Europaudvalget 2017
KOM (2017) 0090
Offentligt
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EUROPEAN
COMMISSION
Brussels, 22.2.2017
SWD(2017) 75 final
COMMISSION STAFF WORKING DOCUMENT
Country Report France 2017
Including an In-Depth Review on the prevention and correction of macroeconomic
imbalances
Accompanying the document
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN
PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE
EUROGROUP
2017 European Semester: Assessment of progress on structural reforms,
prevention and correction of macroeconomic imbalances, and results of in-depth reviews
under Regulation (EU) No 1176/2011
{COM(2017) 90 final}
{SWD(2017) 67 final to SWD(2017) 93 final}
EN
EN
kom (2017) 0090 - Ingen titel
CONTENTS
Executive summary
1.
2.
3.
4.
Economic situation and outlook
Progress with country-specific recommendations
Summary of the main findings from the MIP in-depth review
Reform priorities
4.1.
4.2.
4.3.
4.4.
4.5.
Public finances and taxation
Financial sector
Labour market, education and social policies
Competitiveness
Sectoral policies
1
4
10
13
21
21
29
32
39
48
A.
B.
C.
Overview Table
MIP Scoreboard
Standard Tables
54
61
62
References
67
LIST OF TABLES
1.1.
2.1.
3.1.
4.2.1.
4.4.1.
Key economic, financial and social indicators – France
Summary Table on 2016 CSR assessment
MIP Assessment Matrix (*) – France 2017
Financial soundness indicators, all banks in France
Labour productivity growth (per person employed) in France and in the rest of the euro
area
B.1.
C.1.
C.2.
C.3.
C.4.
C.5.
The MIP scoreboard for France
Financial market indicators
Labour market and social indicators
Labour market indicators (cont.)
Product market performance and policy indicators
Green growth
42
61
62
63
64
65
66
9
11
19
29
LIST OF GRAPHS
1.1.
Contributions to GDP growth (2010-2018)
4
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1.2.
1.3.
1.4.
1.5.
1.6.
3.1.
3.2.
4.1.1.
4.1.2.
4.1.3.
4.1.4.
4.1.5.
4.1.6.
4.2.1.
4.3.1.
4.4.1.
4.4.2.
4.4.3.
4.4.4.
4.4.5.
4.4.6.
4.4.7.
Potential GDP growth breakdown in France
Import penetration in selected EU countries
Trade in services – France
Net lending/borrowing by institutional sectors – France
Private debt in France and in the euro area
Export market shares in value and in volume – France and euro area
Real compensation per employee and productivity in France
Difference in debt dynamics between France and the euro area
Public debt projections of French public debt under different scenarios
Changes in the composition of public expenditure
Healthcare expenditure as a share of GDP in selected countries (2005-2015)
Composition of total taxes on companies, 2015
Taxes on consumption as percentage of total taxation in 2014
Funding of non-financial corporations
Unemployment rate in France, 2006-2015
Export market share breakdown for France – Goods
French export performance – Goods
Exports of selected sectors (in value) – France
Share of export values per 5 categories of quality rank – France (% of total exports)
Exports market shares in value and in volume – France
Share of services in total exports in selected EU countries
Real unit labour costs in selected EA countries (deflated by GDP deflator) – whole
economy
5
5
6
6
7
13
14
21
22
24
24
26
27
30
32
39
39
40
40
41
41
42
42
43
44
4.4.8.
4.4.9.
Breakdown of real unit labour costs in France – whole economy
Sectoral breakdown of unit labour costs (average annual growth rate 2008-2015)
4.4.10. Investment composition (% of value added) – whole economy
4.5.1.
Performance of France's innovation system - distance to EU innovation leaders and to EU
average
4.5.2.
4.5.3.
4.5.4.
Efficiency of public funding of private R&D
Competition per service sector and country
Regulatory restrictions, France and EU
48
49
50
50
LIST OF BOXES
2.1.
3.1.
4.1.1.
4.3.1.
4.4.1.
4.5.1.
