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International Monetary FundFebruary 2, 2012

France

Presented byPresented by

Joong Shik KangResearch Department

Diagnostics

• “Moderate” or “large” external deficits

• “Moderate” or “large” public and private debt

G-20 Indicative Guidelines

• Current account balance has deteriorated since the late 1990s, reflecting a worsening trade balance.

• Public debt was above SGP limits prior to the crisis and has deteriorated

• Moderate or large public and private debt

Evolution of Key Imbalances since Late 1990s

• Public debt was above SGP limits prior to the crisis and has deteriorated substantially following the crisis.

• Private debt has also increased over the past decade.

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88

Current Account Balance Components(percent of GDP)

Private and Public Saving – Investment Balances(percent of GDP)

External Imbalances

Current account balance has deteriorated gradually, led by a worsening trade balance, reflecting a combination of higher investment and lower saving

0

2

4

6

8

(S-I)p (S-I)g CAB

0

2

4

6

8

Goods Services

Income Transfers

Current account Goods and services

-8

-6

-4

-2

96 98 00 02 04 06 08 10

-6

-4

-2

96 98 00 02 04 06 08 10

Source: IMF, World Economic Outlook. 3Source: IMF, World Economic Outlook and staff estimates.

2011 2011

6

Domestic Demand Growth(annual percent change)

Root Causes of External Imbalances

40

Real Export Growth, 2001-05 to 2006-11 1/(percent)

The current account has deteriorated largely due to strong domestic demand (early 2000s) and a worsening competitiveness of French exports (since mid-2000s)

2

3

4

5

6

Germany

France

15

20

25

30

35

-1

0

1

01 02 03 04 05

Source: IMF staff estimates.

0

5

10

ITA FRA ESP GBR Euro area

USA GER

Source: IMF staff estimates.1/ Percentage change of average exports volumes between two periods. 4

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3

4 5130

Real Effective Exchange Rate(cpi based index; 1999=100)

Wage Growth minus TFP Growth(percent)

Root Causes of External Imbalances

Competitiveness has been worsening, mainly due to a large gap between wage and productivity growth

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1990-99

2000-05

2006-09

100

110

120

130

Germany Italy Spain

U.K. France U.S.

0.0

0.5

1.0

France Germany Euro area 1/

70

80

90

99 00 01 02 03 04 05 06 07 08 09 10 11

Source: IMF, Global Data Source. 5

Sources: The Conference Board Total Economy Database, January 2011, http://www.conferenceboard .org/data/economy database/; and OECD.1/ OECD countries excluding Germany and France.

6

General Government Accounts(percent of GDP)

Overruns in Real Spending Growth(percent)

Root Causes of Internal Imbalances

Deterioration of public finances reflects fiscal slippages by local governments and social security administration, weakness in fiscal institutions, and crisis-related costs

0

1

2

3

4

5

6

Central government

Social security

Local governments

40

50

60

70

80

90

100

4

5

6

7

8

9Gross public debt (RHS)

Fiscal deficit

-3

-2

-1

0

SP2003 for 2005-2007

SP2004 for 2006-2008

SP2005 for 2007-20090

10

20

30

40

0

1

2

3

99 00 01 02 03 04 05 06 07 08 09 10 11

Source: IMF, Global Data Source. 6

Source: Martin, Tytell, and Yakadina, 2011, "France: Lessons from Past Fiscal Consolidation Plans," IMF WP/11/89.

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How to Address Imbalances?

• Product market to promote innovation and create favorable business conditions

Long-standing structural reforms to boost competitiveness and growth

Product market to promote innovation and create favorable business conditions

• Labor market to increase labor participation and re-absorb unemployment

• Labor and business income taxation to improve incentives for employment and growth

Growth-friendly fiscal consolidation

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• Additional consolidation efforts needed to achieve the targets for 2013-14

• Fiscal rule based on independent macro forecasts to entrench fiscal credibility

• Continued pension and healthcare reforms to ensure long-term sustainability