France: Recovering Well But Public Debt a Challenge

Recovery under way, tested by recent turmoil in Europe

Challenge is to restore sound public finances while protecting growth

Regulatory and supervisory reforms to reinforce financial system

The IMF projects the French economy will grow by 1.4 percent in 2010 and 1.6 percent in 2011. While the recovery would be somewhat faster than in the euro area as a whole (see Chart 1), persistently high unemployment and imminent fiscal consolidation in France and its main trading partners will weigh on demand, despite some relief from the recent depreciation of the euro.

Early rebound

France weathered the “great recession” better than most of its peers and was among the first countries to see a rebound. Benefiting from its fairly resilient financial sector, large social safety nets, timely and decisive government intervention, and with a comparatively less open economy, France had a less severe recession than the euro area as a whole and exited the recession in the second quarter of 2009.

Policies are now shifting from managing the crisis to strengthening the foundations of the economy. Following through on the authorities’ commitment to fiscal consolidation, further strengthening financial stability, and implementing growth-oriented structural reforms should lead to a stronger and sustainable recovery, IMF economists say.

Restoring fiscal sustainability

The financial crisis and economic downturn have taken a significant toll on public finances. While the fiscal stimulus in 2009-10 has been appropriate and helped cushion the downturn, the impact of the recession on the fiscal balance has worsened the already challenging debt situation associated with mounting aging-related spending pressures. The general government deficit rose significantly to 7 percent of GDP and the general government gross debt reached about 78 percent of GDP in 2009 (see Chart 2).

Against the backdrop of the sharply increased public debt and the turbulence in European financial markets, a well-designed fiscal consolidation plan is needed to place public finances on a sustainable path. France must now focus on achieving its objective under the Stability and Growth Pact of reducing the overall fiscal deficit to 3 percent of GDP by 2013, which is crucial to anchor expectations and avoid an unsustainable debt dynamics. Keenly aware of this, the authorities have recently announced a raft of fiscal consolidation measures. These measures, once legislated and implemented...