standing structural fiscal imbalance have so far been met by increasing the tax burden, with a risk of undermining potential growth.

A. Scope for Easing Fiscal Adjustment, but Refocused on Expenditure Containment

20. Faced with lower-than-expected growth in 2013, the authorities decided not to take additional measures in pursuit of the nominal deficit target, but to allow automatic stabilizers to work in full. Even so, the degree of adjustment (1.8 percent of GDP in structural terms) remains large, and staff considered that less front-loading would have been preferable on cyclical grounds. The authorities explained that fiscal policy decisions for 2013 had been constrained by European commitments and the need to solidify market confidence. The deficit is projected to decline from 4.8 percent of GDP in 2012 to 3.9 percent in 2013.

21. Under the Stability Program of April 2013, structural adjustment would remain substantial in 2014, with a proposed 70 percent contribution from expenditure containment and 30 percent from revenue measures. Adjustment would moderate thereafter until a small structural surplus is reached in 2016. The Stability Program is built on more optimistic growth assumptions than those of staff. Differences in estimated potential GDP and output gaps result in differences in measured structural fiscal adjustment for the same underlying fiscal effort. These differences are illustrated in Figure 8. Thus, whereas the Stability Program (blue line in Figure 8) estimates structural fiscal adjustment to be 1 percent of GDP in 2014, the same underlying effort produces a structural adjustment of 0.8 when using the staff’s macroeconomic framework (green line in Figure 8). Similarly, based on the staff’s macroeconomic assumptions, the structural fiscal balance would still be in a deficit of about 0.3 percent of potential GDP in 2016, compared to a 0.2 percent surplus in the authorities’ scenario.

Figure 8.France: Medium-Term Fiscal Adjustment, 2012–17

1/ In percent of potential GDP.

2/ Same revenue-to-GDP ratio and real expenditure growth as in the stability program.

3/ Based on the Inspection Générale des Finances (2012) estimates of real expenditure trend growth of 1.5 percent per year during 2014–17. Assumes a revenue-to-GDP ratio at the stability program level, IMF macroeconomic framework, and no fiscal multiplier effect.

Sources: French authorities and IMF staff.

22. The authorities confirmed that they would henceforth by guided by structural deficit targets (Box 1). They welcomed the role played by the Fund in swaying the policy debate in this direction, and underscored that structural deficit targets would not only avoid procyclicality but also make policy making more predictable. They also stressed the need to maintain potential growth assumptions unchanged over the policy horizon in order to provide a stable framework for measuring the fiscal effort. Staff agreed that the metric by which adjustment is measured should be stable. However, as Figure 8 illustrates, the use of optimistic potential growth assumptions implies that the medium-term target may not be reached in the intended time frame. As stressed in the previous consultation, staff suggested that prudent growth assumptions would be preferable since the implications of an upward revision to potential GDP (e.g., the opening of additional fiscal space) are much easier to handle than the opposite.15 In its commentary on the Stability Program, the newly created Fiscal Council also urged the use of less optimistic macroeconomic assumptions in policy planning.

Box 1.Moving to Structural Fiscal Targets: Framework and Challenges

The October 2012 “organic law” aligning French laws to the requirement of the European Treaty on Stability, Coordination, and Governance stipulates that the multi-year fiscal laws (Lois de Programmation des Finances Publiques, LPFP) define annual structural deficit targets (in euros) over a five-year policy horizon. The LPFP covering 2013–2017, which was adopted in December 2012, is the first LPFP to meet these criteria and thus sets the annual targets against which performance will be measured until 2017. The Stability Programs submitted to the European Commission in April can modify the projections but the structural targets have to remain consistent with the LPFP.

Annual budget laws have to be consistent with the trajectory set in the LPFP. The fiscal council (Haut Conseil des Finances Publiques, HCPF) established by the organic law has to provide an independent opinion on the macroeconomic assumption underlying draft budgets and their consistency with the LPFP targets. The HCPF also verifies ex-post execution of the budget and issues an alert if the fiscal outturn deviates from the medium-term trajectory by more than 0.5 percent of GDP in one year or cumulatively over two subsequent years. The Government then has to implement corrective measures.

In order to monitor performance under this framework, structural targets should ideally only reflect policy choices and not revisions of potential GDP.1 For this reason, the authorities and the HCFP have decided to monitor future fiscal performance based on the potential GDP as estimated in the last LPFP, regardless of future revisions to potential GDP.

Even for a given level of potential GDP, revisions in national accounts can affect the measurement of structural fiscal deficits. For instance, the recent upward revision of the 2011 GDP (and associated revision of the output gap) mechanically increased the 2012 structural deficit by 0.3 points. Following this revision, no corrective measures have been recommended for 2012, but it will be up to the HCFP to advise whether this deviation, together with the 2013 fiscal outturn, calls for a correction.

1 For example, between the April 2012 Stability Program and the April 2013 Stability Program, the structural deficit for 2011 was revised from 3.7 percent to 4.9 percent of potential GDP owing to a change in the estimated potential GDP.

23. Staff recommended easing somewhat the pace of fiscal consolidation in 2014 relative to the Stability Plan in order to support the uncertain recovery. The structural adjustment expected to be completed over 2011-13 (4 percentage points of GDP) covers 2/3 of the estimated cumulative effort needed to reach the medium-term structural balance objective. Given this track record, and in order not to undermine the fragile recovery, staff recommended retaining only the expenditure containment part (i.e., 70 percent) of the adjustment proposed for 2014 under the Stability Program (red line in Figure 8). This would deliver structural adjustment of 0.5 percent of GDP in 2014. The foregone adjustment in 2014 (0.3 percent of GDP) is relatively small and would be recovered by maintaining a steady pace of structural adjustment over a longer period of time than envisaged under the Stability Program (Figure 8).

Macroeconomic assumptions
Real GDP Growth
Stability Program (April 2011)
Stability Program (April 2012)
Budget 2013 (October 2012)
Stability Program (April 2013)
Fiscal Deficit
Stability Program (April 2011)-5.7-4.6-3.0-2.0
Stability Program (April 2012)-5.2-4.4-3.0-2.0-1.00.0
Budget 2013 (October 2012)-5.2-4.5-3.0-2.2-1.3-0.6-0.3
Stability Program (April 2013)-5.2-4.8-3.7-2.9-2.0-1.2-0.7
Structural Fiscal Deficit
Stability Program (April 2011)-3.8-2.9-1.6-0.9
Stability Program (April 2012)-3.7-2.6-1.2-
Budget 2013 (October 2012)-4.8-3.6-1.6-1.1-
Stability Program (April 2013)-4.9-3.7-2.0-1.0-
Note: IMF data for 2011 includes the impact of national accounts revision, see Box 1 for details.
Note: IMF data for 2011 includes the impact of national accounts revision, see Box 1 for details.

24. Staff stressed that the move to structural deficit targeting should also be the occasion for anchoring medium-term adjustment to an explicit expenditure norm while stabilizing the tax burden. As noted above, tax measures have raised the tax burden to 46 percent of GDP, one of the highest levels in Europe. The perceived risk that taxation will rise further appears to be one of the factors holding back spending by households and enterprises. Staff emphasized the importance of targeting more explicitly expenditure growth at the general government level to strengthen fiscal credibility and improve the growth potential. Staff noted that the pace of public expenditure growth implied by the Stability Program for 2014-15 (0.4 percent in real terms in 2014 and 0.2 percent in 2015) was appropriate. Combined with a stabilization of the revenue-to-GDP ratio at its 2013 level, this expenditure path would result in a deficit of around 3½ percent of GDP in 2014 and under 3 percent in 2015, consistent with the recent proposed recommendations of the European Commission. Real expenditure growth could then be capped at around 0.3 percent a year until the structural budget balance objective is reached in 2017, i.e., one year later than envisaged by the authorities. The debt-to-GDP ratio would peak in 2014 at 95 percent of GDP. Because of the sensitivity of the debt path to growth outcomes (Appendix IV), stronger expenditure containment might become necessary over the medium term.

Debt-to-GDP ratio


Sources: French authorities and IMF staff.

25. The authorities confirmed that the adjustment effort would be rebalanced toward expenditure containment starting in 2014, but that revenue measures may still be necessary. They noted that reducing tax expenditures could be an efficient adjustment instrument, even though it would raise the tax-to-GDP ratio, as in the case of the recently announced reduction in the family tax allowance. Furthermore, reducing tax expenditures was, in many cases, akin to reducing transfers in terms of its economic impact. At the same time, the authorities have stated that they would stabilize tax incentives pertaining to enterprises in order to reduce tax uncertainty.

26. Delivering the ambitious degree of expenditure containment embedded in the Stability Program for 2014 and 2015 (and supported by staff) depends on identifying structural spending measures that can be deployed over time. The proposed expenditure path represents a significant departure from trend expenditure growth which the authorities estimate at around 1.5 percent annually. Given the structure of government spending, the public sector wage bill and social transfers will need to bear much of the adjustment. Pushed by the expansion of spending by local governments and state agencies (ODAC), the general government wage stands above 13 percent of GDP (2 points higher than the EU average) with no clear downward trend. Also, the pursuit of social objectives has pushed social transfers to the highest level among OECD countries (in terms of GDP). However, social outcomes are not uniformly better than in the rest of the OECD, which suggests that the social protection objectives of public policy could be achieved more efficiently.16 Staff noted that the Audit Court (Cour des comptes) has identified and documented potentially large efficiency gains in the public sector (education, firm subsidies, health, professional training, and housing subsidies) which could guide future government policies.

France: Possible Spending Containment Measures
MeasureFiscal gain

(In percent of GDP)
Closing the pension system deficit0.8
Closing the unemployment insurance system deficit0.2
Family benefits (better targeting)1.1
Health care (increase efficiency)1.3
Education (raise tuition fees for tertiary education)0.3
Reduce subsidies as a share of GDP to OECD average0.2
Wage bill (reduce gap relative to Euro Area average by half)1.2
Source: Conseil d’orientation des retraites, OECD, and IMF staff estimates.
Source: Conseil d’orientation des retraites, OECD, and IMF staff estimates.

27. The authorities underlined that a number of reforms in progress would sustain expenditure containment. They noted that expenditure norms were already in effect at the central government level and for health spending. Ongoing cuts in transfers to local governments would reduce their resources by 0.2 percent of GDP by 2015. The inter-ministerial committee charged with rationalizing public policies (Modernisation de l’ action publique, i.e., MAP) would be the main instrument to identify future expenditure measures. The MAP is currently reviewing policies accounting for 20 percent of government spending. The government has also announced its intention to reform the pension and unemployment insurance systems by year end, with a view to closing the deficit of the pension system by 2020 (0.8 percent of GDP).

