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 per cent 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.

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 per cent of gross domestic product (GDP), and debt servicing costs to about 2½ per cent of GDP in 2010. While the fiscal stimulus during the crisis was appropriate, France needs a credible consolidation to ensure fiscal sustainability and safeguard its AAA-rated borrowing status.

Making the financial system more resilient

The French banking sector has come through the financial crisis fairly well, and the financial sector has returned to profitability. Stress tests attest to the overall ability of the system to handle new shocks, such as those that could emerge from exposures to European crisis countries.

“The French banking system is robust and there is no danger that the Greek exposure would cause major problems. However, if the Greek situation were to cause further problems in other European countries, this could be more of an issue because, of course, France is very closely integrated with the rest of Europe”, Gulde-Wolf said.

France has also reformed its supervisory arrangement in response to the need to enhance systemic—as opposed to institution by institution—supervision. For example, the unification of banking and insurance supervision, the addition of a consumer protection mandate for the Autorité de Contrôle Prudentiel (ACP), and the creation of a national systemic risk board are clearly welcome steps. The French authorities have also requested a Financial Stability Assessment Programme (FSAP) which should start this year.

It is also important that French banks continue to increase their capital, following the plans that they have already agreed upon to meet new international criteria by 2013-14. This will increase their ability to withstand shocks and, given their exposure to the rest of Europe, will make French banks more stable and more credible.

Press release