Contribution of the EU budget to structural change
Euro area spillovers
Effects of a tax shift from taxes on production factors to indirect taxes
Selected highlights: recent reforms to promote flexicurity in France
Investment challenges and reforms in France
Indebtedness of the State-owned network industries and implications for investment
12
17
28
38
46
53
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EXECUTIVE SUMMARY
This report assesses France’s economy in the light
of the European Commission’s Annual Growth
Survey published on 16 November 2016. In the
survey the Commission calls on EU Member
States to redouble their efforts on the three
elements of the virtuous triangle of economic
policy — boosting investment, pursuing structural
reforms and ensuring responsible fiscal policies. In
so doing, Member States should focus on
improving social fairness in order to deliver more
inclusive growth. At the same time, the
Commission published the Alert Mechanism
Report (AMR) that initiated the sixth round of the
macroeconomic imbalance procedure. The in-
depth review, which the 2017 AMR concluded
should be undertaken for the French economy, is
presented in this report.
Economic growth is forecast to accelerate
moderately.
GDP growth declined slightly to
1.2% in 2016 from 1.3% in 2015, despite the
acceleration in domestic demand, as net exports
represented a drag on growth of almost 1 pp. of
GDP growth. The Commission 2017 winter
forecast projects French GDP to grow by 1.4 % in
2017 and 1.7 % in 2018. The recovery in exports is
expected to rebalance growth away from private
consumption and help sustain the recovery,
although net exports are forecast to continue to be
a drag on growth. Inflation is expected to moderate
gradually, as the effects of past oil price increases
fade. In the long term, growth is expected to
remain moderate, as, in line with an EU wide
trend, France’s potential growth has been eroded
since the 2008 financial crisis, to 0.9 % in 2015.
Export performance remains subdued.
Export
market shares have stabilised since 2012 but
exports barely grew in 2016. The trade deficit
deteriorated in 2016 and is expected to widen
further, as imports remain more vigorous than
exports and oil prices rebound. While external
sustainability is not a concern for France in the
short term, the weak export performance weighs
on growth prospects.
Cost competitiveness is improving without
having fully regained past losses, while
substantial
improvements
in
non-cost
competitiveness are still to materialise.
The
growth of unit labour costs has slowed down
thanks to labour tax cuts and continued wage
moderation, but low productivity growth prevents
a faster recovery of France’s competitiveness. Low
levels of product market competition and slow
adoption of technology hamper productivity
growth. Incentives for employers to hire on open-
ended contracts have been introduced. In addition,
derogations through firm-level agreements from
branch-wide and general legal provisions are
becoming more systematic. However, the
minimum wage indexation mechanism has not
been revised and the labour market remains
segmented holding back the improvement of the
labour force's skills. Finally, the tax burden for
companies is high compared to other EU countries.
France's public indebtedness is high.
The deficit
is expected to decline below the threshold value of
3 % of GDP in 2017, but the pace of fiscal
adjustment is slow as the adjustment of
government spending proves difficult. This raises
concerns about the durability of the deficit
correction. The still comparatively high
deficit - coupled
with
the
low
inflation
environment and low growth - indicates that debt,
expected at 96.4 % of GDP in 2016, continues to
increase. More progress has been made on fiscal
structural reforms: the sustainability of the pension
system has been improved, territorial reform is
allowing local government to make efficiency
gains and setting-up the High Council of Public
Finances has strengthened fiscal governance.
Unemployment is falling from the peak reached
in 2015, while long-term unemployment
continues to rise in contrast with the EU trend.
After
increasing
steadily
since
2008,
unemployment started to fall, from 10.4 % in 2015
to 10.0 % in 2016, and is forecast to fall further in
the coming years. Yet, unemployment for young
people and low-qualified remains high and, as a
percentage of total unemployment, long-term
unemployment reached 44.2 % in the third quarter
of 2016, contrary to the decreasing trend in the
EU.
Overall, France has made some progress in
addressing
the
2016
country-specific
recommendations.
Substantial progress has been
made in ensuring that labour cost reductions are
sustained and in reforming the labour law. The
2016 Labour Act paves the way for a
comprehensive review of the Labour Code and
introduced measures aimed at improving firms’
capacity to adjust. However, no progress has been
1
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Executive summary
made on reforming the unemployment benefit
system. Some progress has been made in
improving the system of vocational education and
training. Also, some progress has been made on
removing barriers to activity in the services sector
and in simplifying administrative, accounting and
fiscal rules for companies. By contrast, limited
progress has been made in reducing taxes on
production and the corporate income tax,
simplifying innovation policy schemes and
boosting the savings identified by the spending
reviews. No progress has been made in alleviating
the effects on firms of size-related legal thresholds.