Public and Private Social Expenditure

(In percent of GDP in 2009)

Source: OECD Social Expenditure Database.

B. A Multi-Pronged Structural Reform Strategy to Revive Growth

28. The overarching objective of structural policies should be to close the gap between the cost of labor and productivity and to increase activation of underused labor resources. The preferred outcome would be to raise productivity and reduce the non-wage cost of hiring and doing business by removing rigidities in the labor market and obstacles to competition in product markets. To the extent that the wage-productivity gap is too large to be closed by acting on these levers, however, an adjustment in wages may be necessary. There is also scope to generate growth by increasing incentives to seek employment and remain in the labor force.

29. The authorities have undertaken reforms on a broad front to meet these objectives (Appendices III and IV). They shared the mission’s diagnostic that the institutional and regulatory environment in which enterprises operate needs to be more supportive of investment and growth and that direct and implicit costs need to be reduced to restore profits shares. They underscored the actions taken to improve cost competitiveness (reduction of the labor tax wedge) and reduce labor market rigidities (labor market reform), as well as planned reforms to strengthen labor training and simplify regulations. The authorities had not yet decided on an approach to product market reform.

Labor market policies and reforms

30. A significant competitiveness boost has been provided by the reduction of the labor tax wedge which is expected to cut labor costs by about 3 percent by 2015.17 The related increase in profit margins should enable enterprises to improve competitiveness through lower prices or through investment. The budgetary cost of the measure (about 1 percent of GDP) will be split evenly between lower expenditure and higher other taxes (VAT and yet-to-be-identified environmental taxes).

31. The broad labor market agreement negotiated by social partners and its transposition into law represent a very significant step toward flexicurity (Box 2). The authorities pointed out that the success of the negotiations opened the door to a more collaborative relation between social partners and thus better labor market outcomes. The government’s decisions to adopt the agreement without any changes gives it added legitimacy. The reform creates flexibility for firms under economic pressure to renegotiate (within certain limits) wages and working hours. It also aims at reducing labor market duality by encouraging a shift from reliance on short-term contracts as the primary labor market shock absorber to a model where regular (open-ended) contracts provide sufficient flexibility to accommodate shocks. The extent to which the flexibility provisions of the law will increase incentives to hire and reduce the duality of the labor market depends in large part on implementation and the effective reduction of judicial uncertainty associated with labor disputes. The authorities emphasized that this reform should be allowed to bear fruit before contemplating additional reforms. Staff noted that the reform goes in the right direction but would need to go further to effectively reduce labor market duality.

Box 2.Labor Market Reform on a Forward Momentum

The role of social partners. In the face of poor labor market outcomes (e.g., rising structural unemployment and a dysfunctional dual labor market), the new government decided to launch a broad reform in July 2012. To give the reform legitimacy and weight, it tasked social partners to negotiate a deal. The resulting agreement of January 2013 (Accord National Interprofessionnel, or ANI), was signed by a majority of the unions and of employers’ federations, and was transposed into law in May. It is the broadest labor market reform since the 1980s, and the successful negotiation marks a very significant improvement in labor market relations (top right chart below).

The reform. The reform trades off more flexibility in adjusting working conditions at the enterprise level for enhanced security and training opportunities for employees. By reducing the (implicit) cost of labor, the flexibility provisions should increase firms’ incentives to hire. Greater security for workers can be expected to translate into higher and better training (both in the workplace and during job transitions), raising productivity growth.

The flexibility part of the agreement has two main components:

  • Internal flexibility: To preserve jobs in the face of a downturn, the “agreements on safeguarding jobs” allow companies to negotiate a reduction of working hours and/or wages (no lower than 1.2 times the minimum wage) during a maximum period of two years. Any employee that refuses the agreement can be dismissed under simplified dismissal procedures. Internal mobility within companies under restructuring is facilitated by removing formal redundancy procedures (which prevent the transfer of workers across units).
  • External flexibility: Both collective and individual dismissals will be eased. Owing to a very complex labor code, long prescription periods, and lengthy judicial processes, France’s job protection system has been particularly cumbersome. There is ample evidence that legal uncertainty over dismissals inhibits hiring by firms, besides acting as a hindrance to competitiveness.1 Following the reform, redundancy plans will be decided by collective agreement and endorsed by the labor ministry within short delays. Although workers will still be able to challenge collective dismissal in court, the prescription period is shortened from 12 to 2 months. On individual dismissals, the agreement facilitates conciliation by setting benchmark compensations for separations, which should help reach settlements and shorten legal procedures.

The security dimension of the agreement expands health and unemployment insurance, provides for more effective training, and discourages the use of fixed-term contracts to reduce labor market duality, all of which should improve economic efficiency.

  • Expanded health and unemployment insurance: (i) Health insurance. In 2012, social security covered 78 percent of health costs, with a supplemental health insurance being provided by employers to their employees on a voluntary basis. To reduce inequality, complementary health insurance will be extended to 3.5 million additional workers by 2016 at the latest, and financed by an increase in employers’ and employees’ social contributions (equally split); (ii) Unemployment insurance. To improve job search incentives, employees will be allowed to carry their accrued unemployment benefits’ rights to another job or from an unemployment situation to a job (droits rechargeables).
  • Reduced labor market duality: Some 12 percent of private sector employees work under temporary contracts, but, because of their revolving nature, these contracts account for 85 percent of hiring and have de facto been used by enterprises to adjust the labor force in response to changing demand conditions. To internalize the social costs of overusing these contracts, employers’ unemployment contributions will be increased by 4-7 percent for contracts shorter than 3 months. Permanent contracts will be encouraged by waving the first three months of employers’ contributions to unemployment benefits for new hires under 26 years old.
  • Better targeted training: Under the current system, social security contributions finance part of training, but the rights to training acquired in one job are not easily transferred to another job or even to unemployment status. The result is that training is poorly targeted, and benefits those already in a permanent job rather than on job seekers. To improve employability, workers will receive a personal “training account” which they will be able to draw from at any point during their career.

Assessment and risks. Overall, the reform is an important step towards increasing flexibility in the labor market. Still, uncertainties remain over its implementation by social partners and the judiciary. The scope for modulating wages and working hours has to be negotiated at the enterprise level; and the extent to which the enhanced flexibility will encourage firms to increase hiring also depends on whether judicial uncertainty is curbed in practice. If flexibility is not increased sufficiently, the objective of reducing labor market duality may be short-circuited by recourse to interim employment contracts, which are not covered by the agreement. For some firms, the financing of the supplemental health insurance may prove costly. And finally, the costs of carrying cumulated unemployment benefit and training rights across jobs are as yet uncertain.

France: Labor Market Indicators

Sources: INSEE; Déclarations Uniques d’Embauche, Ministry of Labor; World Economic Forum, Global Competitiveness Report 2012-13; and Staff calculations.

Next steps. The fact that trade unions and employers were able to find a compromise is positive and paves the way for broader reforms. To remove existing distortions and lift employment durably, significant avenues for reform remain in the areas of unemployment benefits, geographical and professional mobility, and further simplification of individual dismissal procedures.

1. See “Structural Reforms and Export Performance,” by J.J. Hallaert, in France: Selected Issues, IMF Country Report No. 13/3 (January 2013).

32. The minimum wage remains an obstacle to employment at the lower-skill end of the labor force and for youth, despite substantial reductions in the tax wedge and employment subsidies targeted to these group. Even after such targeted reductions, the cost of unskilled labor compares unfavorably to that of other European countries. Budget constraints limit the potential for reducing the tax wedge any further. The authorities expected substantial job creation from the expansion of subsidy schemes (see Appendix IV). The mission suggested that a temporary freeze of the minimum wage indexation could help bridge the productivity-labor cost wedge. The next index jump will take place in January 2014.

Employment Rates by Age Group

(Employment in percent of the population age group, average 2005-2011)

1/ Australia, Canada, Denmark, Iceland, New Zealand, Norway, the Netherlands, Switzerland, and the UK

Source: OECD

Employment Rage by Age Group, 2011

(In percent of the population by age group)

33. Training and activation policies are also critical to improving labor market outcomes. Spending on training comes to about 1.5 percent of GDP, but is broadly recognized to be poorly targeted and ineffective. In addition to creating personal “training accounts” (Box 2), the government has launched a broader reform process aimed at broadening the reach of training programs to those most in need (e.g., the unemployed), and upgrading the quality of the training. While the planned reforms of the pension and the unemployment insurance systems (paragraph 27) are primarily intended to close financial deficits, they should also be seen as instruments to increase employment rates. The 2010 pension reform and phasing out of various early-retirement schemes have already increased the employment rate of older workers, but the gap relative to other countries remains large, as it is for young workers. Thus, staff recommended that these reforms focus on lengthening professional lives and increasing incentives to shorten unemployment spells, rather than increasing contribution rates.

Figure 9.France: Labor Cost Reducing Measures

Regulatory and Product Market Reform

34. Staff reemphasized the potential benefits of product market liberalization carried out in conjunction with labor market reforms. It pointed to the productivity gains and employment opportunities that could be created by removing regulatory and administrative obstacles to competition in the services sector (regulated professions, transportation and distribution) and redistributing the associated rents (through lower prices). Non-tradable sectors are characterized by lower competitive pressures, weaker TFP growth and, relatedly, higher ULC increases.18 Because of their high forward linkages to the rest of the economy, inefficiencies in the non-tradable sectors are transmitted to the exposed sectors. Given the imbalance between the powerful vested interests of protected sectors and the diffused benefits of liberalization, staff suggested that a stronger role be given to the competition authority as an advocate of reform, by empowering it to review practices and regulations and guiding the public debate through an enhanced consultative role. This would enable a more ambitious implementation of the EU Services Directive.19

35. The authorities saw the benefits of services liberalization as being too uncertain relative to the adjustment costs. They emphasized the possible backlash against a broad liberalization effort because of possible short-term adverse effects on employment, and indicated that selected and opportunistic initiatives to increase competition would be more effective. They noted that efforts to protect consumers against anti-competitive practices were being strengthened, notably through the introduction of a class action provision in the new consumer law (the first such provision in France).

36. The authorities have announced a “simplification shock” to alleviate the regulatory burden on enterprises. They recognized that the business environment needed to be stabilized and improved. In addition to a commitment to tax stability for enterprises, the “simplification shock” would lighten administrative procedures and shorten response delays (Appendix IV). Indeed, the regulatory and tax systems appear to create important threshold effects in the enterprise sector.20 For example, a firm becomes subject to more than 30 additional laws and regulations when it exceeds 50 workers. One implication is the much smaller median size of French enterprises compared with German enterprises, which also acts as an impediment to accessing export markets.

