Written by Hilary Barnes
It’s worth to frighten for, that the markets in the IMF’s latest report on France, which is not to say that everyone can sleep easy from now on. There are risks ahead that could prove to be troublesome for France’s progress towards return to growth and a better budget balance, but there’s no reason to assume; that at this stage, the apple cart will be upset.
The IMF predicts that France’s GDP will shrink by 0.2% in 2013 and increase by 0.8% in 2014; which is just slightly below to optimistic projection of the French Government’s 0.1 and 1.2%. It expects the fiscal deficit to reach 3.9% of GDP this year and 3.5% in 2014, landing at –1.0% in 2017 in due course, the next Presidential and Parliamentary election year.
But the structural deficit (deficit excluding interest on debt), which is the measure the government has now chosen by which to assess progress on budget improvement, is expected to fall below 1.0% in 2014 and to reach 0.0% in 2017.
The projections for the budget deficit this year and next are close to government expectations, but many French economic commentators think that the 2013 deficit will reach at least 4.0% and probably more, which will place pressure on the government to toughen up the austerity programme, thus endangering the growth outlook in 2014 and subsequently.
In an unfavourable environment, this slippage could lead to an increase in the rates of interest at which France would be able to continue to finance its budget deficit through bond issues, a scenario which the IMF includes among the risks to which France is exposed.
It notes, however, that market speculation about the risks to fiscal sustainability appear to have diminished.
It regrets, however, that the present government has put all the emphasis in trying to reduce the budget deficit on increasing revenue at the expense of limiting government expenditure, but it accepts the government’s assurances that in 2014 the emphasis will change.
So far not much evidence of this change has been visible, but perhaps it will show up as the 2014 budget is finalised in autumn.
The IMF approves of the reform measures so far undertaken, including a reduction in the labour tax wedge (corporate tax rebates based for 2014-16), labour market reform that gives employers greater flexibility to reduce labour demand in periods of slack while maintaining employer job security) and planned regulatory simplifications.
But it says “the reform momentum needs to be powered up” by deepening labour market reforms (not much sign of that), opening product markets to greater competition (not much sign of that either) as an important lever of productivity and growth and employment creation, and by a reform of the retirement pension system (major business of the autumn session of the parliament).
The risks the IMF regards as possible threats sparing anything but a precarious growth in Europe, a possible resurgence is possible in this stressful financial market, notably in relation to fiscal policy choices and a stalling in domestic structural reforms. The government cannot say it has not been warned.
A failure of growth to recover would would make it more difficult to reverse the debt dynamics, the IMF says. But financial stability risks have abated as the banks have completed their deleveraging objectives and strengthened capital and liquidity buffers, although low bank profitability remains a risk.