‘Gradual recovery’ under way in France but more reform needed, says IMF

The IMF said “sizeable efforts to reduce the government deficit over the past three years and structural impediments, including a loss of external competitiveness, have created a drag on growth”.

According to the IMF there are signs that a “gradual recovery is taking hold”, with the economy projected to grow by 0.7% in 2014 and 1.4% in 2015, but “the recovery faces a difficult take-off” and the pace of recovery also “hinges on that of the euro area”.

However, IMF executive director for France Hervé de Villeroché said the organisation expected to see a recovery of France’s economic climate in 2014-2015 “thanks to increased business and household confidence, as well as the implementation of structural reforms”, notably as a result of the government’s ‘Responsibility and Solidarity Pact’ (RSP), launched earlier this year.

De Villeroché said (66-page / 1.90 MB PDF): “As a consequence, 2014-2015 should see a pick-up in corporate investments and in consumption. France should also benefit from the ongoing recovery in the Eurozone and in advanced economies, which would be materialised by an increase in exports.”

According to the IMF, the RSP also includes a ‘fiscal side’ “that will imply business taxes to be streamlined and reduced”. The country’s ‘corporate social solidarity contribution’, which is based on turnover and not on income, will be reduced starting in 2015 and phased out by 2017, the IMF said. “The exceptional corporate income tax payment for large corporations will be phased out in 2016 and the standard rate of corporate income tax will decrease starting in 2017, bringing it down to 28% by 2020.”

The IMF said: “Despite substantial adjustment, mostly on the tax side, the government deficit still stood at 4.2% of gross domestic product (GDP) in 2013 and debt rose to 92%. Efforts to reduce the deficit need to continue, albeit at a more moderate pace, so as to balance the need to restore fiscal space against the risk of undermining the recovery.”

Credit conditions in France have remained “relatively stable”, even as banks adjusted to tighter market and regulatory conditions with “capital and liquidity positions strengthened significantly”,” the IMF said. “These efforts increase the resilience of banks and thus better shield the economy and public finances from financial instability.”

However, the IMF said the French financial system “still needs to adjust further to new international prudential norms, and this will require additional changes in the way banks raise funds, notably by lessening reliance on wholesale funding markets”. “Throughout this process it will be important to ensure that the financing of enterprises is not disrupted.”

An assistant director in the IMF’s European Department and head of the mission that conducted the assessment of France, Edward Gardner, said: “The long-standing tendency for public spending to outrun GDP has resulted in persistent fiscal deficits, even in good times, which have eroded the ability of the government to counter effectively possible future shocks.”

Gardner said: “The authorities’ plan to close the deficit by reducing expenditure is therefore not only appropriate but fundamental to restore sound public finances.”