Although the deficit is projected to decline below
the 3 % Treaty threshold, the limited progress
made in taking the required structural budgetary
measures means that there are no fiscal buffers
against unforeseen circumstances.
Regarding progress in reaching national targets
under the Europe 2020 Strategy, France is
performing well in decreasing greenhouse gas
emissions, improving energy efficiency and
reducing early school leaving. At the same time,
more action is needed to increase the employment
rate, R&D intensity, use of renewable energy, and
to reduce poverty.
The main findings of the in-depth review
contained in this report, and the related policy
challenges, are as follows:
French exports continue to suffer from weak
competitiveness.
The increased specialisation
of goods exports on a few sectors makes
France’s export performance more vulnerable
to negative developments in these sectors.
Moreover, the quality of goods exports has
declined slightly in recent years. Export market
shares in services have been more resilient than
those in goods since 2008.
Cost competitiveness has improved in recent
years.
Since 2013, unit labour cost growth has
been lower in France than in the rest of the
euro area, in particular thanks to measures
taken to reduce the labour tax wedge, but
accumulated past losses have not been made up
for yet. Wage moderation continues, but low
productivity growth is preventing cost
competitiveness from recovering faster.
France performs well in terms of investment
levels.
Productive investment in machinery and
equipment has started to pick up supported by
fiscal measures. The quality of investment is
however uneven. Investment in R&D is mainly
in sectors whose relative weight is declining,
and businesses are relatively slow to take up
digital technologies. While barriers to
investment are overall moderate, investment is
highly concentrated around a limited number of
larger firms. These investment patterns weigh
on labour productivity and competitiveness and
affect the long-term growth potential of the
whole French economy.
The design of the tax system weighs on
competitiveness.
The high tax burden on
companies may be an obstacle to investment
and firms' growth. It is combined with a
relatively low level of consumption taxes. The
tax wedge on labour is being reduced but
remains above EU average at the average
wage. In addition, the complexity of the tax
system may also be a barrier to a well-
functioning business environment.
The French business environment is middle-
ranking
in
comparison
to
major
competitors.
While the government has tried
to simplify the regulatory burden for
businesses, the latter are still faced with a high
regulatory
burden
and
fast-changing
legislation. Size-related thresholds in social and
tax legislation also continue to weigh on firms’
growth. Competition has improved in some
service sectors, but is still weak in several
sectors of major economic importance. Given
the targeted scope of already adopted reforms,
serious barriers remain in place.
High public debt coupled with low growth
could be a source of significant risks for
public finances in future.
Short term
sustainability risks remain low. In the long
term, risks are also contained, notably due to
pension indexation rules and favourable
demographic developments compared to the
rest of the EU. Nonetheless, there are
significant consolidation needs in the coming
years to bring down the public debt. The debt
burden for the private sector is stabilising albeit
2
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Executive summary
at a high level. The combination of high public
and private debt is an additional risk factor.
The
expenditure-based
consolidation
strategy has relied mainly on declining
interest rates and cuts in public investment.
The already very high revenue-to-GDP ratio
leaves little margin for further tax hikes,
suggesting that further consolidation needs to
be expenditure-based. However, it is unlikely
that the low interest rate environment will
prevail in the medium term and if productive
investment is cut the economic potential could
be harmed. In contrast, the spending reviews
have identified a number of possible efficiency
gains, most of which have not been
implemented yet.
Its large economy and close integration with
the rest of the euro area makes France a
potentially significant source of cross-border
spillovers.
Structural reforms in France can
have positive spill-over effects in other
Member States. Model simulations suggest that
product and labour market reforms or a growth-
friendly tax shift in France can yield positive
GDP effects for both France and for the rest of
the euro area. These effects should remain in
the long-term.
Other key economic issues analysed in this report
that point to particular challenges facing France’s
economy are the following:
Measures to reduce the cost of labour have
had an effect on employment.
The recent
evaluations of the
crédit d'impôt pour la
compétitivité et l'emploi
(CICE) highlighted its
positive effect on employment, although an
increase in its credit rate was not found to have
an increased impact on employment. The
Labour Act also aims to reduce labour market
rigidities. Nonetheless, the French labour
market remains segmented, while women and
people from a migrant background continue to
be affected by lower employment rates. The
unemployment benefit system continues to be
in deficit and its rules reinforce the labour
market segmentation by favouring successive
short periods of work.