37. Given the limited success of policies to promote housing construction and ownership, the authorities have redirected efforts toward addressing supply rigidities. There is increasing recognition that tax incentives and financing advantages that stimulate demand without addressing constraints on the supply side have in fact contributed to raising prices, making housing less affordable to most, and benefiting property owners at the expense of taxpayers. Rising real estate prices have been found to worsen inequality and undermine business competitiveness.21 Supply constraints stem from zoning restrictions by local authorities and long and cumbersome procedures on building permits.

C. Reduced Risks to Financial Stability but a Financial System Under Transformation

38. The French financial system still needs to adapt fully to new international regulations on bank liquidity and insurance solvency ratios. Bank credit has played a central role in the financing of the economy. However, because household savings have been channeled (by tax incentives) to life insurance and regulated savings products, banks have in turn relied heavily on wholesale funding to meet demand for credit. Pressure to reduce exposure to wholesale funding is thus creating a broader need to reorganize financial intermediation.

39. Measures to foster more market-intermediated credit would support banks’ adaptation to new liquidity ratio requirements. Banks have started transitioning toward the originate-and-transfer model of credit, although their ability to do so is constrained by narrow interest margins which is compressing loan profitability. This reflects both intense competition and cost rigidities on the funding side (discussed below). Margins on new loans have recently improved and this should gradually improve profitability. The authorities also noted that measures were underway to foster greater securitization of SME credit, with a first issuance planned for October 2013. Combined with a proposed rebalancing of tax incentives on life insurance policies toward long-term riskier assets, these measures should help deepen market financing mechanisms, especially for SMEs (Appendix IV).

40. Continued progress towards new prudential norms would also be supported by removing tax and regulatory incentives that undermine deposit collection by banks. Going forward, domestic credit growth may be constrained if bank deposits cannot adequately compete with products that benefit from tax advantages. The ceiling on regulated savings has been raised by 50 percent (to EUR 22,950 per person) since October 2012. Combined with an attractive yield, this action has resulted in a surge in collection. Regulated savings account for 29 percent of customer deposits and banks retain only 35 percent, on average, of these inflows. The remainder is centralized at the Caisse des Dépôts et Consignations (CDC)22. Staff recommended more flexible sharing arrangements with the CDC and a broader reform of financial savings taxation that levels the playing-field between products of similar risk characteristics (e.g., maturity) in the medium-term.23 The authorities agreed that tax incentives should favor long-term saving regardless of the underlying instrument, but saw stability of financial savings taxation as important to maintain savers’ confidence. They indicated that measures based on the Berger-Lefèbvre report recommendations will be implemented in the 2014 budget (Appendix IV), and that mechanisms to prevent the locking of funds at CDC were being devised.

Figure 10.Household Financial Savings

41. Effectiveness of the monetary transmission mechanism going forward could be undermined by the rigidity of the rate on regulated saving products. The remuneration of tax-free savings passbooks was lowered in February 2013 to 1.75 percent but remains higher than market rates. Banks considered that the regulated savings rate effectively acts as a floor on bank deposit rates. Already, there is evidence that deposit rates for similar maturity products are higher in France than in Germany whereas, historically, that was not the case. While the impact of higher deposit rates on banks’ funding costs has been manageable in 2012, a continued widening of the spread between administered and market rates may eventually impair the monetary transmission mechanism. The authorities agreed that such a risk could materialize in the event of future reductions in ECB policy rates and that a tighter link between the rate on regulated saving products and market or policy rates would be desirable, although they noted that, currently, any evidence of fragmentation issues or funding cost rigidities was limited to deposit rates.

42. Given the vulnerability of French global systemically important banks (G-SIBs) to funding shocks and their potential for propagating the shock, actions to reduce perceived risks assume critical importance.24 An essential next stage to the planned Single Supervisory Mechanism (SSM) in 2014 is the asset quality review (AQR). Staff stressed the importance of ensuring the highest credibility and transparency for such an exercise to be effective in restoring confidence in the EA banking system. Given the risk of re-ignition of financial stress should the exercise raise concerns about the burden sharing of possible capital shortfalls, staff emphasized the importance of (1) pro-active communication on the framework and methodologies of the AQR and (2) involvement of an independent third party. The authorities were confident that the reliance on harmonized methodologies for NPLs, provisioning rules, and risk weights, and the involvement of other national authorities (along with the ECB and EBA) would go a long way toward establishing the credibility of the AQR. They were less convinced of the need to involve an independent third party. The mission and the authorities agreed that, while loan loss provisioning ratios have stabilized in the first quarter of 2013, corporate exposures are a key near-term risk in light of the fragile recovery. By contrast, absent an unexpectedly large deterioration in unemployment, banks’ housing exposures appear less risky and historical default rates have been low. Staff took note of the regular assessments by the supervisor (Autorité de Contrôle Prudentiel, or ACP) of the adequacy of risk weights and internal risk-based models used by banks and generally conservative origination practices for housing loans. They authorities considered that these actions placed them in a relatively sound position ahead of the AQR. Since market participants are not fully aware of the extent and frequency of ACP’s control measures, and because low risk ratios of French G-SIBs relative to comparable jurisdictions have raised questions about the reliability of risk weights, staff encouraged the authorities to publish the key findings of their regular evaluations and, more generally, to enhance financial disclosures as recommended by the 2012 FSAP Update (Appendix IV).

43. The authorities restated their support for rapid progression on the three pillars of a European banking union (supervision, resolution, and deposit insurance). They considered that the next steps should focus on strengthening national regimes and harmonizing rules and approaches (e.g., provisioning policies) at the European level. As regards supervisory arrangements, the authorities believed that first-level supervision should be entrusted to joint national supervisory teams rather than a single ECB-led team.25 Staff and the authorities agreed on the need for early introduction of the SRM to ensure the effectiveness of the future SSM. In staff’s view, a strong Single Resolution Authority (SRA) with the right incentives to act in a timely and least costly way, especially on cross-border banks, is an essential basis for the SRM. In contrast to the EC’s proposal that the Commission is best placed to be entrusted with the single decision-making authority, the French and German authorities favored a “single resolution board” involving national resolution authorities, with financing from the industry and national private backstop arrangements, allowing the SRA to become operational swiftly without a Treaty change. Acknowledging that the debate on SRA had shifted more recently toward issues of depositor preference and bail-in, the authorities noted their preference for equal treatment of large depositors and other senior unsecured creditors, while acknowledging that views were still evolving.26 Finally, they favored a gradual implementation of the third and last pillar of the Banking Union, involving in a first stage a system of national deposit guarantee schemes (DGSs) that follow harmonized rules and use own funds, with access by DGSs to re-financing at the European level in a second stage.

Risk Ratios, 2012

(Risk-weighted assets as a percent of assets)

Sources: SNL Financial; and IMF staff calculations.

1/ Average of a group of peers in Europe sharing the same business profile.

44. The authorities have anticipated in their own banking reform the proposed EU Recovery and Resolution Directive and possible follow-ups to the Liikanen report. The draft banking reform law (hereafter, the law), expected to be voted in the summer of 2013, creates a new resolution authority by reinforcing the powers of the supervisor (ACP) to prevent and manage banking crises, under the new name of Autorité de Contrôle Prudentiel et de Résolution (ACPR) (see Appendices IV and V). It also requires banks to put in place recovery and resolution plans and gives the ACPR the authority to mandate organizational changes in entities when the existing organization could potentially complicate resolution. The law provides for the possibility of bail-in of subordinated creditors. The structural provisions of the law aim at carving out only those activities that do not significantly contribute to the financing of the economy, thus exempting market-making activities which are considered critical to serving corporate clients. In response to the mission’s concern about consistency of these reforms with future EU-wide provisions, the authorities indicated that the national resolution framework—including the stance on bail-in rule and other provisions of the law related to structural bank reforms—would be adjusted as needed to ensure compliance with the evolving EU framework. Similarly, they expected the EU financial transactions tax (FTT) to replace the French FTT introduced in August 2012. The mission argued that the far-reaching market implications of the EU FTT (particularly for French banks which are major players in the derivatives markets) warrant a reconsideration of its planned introduction next year. The authorities agreed with the mission that the initial proposal would likely be amended leading to some delays in introduction, but reiterated their support for an FTT.

Staff Appraisal

45. Recent improvements in economic indicators support the expectation of a gradual turnaround in economic conditions in the second half of 2013, although downside risks remain substantial. In a context of continued rapid fiscal adjustment, the recovery of domestic demand depends critically on reducing the policy uncertainty that weighs on spending decisions of households and enterprises. On the positive side, the relatively sound financial position of households and enterprises implies that an improvement in confidence can translate relatively quickly into a demand response.

46. While fiscal consolidation needed to restore the health of public finances remains considerable, there is scope to ease the pace of adjustment in 2014 while rebalancing it toward stronger expenditure containment. A somewhat smoother adjustment in 2014 (than envisioned by the authorities’ Stability Program) would support the fragile recovery. At the same time, the adjustment effort may well need to be sustained for a longer period to reach structural balance, than the authorities’ optimistic medium-term growth assumptions suggest. The transition to structural deficit targeting is a welcome change in the fiscal policy framework and should provide greater stability in policy planning. It should, however, be anchored by an explicit commitment to contain expenditure growth as the key instrument of adjustment going forward combined with greater clarity about the sources of these expenditure savings over the medium term. Such a rebalancing would reduce policy uncertainty and thereby strengthen the recovery.

47. The government expenditure containment assumed in the authorities’ Stability Program is appropriately ambitious and as such needs to be backed by structural fiscal measures. The authorities’ approach to spending rationalization has produced some useful recommendations, and more is expected from the upcoming reform of pensions and unemployment insurance. However, the scale of the expenditure adjustment needed over the medium term will require a more ambitious approach to rationalizing spending by local authorities and deeper reforms to improve the efficiency of social spending.

48. Structural policy priorities should go to strengthening the economy’s growth potential beyond the pending recovery, and improving external competitiveness. As discussed in last year’s report, significant rigidities have hindered the economy’s capacity to grow and to create jobs, and weakened the external accounts as noted in the staff’s external assessment. The gap relative to European trading partners in terms of cost and non-cost competitiveness remains a dampening factor and ultimately a risk for macroeconomic balances, notably in a context where euro area periphery countries are registering large competitiveness gains. On the positive side, France benefits from a number of structural strengths which, in a more supportive environment, could provide a substantial impulse to growth. They include a high household saving rate, first rate global enterprises, positive demographics, a strong scientific research capacity, and high quality public infrastructure.

