10 April 2013

Macro-economic Imbalance Procedure in-depth review for France

The review concludes that while the reforms in progress are steps in the right direction, they will not be sufficient to solve the competitiveness issues and, in view of the challenges ahead, further policy response will be needed.

The resilience of the country to external shocks is diminishing and its medium-term  growth prospects are increasingly hampered by long-standing imbalances. In 2008 and  2009, the French GDP decreased by 0.1 per cent and 3.1 per cent a much smaller slump than in most euro area countries. Since then, in the midst of tensions on sovereign spreads and on the banking  system, France has remained among the few EU Member States which avoided a recession in  2010 and 2011. However, the resilience of the economy has been put to the test and a number of imbalances, both internal and external, have built up in the last few years.

The high and increasing public debt is reducing the capacity of public finances to face potential adverse shocks and could result in negative spillovers to the whole economy. While risks to medium-term sustainability appear moderate, sensitivity tests show that adverse economic events may have a significant negative impact on debt dynamics. Rising debt levels could adversely affect the country's banking system and thus have a negative impact on firms' financing costs. More generally, rising debt service could drive out more productive government expenditure and result in higher taxes. Finally, France's public sector  indebtedness represents a vulnerability, not only for the country itself but also for the euro area as a whole.

A consistent set of reforms, addressing both fiscal and structural imbalances, has been initiated by the government to restore competitiveness in the medium term. The commitments of the French authorities to achieve a sizeable structural effort despite disappointing economic growth, together with withering tensions in the euro area, have  contributed to strengthening market perceptions of the public debt. A wide set of initiatives has been launched to foster competitiveness, including through measures to reduce the cost of labour (the "Pacte pour la compétitivité, la croissance et l'emploi") and to develop flexicurity further. While these reforms are steps in the right direction, they will not be sufficient to solve the competitiveness issues and, in view of the challenges ahead, further policy response will be needed.

The IDR also discusses the policy challenges stemming from these developments and what could be possible avenues for the way forward. The measures included in the competitiveness pact recently adopted by the authorities represent a significant step in the right direction. Further efforts will need to be done, targeting in particular innovation capacity and export potential of companies. Specific attention should be also dedicated to ensure that increasing indebtedness of companies does not hinder their investment capacity. Further measures addressing the cost of production, for example through higher competition in service, should be considered. Finally, the agreement reached by social partners on flexicurity is an important first step, but still needs to be translated into law, a critical step to ensure  the effectiveness of the reform.

Full review

© European Commission