Educational inequalities remain high and
the vocational education and training system
is not sufficiently adjusted to labour market
needs.
France performs well with respect to the
Europe 2020 indicators concerning education.
However, educational inequalities linked to
socioeconomic background are among the
highest in the OECD. The system of initial
vocational education and training does not lead
to a satisfactory integration of young people in
the labour market. Access to the continuous
vocational training system is uneven for
different categories of workers.
France scores better than the EU average in
relation to poverty, social exclusion and
inequality.
Social situation indicators show no
major changes. Yet, some population groups
remain more exposed to poverty, notably part-
time workers and single-parent families. For
very low income earners, access to affordable
housing remains challenging.
The French national innovation system does
not match the performance of Europe's
innovation leaders.
A high degree of
complexity remains and overall coordination is
a challenge. The discrepancy between the
amount of public support granted and France's
middling innovation performance raises
questions about the efficiency of public support
schemes.
3
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1.
ECONOMIC SITUATION AND OUTLOOK
prolongation of the over-amortisation scheme until
14 April 2017, rising profit margins and easy
financing conditions are expected to sustain robust
growth rates. Export growth is expected to
gradually normalise in 2017 and 2018, in line with
the moderate recovery projected in French export
markets. Meanwhile, imports are forecast to
moderate somewhat in 2017, in a context of
decelerating domestic demand, allowing for a
more balanced contribution of net exports to GDP
growth.
The unemployment rate has been declining
since mid-2015, supported by the labour market
measures adopted since 2013.
Employment is
forecast to continue growing at a sustained pace,
supported by the ongoing economic recovery and
by policy measures to encourage job creation by
reducing the labour tax wedge (the Tax Credit for
Competitiveness
and
Employment,
the
Responsibility and Solidarity Pact, and the Hiring
Subsidy). Moreover, the emergency plan for
employment announced in January 2016 is further
decreasing the unemployment rate by providing
training to unemployed people who subsequently
do not appear as unemployed any more.
Consequently, the unemployment rate is forecast
to decline to 9.9% in 2017 and 9.6% in 2018.
Inflation is set to moderate gradually.
Inflation
rose sharply to 1.6% in January 2017, from 0.8%
in December 2016. Overall, HICP is expected to
average 1.5% in 2017, before declining slightly to
1.3%, as the strong positive contribution from
recent oil price increases fades out and domestic
price pressures increase only gradually.
Risks to the outlook are more balanced.
Despite
continued global uncertainty, risks to the forecast
for France are less tilted to the downside than in
the autumn. The improvement of labour market
conditions could allow for a more significant drop
in the household saving rate and thus stronger
private consumption.
Potential growth
GDP growth
Economic growth is forecast to accelerate
moderately.
GDP growth declined slightly to
1.2% in 2016 from 1.3% in 2015, despite growth
reaching 0.4% in the fourth quarter. Private
consumption accelerated on the back of dynamic
household purchasing power, while investment
growth has been boosted by anticipation of the end
of the over-amortisation scheme, a fiscal incentive
for firms to invest. However, after an exceptional
performance in 2015, export growth fell to 1.0% in
2016, due to several temporary factors, while
imports remained relatively dynamic. As a result,
net exports represented a drag on growth of almost
1 pp. of GDP growth in 2016. According to the
Commission 2017 winter forecast, GDP is
projected to pick up to 1.4 % in 2017 and 1.7 % in
2018 under the usual no-policy-change assumption
(Graph 1.1).
Graph 1.1:
3
%, pps.
Contributions to GDP growth (2010-2018)
2
1
0
-1
10
11
12
13
14
15
16 (f) 17 (f) 18 (f)
Changes in inventories
Investment
Net exports
Government consumption
Private consumption
Real GDP (y-o-y%)
Source:
Commission 2017 winter forecast
The recovery in exports is expected to rebalance
growth away from private consumption and
help sustain the recovery, although net exports
are forecast to continue to be a drag on growth.
Private consumption is expected to decelerate in
line with purchasing power, as the tailwinds from
lower oil prices fade out. Also, the recovery in
investment is gaining momentum, particularly in
the construction sector. After the strong growth
observed in 2016, equipment investment growth is
set to moderate somewhat. However, the
In the long term, growth is expected to remain
moderate as potential growth has slowed since
the 2008 financial crisis.