49. Since the last Article IV consultation in October 2012, the authorities have made meaningful progress on the structural reform front. The reduction of the labor tax wedge gives a boost to enterprises until the impact of structural reforms gains ground. The 2013 labor market reform represents a significant change in both approach and content. The success of the negotiations and its broad support could portend a more collaborative relation between social partners going forward, which, as much as institutions, is key to producing efficient labor outcomes. On the substance, the reform introduces important elements of flexisecurity, although much will depend on implementation.

50. While these reforms are welcome, they are not as yet sufficient to reverse the loss of competitiveness. Deeper reforms are needed to close the gap between labor costs and productivity and activate France’s structural strengths. The launching of reforms on several critical fronts (pensions, worker training, administrative reforms and simplification, activation policies and unemployment insurance) offers an opportunity to address a number of growth impediments. Priority should go to increasing labor market participation, reducing regulatory hindrances and opening product markets to greater competition. As demand recovers it will become increasingly important to increase employment incentives, especially at the two ends of the age distribution. Also, while it is important to allow the labor market reform to gain ground, there is scope to go further in enhancing the flexibility of the labor market. Enhancing competition in product markets, especially in the sheltered services sector, is an important lever of productivity growth and employment creation. Notwithstanding potential adjustment costs, enhanced competition, combined with the French social safety net, could be an effective instrument of economic inclusiveness by redistributing rents and creating new business opportunities and thus jobs. Even with productivity enhancing measures, the cost of labor remains a critical obstacle to employment at the lower-skill end of the labor market, particularly for new entrants. To improve employment outcomes, the rationing effect of the high minimum wage should be reduced and contractual work arrangements could be eased for first-time entrants into the labor force.

51. Financial sector priorities should go to solidifying the significant progress achieved in terms of financial stability and ensuring that the efficiency of financial intermediation is preserved as financial institutions adjust to new prudential requirements. Balance sheet restructuring on the part of banks has greatly reduced financial stability concerns. Signs of stabilization in loan loss provision ratios in the first quarter of 2013 are encouraging, although continued vigilance is necessary to ensure adequate provisioning levels given uncertain recovery prospects. Regular and strict assessments by the supervisor suggest that the French banking system is comparatively well positioned ahead of the AQR. Reaching regulatory liquidity and funding ratios remains a challenge for many French banks requiring continued improvement in funding structures, higher deposit collection and a move toward more market-intermediated credit. It would be important, in this regard, to ensure that tax incentives on financial products are better aligned with bank regulatory objectives, for instance by limiting the capture of saving by government financial institutions, phasing out regulated interest rates, and taking maturity-based rather than a product-based approach to tax incentives.

52. Finally, it is important to underscore the positive role played by the authorities to maintain the process of European convergence toward the Single Supervisory Mechanism and Single Resolution Mechanism in the European Union on track. Apart from the efforts deployed at the European level, the domestic banking reform now before Parliament contributes to the process by aligning the resolution regime to the EU directives in line with FSAP recommendations.

53. It is recommended that the next Article IV consultation with France be held on the standard 12-month cycle.

Table 1.Selected Economic and Social Indicators, 2010–18






Real economy (change in percent)
Real GDP1.72.00.0-
Domestic demand1.82.0-0.9-
Nominal GDP (billions of euros)193720012032206121142178225123362427
CPI (year average)
Unemployment rate (in percent)9.79.610.211.211.611.410.910.610.4
Gross national savings (percent of GDP)17.718.817.517.718.118.719.320.020.5
Gross domestic investment (percent of GDP)19.320.819.819.119.419.519.720.020.3
Public finance (percent of GDP)
Central government balance-6.3-4.4-3.9-2.8-2.4-2.0-1.5-1.1-0.9
General government balance-7.1-5.3-4.8-3.9-3.5-2.8-1.9-1.0-0.8
Structural balance (percent of potential GDP)-5.7-4.6-3.5-1.7-1.2-0.8-
Primary balance-4.8-2.8-2.5-1.8-1.5-
General government gross debt82.485.890.293.595.094.993.891.488.7
Money and interest rates (in percent)
Money market rate 1/
Government bond yield 1/
Balance of payments (in percent of GDP)
Exports of goods20.221.221.521.
Volume growth (in percent)
Imports of goods23.024.925.
Volume growth (in percent)8.95.1-
Trade balance-2.7-3.7-3.5-3.0-3.0-2.6-2.3-2.0-1.8
Current account-1.6-1.9-2.3-1.3-1.2-0.8-
FDI (net)-1.8-1.80.1-0.3-0.6-0.9-1.2-1.4-1.7
Official reserves (US$ billion)55.848.6
Fund position (as of January 31, 2012)
Holdings of currency (percent of quota)79.773.170.9
Holdings of SDRs (percent of allocation)96.195.594.2
Quota (SDRs million)107391073910739
Exchange rates
Euro per U.S. dollar, period average0.750.720.78
Nominal effective rate, ULC-styled (2000=100)102.4102.4100.1
Real effective exchange rate, ULC-based (2000=100)104.3105.4104.8
Potential output and output gap
Potential output0.
Output gap-2.2-1.0-1.8-2.9-3.0-2.6-2.1-1.6-1.1
Social indicators
Per capita GDP (2006): US$35,471; Life expectancy at birth (2009): 77.7 (male) and 84.4 (female);
Poverty rate (mid-2000s): 14.1 percent (60 percent line), 7.1 percent (50 percent line);
Income distribution (ratio of income received by top and bottom quintiles, 2004): 4.2.
Sources: French authorities; IMF staff estimates and projections.

For 2013, average for January-May.

Sources: French authorities; IMF staff estimates and projections.

For 2013, average for January-May.

Table 2.Balance of Payments, 2011–18(Percent of GDP)
Current account-1.9-2.3-1.3-1.2-0.8-
Net exports of goods-3.7-3.5-3.0-3.0-2.6-2.3-2.0-1.8
Exports of goods21.221.521.
Imports of goods-24.9-25.0-24.1-24.0-23.7-23.5-23.4-23.3
Net exports of services1.
Exports of services8.
Imports of services-6.9-6.6-6.6-6.6-6.5-6.5-6.4-6.4
Income balance1.
Current transfers-1.8-1.8-1.5-1.5-1.5-1.5-1.5-1.5
Capital and financial account
Capital account0.
Financial account2.
Direct investment-1.80.1-0.3-0.6-0.9-1.2-1.4-1.7
Portfolio investment12.61.8-1.3-1.0-1.1-1.1-1.1-1.1
Equity securities
Debt securities2.
Bonds and notes
Money market instruments
Financial derivatives
Other investment-
Trade credits
Currency and deposits
Reserve assets0.3-
Errors and omissions-1.0-
Source: IMF, Balance of Payments Statistics; and Direction Générale des Douanes et Droits Indirects for goods exports and imports.
Source: IMF, Balance of Payments Statistics; and Direction Générale des Douanes et Droits Indirects for goods exports and imports.
Table 3a.France: General Government Statement of Operations, 2008–18(In percent of GDP; unless otherwise Indicated)
(in percent of GDP)
Social contributions18.118.818.618.819.018.918.618.318.117.917.6
Other revenue
Compensation of employees12.813.513.413.
Use of goods and services5.
Consumption of fixed capital2.
Social benefits23.525.525.625.526.126.526.426.025.525.325.6
Other expense3.
Net acquisition of nonfinancial assets0.
Acquisitions of nonfinancial assets
Disposals of nonfinancial assets
Consumption of fixed capital-2.5-2.6-2.6-2.7-2.7-2.6-2.6-2.6-2.5-2.4-2.4
Gross Operating Balance0.1-4.0-3.9-2.0-1.7-0.7-
Net Operating Balance-2.5-6.6-6.5-4.7-4.4-3.4-3.0-2.3-1.5-0.6-0.4
Net lending (+)/borrowing (–)-3.3-7.5-7.1-5.3-4.8-3.9-3.5-2.8-1.9-1.0-0.8
Net acquisition of financial assets3.
Monetary gold and SDRs0.
Currency and deposits0.
Debt securities1.2-1.10.8-0.6
Equity and investment fund shares0.30.6-0.5-0.2
Insurance, pensions, and standardized guarantee sche0.
Financial derivatives and employee stock options0.
Other accounts receivable0.
Net incurrence of liabilities6.
Currency and deposits-
Debt securities5.
Equity and investment fund shares0.
Insurance, pensions, and standardized guarantee sche0.
Financial derivatives and employee stock options0.
Other accounts payable0.3-
Memorandum items:
Structural balance-4.1-5.9-5.8-4.7-3.6-1.8-1.3-0.8-
Structural balance (in percent of potential GDP)-4.1-5.7-5.7-4.6-3.5-1.7-1.2-0.8-
Structural primary balance 1/-1.2-3.8-3.7-2.3-1.6-
Central government net lending/borrowing-3.3-6.2-6.3-4.4-3.9-2.8-2.4-2.0-1.5-1.1-0.9
General government Maastricht balance-3.3-7.5-7.1-5.3-4.8-3.9-3.5-2.8-1.9-1.0-0.8
Gross debt (Maastricht definition)
Source: GFS yearbook, INSEE, French authorities, and IMF staff estimates and projections.

Excludes cyclical effects.

Source: GFS yearbook, INSEE, French authorities, and IMF staff estimates and projections.

Excludes cyclical effects.

