IMF Urges France To Continue Cautious Approach To Stimulus

by Ulrika Lomas, Tax-News.com, Brussels

05 August 2009

On July 29, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with France.

The global financial crisis and the contraction of world trade have pulled the French economy into a severe recession and put its financial sector under strain, according to the IMF. Structural features combined with early policy action have helped soften the downturn, which is somewhat less pronounced than in the euro area as a whole. Nonetheless, unemployment has risen steeply since mid-2008, while consumer price inflation has come down rapidly. With the fiscal stance easing in 2008, the budget deficit exceeded the Maastricht ceiling. French banks faced the need to write down toxic assets, and government recapitalization and liquidity measures were required to support the sector. While significant, financial sector losses remained below those in peer countries.

The authorities responded to the deepening of the crisis in 2008 by adopting fiscal and financial sector measures. In response to the crisis automatic stabilizers were allowed to operate fully, with further support provided by a discretionary fiscal stimulus package (above 1.5% of GDP for 2009-10). The fiscal measures are mostly front-loaded and relatively well diversified, with an emphasis on temporary investment expenditures and various tax breaks, commends the IMF. The authorities also undertook a number of measures to recapitalize banks and support liquidity. Those measures have helped to stabilize the financial system says the IMF, and thus far no French bank has come under majority state ownership. France has been playing an active role in promoting international regulatory and supervisory reforms in support of increased cross border cooperation in financial stability, notes the IMF.

Important structural reform measures have been taken, or are under review, says the IMF. Progress includes the establishment of a single Competition Authority with enlarged powers, the creation of a unified job placement agency, and the partial liberalization of retail markets. Further action in the areas of pension reform, job creation, and on improving market efficiency and productivity are under debate.

The near-term outlook is challenging with real GDP projected to drop by 3% in 2009, followed by a gradual recovery in 2010. The IMF notes that the risks to the outlook are mostly tilted to the downside in view of the sensitivity of the French economy to a worse-than-foreseen contraction in the European Union and underlying tail risks, in particular in the financial sector. The steep increase in unemployment could further shake confidence and weaken private consumption, warns the IMF. A worsening of the financial crisis would hurt banks’ balance sheets and could further depress credit growth, the IMF warns. At the same time, lower trade openness and higher social protection are expected by the IMF to continue to shelter the French economy relative to its peers.

In its recommendations, the IMF underlined that the main challenge to fiscal policy continues to be providing short-term stimulus without derailing medium-term fiscal consolidation objectives. A number of directors considered that some modest additional fiscal action might be needed if downside risks materialize, but should be focused on temporary and investment-based measures given France’s limited fiscal space. A number of other directors, however, saw no scope for additional fiscal support, in light of the sizable stimulus already in train and the pressing consolidation needs.

The IMF stressed that safeguarding medium-term fiscal sustainability and avoiding unsustainable debt dynamics is a key priority for the coming years, and welcomed the authorities’ determination in this regard. Accoridng to the IMF, important steps already taken in this direction are the adoption of a multi-year budgeting framework, zero-growth expenditure at the central government level, and the ongoing reduction in public sector employment. The IMF recommended that the authorities build on these measures by embarking on a resolute medium term consolidation effort. The strategy should be underpinned by realistic growth assumptions, the articulation of specific expenditure savings at all levels of government, and the streamlining of tax expenditures, the IMF concluded.

Recommended