France: Good Progress But Credibility Needs To Be Cemented

Recovery continues amid an unsettled external environment

Strengthening the recovery and reducing unemployment are key priorities

Further fiscal consolidation and public debt reduction needed

The French economy started to expand in mid-2009 and its robust growth in early 2011 was a pleasant surprise, thanks to strong consumption and inventory-building. Unemployment remains high, but is coming down.

The IMF projects that the French economy will grow about 2 percent over the next two years, even as the country undertakes consolidation policies to reduce its deficit and public debt. Private consumption should remain the engine of growth and will be aided, as it was in the first quarter, by recovering investment spending.

But the country does face risks. Spillover from the sovereign debt crisis in some euro area countries such as Greece is a threat, as is uncertainty about energy and commodity prices.

“The Greek situation has increased markets’ attention to fiscal debt and deficits in all countries. It just further underlines the importance for France to continue on the fiscal consolidation path that it is already embarked on and to ensure that market credibility is maintained,” said Anne-Marie Gulde-Wolf, who heads the IMF team that conducted the annual review of the French economy.

Reforms to encourage growth

Although the near term is reasonably encouraging, over the medium term, France, like all other advanced European countries, has a problem with potential growth.

Its population is not aging as fast as in many other advanced economies, but France faces a number of structural issues with which it must deal, such as declining export market shares and high built-in unemployment, especially among young and unskilled workers. Furthermore, to protect macroeconomic stability, France needs to achieve taxing and spending levels that can be sustained over the long run and make its financial system more resilient to new crises.

Achieving fiscal sustainability

Costs incurred from the global recession—both revenue losses and stimulus spending as well as financial sector support—coupled with aging-related spending pressures have taken a heavy toll on public finances. The crisis brought France’s public debt to above 80 percent of gross domestic product (GDP), and debt servicing costs to about 2½ percent of GDP in 2010 (see Chart 1). While the fiscal stimulus during the crisis was appropriate, France needs a credible consolidation to...