Table 3b.France: General Government Integrated Balance Sheet, 2003–11(Percent of GDP)
(in percent of GDP)
Net worth
Nonfinancial assets
Net financial worth-46.6-47.4-45.4-39.3-35.7-45.8-52.1-57.3-62.8
Financial assets28.629.733.634.637.333.439.238.236.9
Monetary gold and SDRs0.
Currency and deposits3.
Debt securities1.
Equity and investment fund shares13.515.419.322.124.218.822.021.719.2
Insurance, pensions, and standardized0.
Financial derivatives and employee0.
Other accounts receivable8.
Monetary gold and SDRs0.
Currency and deposits1.
Debt securities56.359.561.356.254.560.871.174.578.8
Equity and investment fund shares0.
Insurance, pensions, and standardized0.
Financial derivatives and employee0.
Other accounts payable7.
Memorandum items:
Debt (at market value)
Debt at face value71.171.973.570.971.575.587.090.494.3
Maastricht debt63.365.266.864.
Change in net worth from other flows
Nonfinancial assets
Net financial worth0.
Financial assets0.
Monetary gold and SDRs0.
Currency and deposits0.00.1-
Debt securities0.1-
Equity and investment fund shares0.
Insurance, pensions, and standardized0.
Financial derivatives and employee0.
Other accounts receivable0.
Monetary gold and SDRs0.
Currency and deposits0.
Debt securities-
Equity and investment fund shares0.
Insurance, pensions, and standardized0.
Financial derivatives and employee0.
Other accounts payable0.
Source: GFS yearbook.
Source: GFS yearbook.
Table 4.Vulnerability Indicators, 2006–12(In percent of GDP; unless otherwise indicated)
External Indicators
Exports (annual percentage change, in U.S. dollars)9.113.710.5-12.55.714.3-5.0
Imports (annual percentage change, in U.S. dollars)14.215.415.5-
Terms of trade (annual percentage change)-1.51.3-0.72.8-1.5-2.2-0.7
Current account balance-0.6-1.0-1.7-1.3-1.6-1.9-2.3
Capital and financial account balance1.
Of which
Inward portfolio investment (debt securities, etc.)
Inward foreign direct investment3.
Other investment (net)
Total reserves minus gold
(in billions of U.S. dollars, end-of-period)42.745.733.646.655.848.654.2
Euros per U.S. dollar (period average)
Market Indicators
Financial Markets
Public sector debt 1/
3-month T-bill yield (percentage points, eop)
3-month T-bill yield in real terms (percentage points, eop)
US 3 month T-bill4.
Spread with the US T-bill (percentage points, eop)-
5- to 8-year government bond (percentage points, eop)
10-year government bond (United States)
Spread with US bond (percentage points, eop)-
Yield curve (10 year - 3 month, percentage points, eop)
Stock market index (period average)273.1306.1232.0178.6200.3192.1179.0
Real estate prices (index, Q1-10=100, period average)98.6105.1106.098.5103.5109.7109.1
Credit markets (end-of-period 12-month growth rates)
Credit to the private sector11.013.46.2-
Bank credit to households11.410.
Housing Loans15.
Bank credit to nonfinancial enterprises9.714.110.6-
Sectoral risk indicators
Household sector
Household savings ratio14.915.415.516.415.916.015.6
Household financial savings ratio4.
Real estate household solvency ratio (index, 2001=100) 2/9797101102.099.4100.997.7
Corporate sector
Profitability of business sector (financial margin)37.838.438.135.836.635.835.1
Investment ratio17.418.418.917.118.018.418.0
Savings ratio15.216.514.013.816.214.412.8
Self-financing ratio81.683.869.375.783.872.666.0
Banking sector
Share of housing loans in bank credit to the private sector37.337.137.639.240.240.841.2
Share of nonperforming loans in total loans3.
Ratio of nonperforming loans net of provisions to capital6.86.610.319.317.220.819.4
Liquid assets to total short-term liabilities146.7150.3128.393.176.287.691.4
Return on assets0.
Return on equity14.
Regulatory capital to risk-weighted assets10.910.210.512.412.712.314.3
Sources: French authorities; INSEE; BdF; ECB; Haver; Credit Logement; IMF, International Financial Statistics; and Bloomberg.

The debt figure does not include guarantees on non-general government debt.

This index combines the effect of real disposable income, repayment conditions for loans, real estate prices, and interest subsidies.

Sources: French authorities; INSEE; BdF; ECB; Haver; Credit Logement; IMF, International Financial Statistics; and Bloomberg.

The debt figure does not include guarantees on non-general government debt.

This index combines the effect of real disposable income, repayment conditions for loans, real estate prices, and interest subsidies.

Table 5.France: Daily Movements of Selected Financial Indicators


Change since:
Last Closing7 days ago7/1/20112010-2011Since 2000
CAC 40 Index3872.40.43.2-3.439.2-6.861.1-44.1
BNP Paribas Equity44.30.63.1-18.892.1-25.7113.1-51.6
Crédit Agricole Equity6.80.60.3-37.2135.4-50.4135.4-79.3
Société Générale Equity28.31.34.7-33.488.4-45.988.4-79.9
Eurostoxx 600297.
VSTOXX Index19.1-0.1-15.7-3.428.3-64.464.3-78.2
(Basis points)
3M Basis Swap Spread-
Euribor-OIS 3M Spread11.70.0-0.6-9.92.6-88.920.4-195.2
Sovereign 10Y Yield Spread63.50.25.725.744.8-126.664.9-126.6
Sovereign 5Y CDS Spread76.8-1.4-3.8-2.547.1-172.875.3-172.8
BNP Paribas 5Y CDS Spread141.3-2.8-7.328.391.2-218.3135.9-218.3
Crédit Agricole 5Y CDS Spread179.8-5.4-7.446.5117.7-223.9174.0-223.9
Société Générale 5Y CDS Spread179.2-6.4-6.147.2117.6-261.1173.2-261.1
Sources: Bloomberg; and staff calculations.
Sources: Bloomberg; and staff calculations.
Table 6.France: The Core Set of Financial Soundness Indicators, 2005–12
Deposit-taking institutions 1/
Regulatory capital to risk-weighted assets11.310.910.210.512.412.512.214.0
Regulatory Tier I capital to risk-weighted assets8.
Nonperforming loans net of provisions to capital8.
Bank provisions to Nonperforming loansn.a.170158.3131.0109.5112.0115.3106.7
Nonperforming loans to total gross loans3.
Sectoral distribution of loans to total loans, of which
Nonfinancial corporation18.818.618.118.317.520.519.218.8
Households (including individual firms)26.526.624.824.124.530.528.728.9
Nonresidents (including financial sectors)
ROA (aggregated data on a parent-company basis) 2/
ROA (main groups on a consolidated basis) 3/0.490.570.350.
ROE (aggregated data on a parent-company basis) 2/11.814.09.8-
ROE (main groups on a consolidated basis) 3/13.517.2213.343.86.411.88.26.6
Interest margin to gross income32.428.225.340.434.949.451.541.4
Noninterest expenses to gross income64.362.468.484.263.165.767.463.2
Liquid assets to total assets20.519.918.918.318.323.024.126.2
Liquid assets to short-term liabilities150.1146.7150.3139.6150.1144.4136.3164.0
Net open position in foreign exchange to capital
Net open positions in FX (in millions of euros) 4/52755,2837,058n.a.n.a.n.a.n.a.n.a.
Net open positions in equities to Tier I capitaln.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Sources: Banque de France, ACP

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, ACP

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.Encouraged Financial Soundness Indicators, 2005–12(In percent unless otherwise indicated)
Corporate sector
Total debt to equity71.
Return on equity5.
Interest paid to financial firms 1/8.89.711.513.79.98.810.1n.a.
Corporate net foreign exchange exposure to equityn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Number of enterprise bankruptcies (thousands)n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Number of enterprise creations (thousands)n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.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 countries83.785.
Developing Europe2.
Latin America and Caribbean1.
Africa and Middle East3.
Asia and Pacific Area2.
Offshore Financial Centers6.
Gross asset position in financial derivatives to capital543.7337.0235.0633.2362.7286.2388.8346.2
Gross liability position in financial derivatives to capital484.7293.0227.0616.3361.9286.7388.0346.0
Large exposures to capital3.
Trading income to total income23.926.016.8-63.916.410.3-13.26.4
Personnel expenses to noninterest expenses58.354.053.351.661.144.942.136.0
Spread between reference lending and deposit rates215226232218237246227219
Spread between highest and lowest interbank raten.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Customer deposits to total (noninterbank) loans83.580.577.478.085.379.578.467.9
FX loans to total loans 2/12.011.411.310.510.
FX liabilities to total liabilities17.818.618.116.815.316.415.413.9
Net open position in equities to capitaln.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Market liquidity
Average bid-ask spread in the securities market 3/n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Average daily turnover ratio in the securities marketn.a.
Other financial corporations
Assets to total financial system assets20.220.920.619.720.920.319.019.5
Assets to GDP180.8207.8223.1207.4227.5214.2200.5211.4
Household debt to GDP42.144.647.149.353.154.655.756.0
Household debt service and principal payments to income12.914.512.111.712.313.213.012.7
Real estate markets
Real estate prices14.810.05.5-3.8-
Residential real estate loans to total loansn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Commercial real estate loans to total loansn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Sources: Banque de France ; ACP ; BIS ; Ministère des Finances

In percent of financial firms’ gross operating surplus.

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

Or in other markets that are most relevant to bank liquidity, such as foreign exchange markets.

Sources: Banque de France ; ACP ; BIS ; Ministère des Finances

In percent of financial firms’ gross operating surplus.

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

Or in other markets that are most relevant to bank liquidity, such as foreign exchange markets.

