Basic Statistics of France
A moderate recovery is underway, but the recession will leave lasting traces. France is in an intermediate position amongst OECD countries in terms of the impact of the crisis. Various factors, including an appropriate macroeconomic policy response, enabled the economy to withstand the shock. Yet the financial and global nature of the recession would suggest that the recovery is likely to be moderate, with GDP growth rebounding gradually to reach 2% in 2012. This pace will doubtless be insufficient to bring joblessness down quickly. Export performance improved in 2010, and private investment should take over as the prime engine of growth. Although there is a housing shortage in some strained areas, the property market would probably be vulnerable if rates were to climb back up. Against the backdrop of bond-market turmoil in the euro area, the highest priorities are fiscal consolidation, raising employment rates and spurring productive supply.
Assessment and recommendations
Relatively prudent lending practices, euro area monetary policy, domestic support measures and the size of automatic stabilisers, as well as the structure of output, substantially cushioned the impact of the global financial crisis on the French economy, with private consumption in particular holding up well. The policy of low interest rates was reflected in accommodative financial conditions throughout the economy, with France remaining largely unscathed by mounting risk aversion in some foreign sovereign debt markets. In many respects, France finds itself in an intermediate position amongst OECD countries in terms of the impact of the crisis. Buoyed by exceptionally favourable lending terms and conditions, the real estate market has turned around, as in many other countries, with prices rebounding to their record-high levels of mid-2008. The market would probably be vulnerable if rates were to go back up, but the overall situation is marked by a shortage of available housing in certain parts of the country, and there is a risk that a prolonged period of easy finance could result in a price bubble. While exports were dynamic in 2010, France’s foreign-trade performance has been disappointing over the long term, and the current-account deficit has been flat at roughly 2% of GDP.
Securing a lasting recovery
The Great Recession will leave lasting scars on public finances and on employment. A modest recovery is underway and should allow only a slow retreat in unemployment. Priorities will be to ensure that the public finances do not threaten macroeconomic stability, to improve regulation of the banking system, and to pursue structural reforms that stimulate employment and the productive potential of the economy. Banking supervision seems relatively effective in France and was significantly improved in 2010. However, it is still difficult to assess the real soundness of the financial system. The growth in banking concentration calls for the urgent introduction of a mechanism for monitoring systemic risk. This could lead to stricter capital adequacy requirements in light of the degree of systemic risk posed by each institution, and the development of a mechanism for dealing with failed banks. In the case of a sustained real estate price boom, the authorities should not hesitate to take macro-prudential measures to limit bank lending to households. Turning to the all-important labour market France still has a structural jobs deficit concentrated on younger and older workers. For a decade now, numerous measures have been taken to enhance employment opportunities for older workers, and the 2010 pension reform will help in this regard. Moreover, elimination of the taxe professionnelle, expanded powers for the competition authority, the research tax credit, greater autonomy for universities, future spending on higher education, training and research – all these recent measures speak to the determination of the authorities to boost the supply potential of the economy. In both areas – the labour market and the supply of output – there will have to be a protracted effort in order to overcome the principal weaknesses of the French economy.
Bringing French public debt down
France has a track record of persistent general government deficits, partly reflecting pro-cyclical fiscal policies in upswings. This has resulted in a quadrupling of its public debt-to-GDP ratio since the 1970s to above 80% of GDP. Reducing public debt is crucial because a high level of public debt may hamper long-term growth and may have a direct impact on fiscal sustainability if long-term interest rates rise. Bringing back public debt to 60% of GDP even by 2030 would require a fiscal effort of 4 to 5 percentage points of GDP (under the assumption of unchanged long-term rates), implying permanent primary general government surpluses, which is very ambitious in view of French fiscal history since 1970. The government’s consolidation programme, which is aimed at reducing the general government deficit to 3% of GDP by 2013, represents around two-thirds of this effort. This chapter analyses how fiscal governance could be improved by the creation of a structural deficit rule and looks at ways the public deficit could be lowered. With France already having a very large public sector, most of the effort should be borne by holding down spending. Better control of the public wage bill, increasing public-sector efficiency and tackling agerelated costs are the obvious candidates to contain expenditure. On the revenue side, there is significant potential for cutting tax expenditures. Furthermore, eliminating distortions in the tax base would encourage economic growth.
Making the housing market work better
Housing plays a key role in the economy, because of its weight in household expenditures and assets, its importance for social well-being, and its impact on educational outcomes and employment as well as on the business cycle. Over the past half century, the bulk of the population has benefited significantly from improved housing conditions. Yet perhaps 5% of families are still poorly-housed, and inequalities in access to housing have widened since the mid-1990s, as soaring real estate prices have produced strong distributional effects. Although the severity of the economic crisis seemed to portend a sharp downward correction, the market has in fact turned around and recovered vigorously in France as in many OECD countries, supported by exceptional financing conditions and policies to stimulate demand. While the risk that prices will fall is non negligible, particularly if credit conditions tighten, the situation in France seems to reflect a shortage of housing supply, concentrated in certain "strained" geographic areas. The key role that housing plays in ensuring the social inclusion of individuals and the many imperfections inherent in the housing market justify government intervention. A crucial question is whether the policies being implemented are helping to correct these imperfections efficiently or whether, on the contrary, they are amplifying them, with possible negative spillovers on employment, economic growth or equity. The general principles underlying government housing policies should embrace three aspects: income-tested assistance to individuals, the most effective instrument because it allows for better targeting; direct support for housing supply in areas of excess demand, especially through the social sector, which should focus on disadvantaged households; and the removal of obstacles that work against market mechanisms, so as to make supply more responsive and the market more fluid and transparent, and to limit the many distortions induced by regulation, taxation and subsidies.
France's environmental policies
The authorities have a very ambitious environmental-policy agenda, aimed chiefly at cutting greenhouse gas (GHG) emissions but also at dealing with local air and water pollution, waste management and the conservation of biodiversity. The laws that followed the Grenelle de l’environnement encompass policy measures in energy generation, manufacturing, transport, waste management, construction and agriculture to encourage a transition towards a low-carbon economy. The government is committed to an ambitious GHG reduction objective of 75% to be achieved by 2050. This chapter evaluates its policies in terms of cost effectiveness, with a special emphasis on: how to impose a unique carbon price in the aftermath of the rejection of the carbon tax by the Constitutional Council; the challenges relating to renewable and nuclear electricity generation; the ways to reduce carbon intensity in the residential and transport sectors; how to improve waste management; and whether external costs related to the use of fertilisers and pesticides are properly accounted for in water management. Whereas considerable progress has been made to "green" the economy, an important challenge that remains is to internalise global and local externalities in all sectors of the economy so as to increase the cost-effectiveness of environmental policies.
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