The report concludes that a critical challenge for the French financial system, and its ability to provide long-term financing to the domestic economy, comes from the need to adapt to international regulatory changes.
The growth outlook is clouded by a stalling recovery in Europe and a competitiveness gap vis-à-vis partners. Assuming a rapid resolution of the euro area crisis, the authorities project growth to rebound to 0.8 per cent in 2013. The competitiveness shortfall is reflected in loss of export market share and low profit margins. Despite high unemployment and the open output gap, core inflation is declining only very slowly, owing to wage inertia.
The authorities are embarked on a path of rapid fiscal consolidation, reflecting euro area commitments and the need to solidify market confidence. They target a reduction of the deficit from 4½ per cent of GDP in 2012 to 3 per cent in 2013, with a view to reaching a balanced position by 2017. Based on a more conservative growth outlook, IMF projects a deficit of 3½ per cent of GDP in 2013. A more measured pace of fiscal consolidation would have been preferable on cyclical grounds, but market and euro area imperatives have reduced fiscal space. While planned adjustment over the medium term is about evenly divided between revenue and expenditure measures, IMF considers that the already high tax ratio (relative to partner countries) calls for rebalancing towards more expenditure containment.
Impediments in the functioning of the labour and product markets are at the core of the competitiveness gap that has built up over time. The planned reduction of labour costs (through a corporate income tax credit) will improve competitiveness, if supported by wage moderation. But the key to improved outcomes in terms of growth and employment lies in reforming the labour market so as to increase the capacity of enterprise to invest, adapt and create jobs. Discussions under way between social partners create a unique opportunity to achieve meaningful reforms in this area.
Liberalisation in the services sector would enhance the benefits of labour market reform, but may be difficult to pursue in tandem. Financial stability concerns, which arose in connection with euro area tensions and dollar liquidity problems in 2011, have abated considerably. Since 2011, French banks moved swiftly to strengthen their solvency ratios and funding structures, largely through external deleveraging. However, banks remain heavily reliant on wholesale funding, which could be a source of vulnerability in the event of another severe liquidity or euro area confidence shock.
Full report
© International Monetary Fund
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article