Appendix I. Main Recommendations of the 2012 Article IV Consultation and Authorities’ Response
Fund RecommendationsPolicy Actions
Fiscal Policy
“Many Directors stressed that adherence to the EU’s fiscal target in 2013 would be crucial to preserve credibility”. “Other Directors encouraged the authorities to refrain from additional fiscal tightening in the event of slower than-expected growth in 2013.”In light of the sharp deterioration of the macroeconomic outlook, the authorities decided to maintain the pace of structural adjustment unchanged and let automatic stabilizers operate fully. As a result, the 2013 fiscal deficit is projected at 3.9 percent of GDP, compared to 3 percent in the budget.
Rebalance fiscal adjustment over the medium term toward additional expenditure containmentThe authorities are rebalancing the fiscal adjustment. According to the April 2013 Stability Plan, 70 percent of the adjustment in 2014 will come from expenditure containment and 30 percent from revenue measures. After 2014, adjustment would come solely from expenditure containment, and the tax-to-GDP ratio would remain stable.
Financial Sector Policy
Further tax reform to create a level playing field and remove disincentives against bank deposits.The current reform proposal rebalances tax incentives provided to life insurance savings toward equity investments over fixed income investments. A broader reform of financial income is not on the table.
Structural Reforms
Address the competitiveness shortfall through deep labor market reforms.The broad labor market reform negotiated by social partners has been transposed into law.
Open the services sector to more competition.The entry of a fourth mobile telecommunication license in 2012 has led to increased competition and lower prices
No other significant measure has been taken to increase competition in the services sector.
Pursue wage moderation to support the reduction in social security contributions.The government continues the policy of wage moderation for civil servants introduced in 2010. In January 2013, the minimum wage was increased in line with the indexation formula (0.3 percent), but no additional (discretionary) increase was granted.
Source: IMF Staff
Source: IMF Staff
Appendix II. Overview of Main Structural Reforms
Product Market and Regulatory Reform
Reducing the labor tax wedge
Crédit d’Impôt pour la Compétitivité et l’EmploiEUR 20 billion (1 percent of GDP) allocated to reduce the labor tax wedge through a corporate tax credit linked to the payroll (excluding wages above 2.5 times the minimum wage). The tax credit is phased in over three years. The rebate amounts to a 3 percent cut in labor costs. The tax credit will be financed in equal measure by revenue measures (VAT and a new green tax) and expenditure measuresImplementation in course
Fiscal support to investment activities by SMEsExisting tax incentives, including rebates for research SME investments, will be kept over the next 5 yearsCommitment
Rationalizing public guarantees to SMEs
Public support was channeled through OSEO, the CDC enterprises and the Strategic Investment Fund until 2012The Public Investment Bank (BPI), created in 2012 by merging the three existing public investment entities, will provide about EUR 42 billion in the form of public guarantees and equity participations to SMEs in 2013. New government guarantees worth EUR 500 million will be provided to ease financing schemes of SMEsImplementation in course
Supporting SMEs’ presence in foreign markets
The BPI will provide personalized help to 1,000 SMEs and intermediate-sized firms to access and expand their presence in international markets; the revamped export bpifrance label (an enhanced partnership between bpifrance, Coface and UBIFRANCE) will provide easier access to export-financing products, and assist enterprises more effectively. A new “export development loan” will be created; international corporate volunteers will be increased by 25 percent over the next three years to assist SMEs with market prospection; a “France Brand” will be launched to promote French productsCommitment
Upgrading the industrial base
Investissements d’avenir program towards priority sectors (politique industrielle de filières)EUR 35 billion program over ten years to promote innovation in enterprises; priority sectors include renewable energy and health; the National Conference of Industry will be restructured to better manage the “contrats de filières” (reciprocal commitments of industry and the state to reinforce competitiveness within specific sectors)”contrats de filières” have already been signed for a number of sectors, including, automobile, aircraft and railway construction, nuclear, chemistry, fashion and luxury, and food
Strengthen the pôles de compétitivité (competitiveness clusters)Support for SMEs will be reinforced on private financing, internationalization, and anticipation of skills needs. Relations between SMEs and large groups will be strengthened, particularly in the area of procurement. The objectives of each cluster, including technological challenges and target markets, will be specified in a six-year contractCluster specific contracts yet to be specified
Pursuing business-friendly environment for enterprises
Simplifying the regulatory and tax environment (lightening procedures, shortening administrative delays)Key initiatives include “Dites-le nous une seule fois”(Tell us only once); the requirement that new rules replace (rather than add to) older regulations; no earmarked taxes will be created without parallel removal of other(s) of at least an equivalent size; and the reform of commercial courts to improve the efficiency of the business justiceImminent adoption
State commitment to pay fasterThe state will target a payment deadline of 20 days to its suppliers. Up to 2 percent of public procurement will go to SMEs and innovative intermediate-sized firms by 2020.Commitment
Disseminating the use of digital technologies
Actions will be articulated around three axes: Making digital technologies a central part of education and learning; promoting innovation and economies of agglomeration in digital technologies through “quartiers numériques” (digital neighborhoods); and promoting inclusiveness (e.g. high-speed internet will be deployed throughout the country; public employment services will use of digital technologies more effectively to improve the matching between labor supply and demand)More than 100 actions have already been taken. The creation of digital neighborhoods has been initiated in Paris (”Paris Capitale Numérique”). A wealth of actions with specific objectives will be achieved by 2017
Raising households’ purchasing power and lowering costs for other sectors through structural reforms
Housing supplyAdministrative regulations constraining the housing supply are simplified (loi sur le logement et l’urbanisme, loi sur la mobilisation du foncier public en faveur du logement) and a grant of EUR 1350 to low income households for insulation (plan d’investissemnt d’urgence pour le logement)Imminent adoption
New consumer lawThe “class action” provision under the new law will improve the contestability of rents earned in protected sectors; enhance information provided to consumers; and raise awareness of their rightsImminent adoption
Draft bill on railway reformA draft bill will set a roadmap for bringing the management of the network and the provision of maintenance services within a unified infrastructure manager. The role of the regulator will be enhanced and public services will be updated. More competition should reduce costs for enterprises and improve the quality of the services providedDraft bill expected throughout 2013; roadmap for implementation spanning over 2014-19
Measures to Curb Unemployment
New contractual arrangements to promote youth’s job inclusiveness
Emplois d’avenirEmplois d’avenir are open-ended contracts or fixed-term arrangements longer than 3 years addressed to low-skilled workers. The employer commits to a reinforced training program and receives, in return, a subsidy of up to 75 percent of the minimum wage in the non-market sector (35 percent in the market sector). The target is to create 150,000 jobs under this scheme by end-2014.Implemenation in course
Contrats de générationFirms hiring young workers on open-ended contracts while preserving the jobs of their senior employees benefit from a yearly lump-sum of EUR 4,000 (per worker hired) during the 3-year term following recruitment. These contracts are meant to facilitate the intergenerational transmission of knowledge. The target is to create 500,000 jobs under this scheme over the next five years (of which 100,000 by end-2013).Implementation in course
Strenghtening incentives to exit unemployment
Reform of the unemployment insuranceObjective of the reform is to close the deficit of the unemployment insurance system (0.13 percent of GDP in 2012). Choice of parametric reform (raising contributions vs. tightening benefits and eligibility) will have an impact on labor market outcomes.Unemployment insurance is managed by social partners who have primary responsibility for its reform. The government will launch the process at the June 2013 social conference.
Reform of professional trainingThe current system is ill-targeted, besides suffering from non-transparent financing. To improve the effectiveness of training throughout life, the labor market reform passed into law in May 2013 promotes portability of training rights through the creation of a personal account. This will be followed by more comprehensive reform later this year to direct it to those who need it most (jobseekers, less skilled workers, youth). The regions will have more prominent role in the administration of training funds. Target of the reform is also to generate fiscal savings of EUR 1.3 billion (0.06 percent of GDP). The adult training systems costs 1.5 percent of GDP (including contributions by the state and social partners)The reform falls in part under the responsibility of social partners because they contribute to the funding of job training. The government will launch the process at the June 2013 social conference, with a view to having a reform before parliament by end-2013.
Public Spending
Modernisation de l’action publiqueAudit by 2017 all public policies with a view to reduce their fiscal cost, to increase policies efficiency, and to simplify them: 40 audits (covering 20 percent of General Government spending) were launched in the first half of 2013 and 9 additional ones will be launched in the second half of 2013. These audits include family allowances, professional training, and subsidies to firms (see below).Being implemented
Pension reform
  • The pension reform aims at ensuring the financial sustainability, increasing the fairness of the system, and simplifying it. The deficit should be reduced starting in 2014 with a view to reaching financial balance at the latest in 2020. The means to achieve this objective will be discussed with the social partners based on the analytical input by the Conseil d’orientation des retraites (COR) and the reform proposals by the Commission pour l’avenir des retraites (CAR).
  • Social partners agreed to a 3-year under-indexation) of supplementary pensions (under the mandatory system of retraites complémentaires) and an increase in contributions by 0.2 percentage points. Estimated fiscal gain: EUR 1 billion in 2014 (0.05 percent of GDP) of which EUR 0.7 billion from the increase in contributions.
Preparatory diagnostic by the COR was completed in January 2013. A report by the CAR was done in June 2013. Discussions with the social partners began in June, with a view to have a draft reform before parliament by end-2013. Implemented as of April 1, 2014
Health spendingTightening of the spending growth ceiling (ONDAM) to 2.6 percent in 2014 and 2.5 percent during 2015-17 (trend growth is estimated at above 4 percent). Estimated fiscal saving of EUR 3 billion in 2014 (0.14 percent of GDP).Done
Family allowancesThe law caps tax expenditure which benefits mostly families with children (quotient familial). Estimated fiscal gain: EUR 1 billion in 2014 (0.05 percent of GDP). Total spending on family allowances (tax expenditure plus outright transfers) was 2.8 percent of GDP in 2012.Done
State subsidies to firmsTargeted reduction by EUR 2 billion by 2015 (0.1 percent of GDP out of a total subsidies of 1.8 percent of GDP, and 2.8 percent when tax expenditures are included)Announced
DecentralizationThree laws will reinforce decentralization by transferring additional competencies from the center to local governments (regional transport, student housing, promotion of local languages) while clarifying responsibilities of each level of government so as to avoid duplication. Introduction of larger metropolitan area authorities (beyond city boundaries) to rationalize spending.The first draft law is under discussion in Parliament. Parliament will discuss the second draft law in the fall. The third law will be discussed in 2014
Financial Sector Reforms
Draft Law on Banking Reform
Separation of ActivitiesFrench banks will have to separate “speculative activities” but without a drastic change to their business model. By July 1, 2015 French banks will have to isolate their proprietary trading activities in a subsidiary separately capitalized and self-funded. The trading entity will be prohibited from: (i) ownership of, or unsecured lending to, hedge funds; (ii) high-frequency trading; and (iii) involvement in agricultural commodity derivatives. Banks will continue to provide a wide range of services to their clients under the universal banking model, including hedging, financing, and investment. In contrast to the EU-wide proposals of the Liikanen Committee, market-making activities will be permitted within the bank, on grounds that they support market liquidity and hence benefit clientsThe draft law is under discussion in Parliament. The reform is expected to be adopted by the summer of 2013. See:;jsessionid=958694DAFC9034DD63CBBDC4791570A9.Tpdjo04v_2?idDocument=JORFDOLE000026795365&type=general
Bank Resolution
  • The draft law aligns the resolution regime to the draft EU Recovery and Resolution Directive. The new regime requires recovery and resolution plans for large banks and investment companies. It also gives the banking supervisor new responsibilities for banking crisis preparedness and resolution, under the new name of Autorité de Contrôle Prudentiel et de Résolution (ACPR)
  • The draft law also allows the ACPR To involve the deposit guarantee fund in bank resolution, under the new name of the Fonds de Garantie des Dépôts et de Résolution
  • The draft law gives the authorities powers to separate failing entities into good and bad banks and to establish bridge banks, in line with FSAP Update recommendations, and will gradually increase the prefunding of the deposit guarantee fund from the current €2 billion to €10 billion
Macroprudential SurveillanceThe institutional framework for macroprudential surveillance will be strengthened. The draft law broadens the powers of the current structure (Conseil de régulation financière et du risque systémique) under a new name of Haut conseil de stabilité financière (HCSF). The HCSF’s composition will remain unchanged (Minister of Finance, Governor of Banque de France, Vice-President of ACP, Presidents of Autorité des Marchés Financiers and of Autorité des Normes Comptables, as well as three independent board members). The HCSF will be able to recommend measures to maintain financial stability, including a capital surcharge on banks during periods of “financial bubbles” “; activation of the measures will be only possible following a proposal by the Governor of the Banque de France, who will be solely entrusted with this responsibility. The HCSF’s powers to implement macroprudential measures will be legally binding, consistent with the provisions of the Capital Requirement Directive IV/Capital Requirement Regulation.
Supervisory PowersSupervisory powers over governance of financial institutions will be strengthened, in line with FSAP Update recommendations. ACPR will be able to oppose the nomination of managers of credit institutions, investment firms, and insurance companies, if they do not meet fit-and-proper requirements. ACPR will also be able to suspend managers during their mandate. Other measures will also broaden the powers of the securities regulator
Raise financing available to small- and medium-sized enterprises (SMEs), social housing, and high-growth sectors
Higher ceilings on regulated savings productsThe ceilings on the LDD and Livret A will be doubled to increase supply of financing for social housing and SMEs (the former through CDC loans for the construction of social housing and the latter through refinancing facilities at the BPI)The ceiling on the LDD was doubled from €6,000 to €12,000 in October 2012. The ceiling on the Livret A was raised by 50 percent in two steps (October 2012 and January 2013), to the current amount of €22,950. No further increases in the Livret A ceiling have been announced
Reform of tax incentives for life insurance policies
  • The Berger-Lefèbvre report (hereafter, Report) recommends making tax incentives for life insurance policies that carry a capital guarantee (i.e., contrats en euros) conditional on a minimum risk investment (e.g., in contrats en unités de compte, contrats euros-diversifiés, or the new contrats Euro croissance) past a €500,000 amount. About 1 percent of the households that own life insurance savings are expected to be affected by this measure
  • The Report also recommends extending fiscal incentives (with no ceiling) to a new contrat Euro croissance (life insurance product with capital guaranteed only at maturity). By removing the liquidity constraint resulting from the need to provide a capital guarantee throughout the life of the policy, insurers are expected to be able to invest the proceeds in riskier, long-duration, assets, including unlisted equity
Measures based on the recommendations of the report are expected to be passed in the 2014 budget
Raise equity financing of high-growth sectors and SMEsThe report recommends the creation of a Plan d’épargne en actions-PME (investment product in equity of SMEs), modelled on the existing Plan d’épargne en actions (vehicle for investments in listed stocks or stock mutual funds with income and capital gains exempt from income tax if held for a minimum of 5 years), and which would be open to both retail and institutional investors.Under consideration
Access by SMEs to market-intermediated creditA securitization company will be created to issue asset backed securities (ABS) backed by bank loans to SMEs. Only loans currently eligible for re-financing at the Banque de France will be accepted for securitization. The Banque de France will publish ratings for the ABS on the basis of the ratings it already prepares for the SME universe concerned (and which are currently used by banks as input in the origination process)Announced. A first ABS issuance is expected in October 2013
Banque Publique d’Investissements (BPI)Existing support programs to innovation and SMEs will be rearranged within the BPI, with the goal of channeling public funds more efficientlyThe BPI is expected to start operations in 2013
Sources: National Reform Program 2013, French authorities, Competitiveness pact, IMF staff.1/ Government’s response to the Gallois report.
Sources: National Reform Program 2013, French authorities, Competitiveness pact, IMF staff.1/ Government’s response to the Gallois report.
Appendix III. FSAP Update: Status of Main Recommendations1
Recommendations and Authority Responsible for ImplementationPriority (H/M)Timing (S/M)2/Status
Overall Financial Sector Oversight
Enhance public disclosure of financial institution conditions and risks.HSNo New Action. Initiatives on this matter (e.g., the publication of bank-by-bank data by ACP, including prudential returns) are not expected in the near term as the authorities consider availability and comparability of financial information for the main banking groups as adequate. The authorities will continue to report on financial sector developments in the context of BdF, ACP, and Corefris annual reports, BdF annual thematic Financial Stability Review and AMF Cartographie des Risques, but have no plans to publish more comprehensive information and analyses of financial stability (including the detailed reviews of credit and market risk assessment by banks conducted by ACP and stress test findings).
Give serious consideration to modifying MoF participation in the Boards of ACP and AMF to support independence of the supervisory process.MMNo New Action. There are no plans to modify MoF participation in ACP or AMF Boards. The authorities reiterated their disagreement with the FSAP evaluation.
Eliminate limits on headcount for ACP, AMF, and H3C.MMNo New Action. The authorities indicated that existing headcount limits could accommodate the higher resource needs related to additional responsibilities given to ACP by the draft banking law. The removal of headcount limits is not expected in the near-term given pressure not to expand budgets.
Banking Supervision
Continue monitoring banks’ funding position and availability of collateral to access liquidity through the secured debt market and/or central bank facilities.HHDone. ACP monitors on an ongoing basis the liquidity position of French banks. At regular intervals, ACP specifically reviews the preparedness of the main banking groups in meeting new regulatory liquidity ratios.
Give ACP powers to assess the suitability of Board members (of both banks and insurance companies) and to require removal of all unsuitable Board members.HMPartly Done. A draft law on banking reform currently before Parliament will extend ACP powers to apply the fit-and-proper test to directors, both upon their appointment and throughout their mandate, and will grant ACP the ability to veto the nomination of or require the removal of a Board member individually. The draft law will also give ACP the ability to establish direct contact with the Board, and to summon and jointly hear Board members.
Give ACP powers to ensure it receives prior notification of major acquisitions and is, therefore, able to consider them ex ante.HSPartly Done. The draft banking law will strengthen ACP’s capacity to review major acquisitions by banks. No other legislative initiatives on the matter are expected in the near term. The authorities indicated that granting ACP formal approval powers for acquisition of EU financial institutions would be inconsistent with EU law (Directive 2007/44/EC).
Require full and consistent disclosure of the capital treatment in place and the related financial interactions within complex groups.HSNo New Action. The exemption allowing the more lenient EU capital treatment by bancassurance groups was allowed to end at end-2012, as stated by the authorities at the time of the 2012 FSAP update. On the matter of disclosure of current treatment and the related financial interactions within complex groups, there are no plans to revise disclosure requirements. The authorities reiterated their disagreement with the FSAP evaluation.
Insurance Supervision
Introduce enforceable legal and regulatory corporate governance requirements.HMOngoing. Revisions to corporate governance requirements are ongoing. The EIOPA Guidelines related to the preparation for Solvency II currently under public consultation will require the introduction of systems of governance, internal control, and risk management based on clear and formalized procedures subject to approval at the highest managerial level. The recommendations are being considered for legislation.
Require insurance companies to have internal audit and actuarial control functions.HMOngoing. Revisions to internal audit and actuarial control functions’ requirements are ongoing. The EIOPA Guidelines related to the preparation for Solvency II currently under public consultation will require the introduction of four key functions, amongst which internal audit and actuarial function. The recommendations are being considered for legislation.
Enhance insurance companies’ disclosures, including on valuation of technical provisions; risk exposures and concentrations; risk management; corporate governance; and sensitivity results from forms of stress testing.HSOngoing. Revisions to data reporting requirements are ongoing. The Solvency II Directive will require enhanced disclosures. The date of entry into force of the Solvency II regime is however still uncertain due to delays in adopting the Omnibus II Directive.
Securities Regulation
Establish stronger conflict-of-interest arrangements to govern industry participation in the AMF Board.HMNo New Action. There are no plans to modify the composition of AMF Board. The authorities reiterated their disagreement with the FSAP evaluation.
Strengthen AMF’s supervision of investment service providers and financial advisors by increasing onsite work, including inspections.HSPartly Done. AMF has reviewed all the associations of financial investment advisors (CIF) between 2012 and early 2013 to assess their capacity to inspect and control their members. AMF is still designing its supervisory approach for supervision of CIF. This approach could be announced in the context of the new AMF strategic plan which sets priorities for coming years.
Provide greater enforcement powers to the H3C and increase its staffing levels.MMPartly Done. H3C is expanding the number of staff dedicated to supervision of commissaires aux comptes and this trend is expected to continue in the near-term. An audit reform is currently under negotiation at the European level and should results in strengthening of H3C powers.
Resolution Framework
Modify composition of Fonds de Garantie des Dépôts (FGD) Board to limit the potential for conflict of interest.HMNo New Action. There are no plans to change the composition of the FGD Supervisory Board.
Expand FDG’s powers in the resolution process, so as to assume assets and liabilities from a failing bank.HSPartly Done. The draft banking law allows the FGD to be involved in bank resolution under the new name of FGDR (Fonds de Garantie des Dépôts et de Résolution), in association with the renamed banking supervisor, ACPR (Autorité de Contrôle Prudentiel et de Résolution).
Central Counterparties
LCH.Clearnet SA should measure its exposures continuously throughout the business day.HSPartly Done. The central counterparty is able to calculate multiple intra-day margin calls as prices and positions change. For fixed-income instruments, one automatic intraday margin call is calculated. For CDS, a margin call is done upon initiation of the operation independently of all netting. Margin calls are manually triggered for cash& derivatives.
Carry out annually an external audit of LCH.Clearnet SA business continuity plan, including that of the in-sourcing company.HMPartly Done. Implementation is still on-going. In compliance with the authorization process under European Market Infrastructure Regulation (EMIR), ACP will conduct an audit of LCH.Clearnet SA’s business continuity plan. Consistent with EMIR obligations, internal rules of LCH.Clearnet SA will require an annual external audit of the BCP. Moreover, contractual arrangements with the providers of business continuity services were modified to allow for the possibility of external audit at any time.
Strengthen the implementation of AML/CFT measures in the overseas territories.HMPartly Done. An agreement covering the financial aspects of the December 19, 2011 agreement between ACP and the overseas issuance institutes (IEDOM and IEOM) was signed on September 10, 2012. These agreements enlarge the mandate of the institutes to cover AML/CFT, including provision of assistance to the ACP’s onsite controls. On November 23, 2012, the Ministry of Justice released two circulars to remind prosecutors (including in overseas departments and territories) to be vigilant and deepen exchanges with TRACFIN.
Complete legislation to enable the authorities to seize laundered property.HMDone. The law n°2010-768 dated July 9, 2010 was strengthened by the provisions of the law n° 2012-409 dated March 27, 2012, which aims to (i) generalize the seizure and the confiscation of property value up to an amount commensurate with the crime and (ii) enable the authorities to seize and confiscate property which the condemned person not only owns but also has free disposal of.

H/M: indicates high or medium priority level. S/M: indicates the time span in which the recommendation could be implemented (short or medium term).

H/M: indicates high or medium priority level. S/M: indicates the time span in which the recommendation could be implemented (short or medium term).

Appendix IV. Debt Sustainability Analysis1

A. Background

1. Debt ratio. The combined effect of low growth over several years and the persistence of high fiscal deficits (due to the impact of large automatic stabilizers and of the fiscal stimulus) have increased the debt-to-GDP ratio by 26 percentage points in five years to 90.2 percent in 2012. Part of the increase (2.4 percent of GDP as of end-2012) reflects financial support to other Euro area countries.2 Such support is projected to increase to 3.3 percent of GDP by 2014. The debt ratio would continue to increase in the short term peaking at 95 percent of GDP in 2014-15 and decline thereafter.

Debt-to-GDP ratio


Sources: French authorities and IMF staff.

2. Sovereign yields. Currently, yields on French debt are at historically low levels. The benchmark yield (10 years) has declined from 4.7 percent in July 2008 about 2.2 percent in mid-July 2013. The spreads over German Bunds, which had increased to almost 200 basis points in November 2011, were back to 57 basis points at mid-July 2013.

French Government Yield Curve

(quote at the end of the month, in percent)

Sources: French Authorities.

10 Year Sovereign Yields

(In Percent)

Source: Thomson Financial/Datastream.

French 10 Year Sovereign Spread with German Bund

(In Basis Points)

Source: Thomson Financial/Datastream.

3. Debt service. Owing to the sharp decline in interest rates, the rising debt has had a limited impact on the debt service. Interest payments amounted to 2.6 percent of GDP in 2012, the same level as in 2006.

4. Contingent liabilities. Financial sector guarantees are estimated at 4 percent of GDP in 2013, of which about 1/3 is accounted for by Dexia.

B. Scenario analysis

5. Baseline (See Table 1). Staff projects that the debt-to-GDP ratio will peak at 95 percent in 2014 and then decline to 88.7 percent in 2018. Interest payments would further decline and average 2.1 of GDP during the projection period because: (1) fiscal consolidation leads to a primary surplus starting in 2015; (2) interest rates are expected to remain low during the projection period; and (3) given the maturity structure of the debt (average maturity of just over 7 years as of end May 2013), the expected small increase of interest rates starting in 2014 has a slow pass-through to implicit interest rate and the budget.

Outstanding Debt by Maturity

(As of May 2013, in billions of euros)

Sources: Agence France Trésor and IMF Staff.

6. The following shock scenarios are used to illustrate the specific risks described in the Staff Report (paragraphs 10 – 17). The scenarios do not assume any policy response to the shocks:

7. Slow recovery. Under this scenario, real GDP is assumed to remain flat in 2014 and to grow only gradually thereafter to 1 percent by 2018. As a result, the debt-to-GDP would increase to 99½ percent in 2018, despite the implementation of the medium term fiscal consolidation. Such as scenario could result from the convergence of a number of adverse developments including, an external demand shortfall and weak confidence in the euro area resolution strategy, failure to implement domestic structural reforms, and additional bank deleveraging affecting domestic credit growth.

Growth Shock

(Percent per year)

Sources: IMF staff estimates.

8. Fiscal policy slippage. In line with standard DSA shocks, one scenario assumes a permanent increase in primary spending of 1 percent of GDP starting in 2014. The second scenario assumes that the expenditure containment policy spending growth returns to its trend (1.5 percent in real terms) starting in 2014. The latter scenario has a more adverse effect and illustrates the importance of expenditure containment for the success of the consolidation strategy.

Fiscal Policy Slippage Scenario


Sources: IMF staff estimates.

9. Increase in real interest rate. An interest rate shock could be triggered by renewed tensions in the euro area, more generalized financial stress, including closure of wholesale markets to French banks. The scenario illustrates the impact of a 200 basis points increase in interest rates (well beyond the standard DSA shock scenario). This scenario illustrates that debt dynamics would be substantially affected only under an extreme shock.

Interest Rate Shock 1/


Sources: IMF staff estimates.

1/ Real interest rate is at baseline plus 4 standard deviations in projection years

10. Combined shock. This scenario combines the growth shock with the interest rate shock and the first expenditure shock (one time increase of spending by 1 percent of GDP). The combination of multiple shocks reflects the tendency for adverse shocks to compound one another during periods of stress, although we consider this to be a tail end scenario.

Combined Shock

(Percent per year)

Sources: IMF staff estimates.

Table 1.Public Sector Debt Sustainability(In percent of GDP; unless otherwise indicated)


balance 9/
Baseline: Public sector debt 1/
o/w foreign-currency denominated0.
Change in public sector debt4.
Identified debt-creating flows (4+7+12)
Primary deficit0.
Revenue and grants49.949.249.550.651.853.
Primary (noninterest) expenditure50.454.354.153.354.154.954.553.853.052.151.3
Automatic debt dynamics 2/
Contribution from interest rate/growth differential 3/
Of which contribution from real interest rate1.
Of which contribution from real GDP growth0.12.2-1.3-
Contribution from exchange rate depreciation 4/
Other identified debt-creating flows0.
Privatization receipts (negative)
Recognition of implicit or contingent liabilities0.
Other (in 2012: recapitalization of Dexia)
Residual, including asset changes (2-3) 5/2.21.7-
Public sector debt-to-revenue ratio 1/136.6160.9166.4169.5174.3175.8178.5178.4176.1171.8168.6
Gross financing need 6/
in billions of U.S. dollars312.3527.2612.6523.0407.6472.6451.8469.3415.1388.2320.7
Scenario with key variables at their historical averages 7/93.596.799.5102.4105.1107.91.2
Scenario with no policy change (constant primary balance) in 2013-201893.595.396.497.197.597.7-1.3
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)-0.1-
Average nominal interest rate on public debt (in percent) 8/
Average real interest rate (nominal rate minus change in GDP deflator, in percent)
Nominal appreciation (increase in US dollar value of local currency, in percent)-6.67.2-9.5-0.30.1
Inflation rate (GDP deflator, in percent)
Growth of real primary spending (deflated by GDP deflator, in percent)
Primary deficit0.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r -π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r -π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

1See accompanying Selected Issues Paper, “External Sector Developments and Competitiveness”.
2The gap relative to the NFA stabilizing current account is found to be negligible. The CGER approach yields somewhat different current account and real exchange rate gaps compared with EBA: the current account gap is estimated at +1.4 percent of GDP (rather than -2.5 percent under EBA); and real exchange rate overvaluation is estimated at 4 percent (rather than 1 percent under EBA).
3The leverage ratio decreased by 3 points from 2011Q3 to 2012Q3. About two-thirds of the decrease in leverage is ratio reflected in a capital increase and one third in a decrease in assets.
4Liquidity reserves comprise central bank deposits and central-bank eligible unencumbered assets. Use of the ECB’s Long Term Refinancing Operations (LTRO) has decreased by 42 percent since its end-2012 peak to around €101 billion as banks have started repaying loans. Deposits at the ECB peaked at €139 billion in mid-2012 and have since decreased to €39 billion.
5Other indicators including interbank rates and bank CDS spreads imply currently favorable funding conditions (Table 5) although recent developments point to higher rate expectations. The EONIA (Euro overnight index averages) forward rates—especially at longer tenors—have risen sharply since the Fed meeting on June 18 and CDS spreads have increased by around 15 basis points during the same period.
6By way of example, the GRAM shock simulation of a protracted period of slower European growth carried out by RES would result in a growth shortfall for France, averaging -1.75 percentage points over 2014-18. Owing to the debt overhang on firms’ balance sheets, this scenario entails a 3 percent and 5 percent decline in euro area private investment (relative to baseline) in 2013 and 2014, respectively. Lower than expected growth outcomes prevent the anticipated fiscal improvement, pushing up sovereign risk premium and triggering further tightening in fiscal stances. The magnitudes of the jumps in sovereign risk premium would be proportional to the country’s level of debt and dependence on foreign funding.
7See “Growth and Fiscal Spillovers of France,” by K. Cheng and S. Weber, in France: Selected Issues, IMF Country Report No. 13/3 (January 2013).
8See “France: Financial Spillovers,” by C. Geiregat, in France: Selected Issues, IMF Country Report No. 13/3 (January 2013).
9See “Risk Exposures and Financial Spillovers in Tranquil and Crisis Times: Bank-Level Evidence,” by H. Poirson and J. Schmittmann, IMF Working Paper No. 13/142.
10See “Growth and Fiscal Spillovers of France,” by K. Cheng and S. Weber, in France: Selected Issues, IMF Country Report No. 13/3 (January 2013).
11See FSAP Update, France: Housing Prices and Financial Stability, Technical Note, June 2013.
12See France: Financial System Stability Assessment, IMF Country Report No. 12/341, December 2012.
13Sensitivity stress tests carried out during the 2012 FSAP Update of a decline in property prices of 25 percent did not show a significant impact on bank capital ratios.
14The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline. The RAM reflects staff views on the source of risks and overall level of concern at the time of discussions with the authorities.
15See accompanying Selected Issues Paper, “Potential GDP Estimates for France: Prudent (and Calling for Action).”
16See accompanying Selected Issues Paper “France: Which Expenditure Saving to Sustain Medium-Term Fiscal Consolidation?”
17As explained in IMF Country Report 12/342, the measure was implemented through a tax credit based on the wage bill (Crédit d’impôt pour la compétitivité et l’emploi, CICE), rather than a reduction of social security contributions, although the economic impact is the same.
18A sector breakdown of TFP growth over the pre-crisis period shows that some market services (real estate, professional services, wholesale and retail trade, and transport) were characterized by weak TFP gains, while sectors exposed to deregulation (utilities and information and communication) registered rapid TFP growth.
19The principles of “necessity, proportionality, and public interest” embedded in the Services Directive have given EU member countries considerable latitude in how strictly to implement the Directive.
20See accompanying Selected Issues Paper, “French Firms and Globalization.”
21Égert and Kierzenkowski, (2010) and Ministère de l’économie (2012).
22The CDC’s is a public institution mandated to finance social housing, but it has also been used to finance local governments in the wake of the collapse of Dexia.
23The 2013 Berger-Lefèbvre report’s recommendation to shift the tax incentives for life insurance policies toward riskier long-term instruments decreases at the margin their substitutability with bank deposits, but at the cost of creating yet another layer of complexity and fails to level the playing field.
24As reported in the 2012 Spillover Report, the French, UK, and German banking system would be the most affected by an adverse funding shock and, because of their large absolute amount of liabilities, are likely to amplify the initial shock through interbank exposures.
25As noted in the 2013 Euro Area Staff Report, outstanding legal uncertainties on the respective responsibilities of the ECB and national competent authorities will have to be clarified to make the SSM operational.
26Since the Article IV discussions took place, an agreement on procedures to handle failing banks was reached by EU Finance Ministers on June 27, 2013. The agreement provides national regulators some flexibility to shield certain types of creditors and liabilities using national backstops if hair cutting them out would put financial stability at risk or spark contagion.
1Prepared by Hélène Poirson (EUR).
1Prepared by Jean-Jacques Hallaert (EUR).
2Bilateral loans (direct and through the EFSF to Greece, Ireland, and Portugal) and contributions to the ESM.

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