Averaging 1.8 % from
2000 to 2008, France’s potential GDP growth
declined to 0.9 % on average from 2009 to 2015
4
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1. Economic situation and outlook
and is expected to pick up only moderately, to
1.3 % by 2018. While this decline has been
observed in all major euro area economies, France
is characterised by a stronger decline in total factor
productivity (TFP) growth, while capital
accumulation and labour force remained relatively
dynamic (
1
). France’s decline in total factor
productivity (TFP) growth, at −0.5 pp. from 2000-
2008 to 2009-2015 (Graph 1.2), is larger than that
of Germany (−0.3 pp.), Italy (−0.2 pp.) or Spain
(+0.1 pp.). As a result, potential TFP growth in
France has decoupled from Germany, although it
remained higher than in Spain and Italy.
Graph 1.2:
2.5%
2.0%
1.5%
1.0%
market rigidities weigh on total factor productivity
by hampering resource reallocation. Labour market
segmentation limits the improvement of labour
force’s skills (see Section 4.3). Moreover size-
related social and tax thresholds and slow adoption
of technology also weigh on total factor
productivity growth (see Section 4.5). Finally, the
tax structure is not growth-friendly.
Imports
Potential GDP growth breakdown in France
Imports have been relatively more dynamic
than final demand since 2008.
The increase in
import penetration reflects first and foremost
general trends in world trade as a result of
globalisation. However, import penetration has
increased relatively more in France than in other
major EU economies (Graph 1.3). This
deterioration in the French market shares in the
domestic market reflects the weak cost and non-
cost competitiveness of the French economy.
Graph 1.3:
Import penetration in selected EU countries
0.5%
Ratio of imports over final demand (in volume)
0.0%
120
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
2008=100
115
-0.5%
Total labour (hours) contribution
Capital accumulation contribution
TFP contribution
Potential GDP growth
110
105
100
95
Source:
Commission 2017 winter forecast
The decline in total factor productivity growth
contributes to the weak competitiveness and
exacerbates the challenges linked to the high
public debt.
Although wage increases have
moderated in recent years, the slowdown of labour
productivity growth, largely due to a decline in
TFP growth despite a continued increase in capital
intensity, prevents a faster recovery of cost
competitiveness (see Section 4.4). The decline in
potential GDP also makes it more difficult for
France to bring down its public debt without
greater
fiscal
consolidation
efforts
(see Section 4.1).
Structural reforms are key to addressing the
economic challenges associated with the
declining potential growth.
Labour and product
(
1
) European Commission (2016c).
90
85
08
FR
09
10
DE
11
12
IT
13
14
ES
15 16(f) 17(f) 18(f)
UK
EA-19
Source:
European Commission
France has been increasingly importing
intermediate goods, which currently represent
half of all imports of goods.
The import content
of its goods exports has also been growing over the
years (from 33 % in 1995 to 39 % in 2009). Yet,
French companies seem to be less integrated in
global value chains, certainly less so than German
companies. France's goods imports remain mostly
downstream in the production chain (i.e. near final
demand). Based on Andras 'upstreamness
indicators', 46.3 % of French goods imports are
5
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1. Economic situation and outlook
near final demand against 39.7 % of German
imports. Additionally, the ratio of domestic added
value in French exports to foreign added value in
its imports fell between 1995 and 2011 (from 51 %
to 43 %), while again increasing in Germany (from
59 % to 67 %) in the same period.
Graph 1.4:
250
the overall trade balance in services. The trend in
transport services is also negative: this sector has
been running a deficit since 2013, mainly driven
by a deteriorating balance in freight road transport
and passenger air transport.
External position
Trade in services – France
bn €
50
bn €
200
40
150
30
100
20
50
10
The trade deficit reached a trough in 2011 at
−2.6 % of GDP.
The trade balance has been
steadily improving since then and reached −1.4 %
of GDP in 2015. A significant part of this
improvement is due to lower oil prices, as the trade
balance excluding energy products has been
deteriorating again since 2013. As oil prices
rebound, the total trade deficit is forecast to
increase. According to the Commission 2017
winter forecast, the trade deficit is set to reach
−2.3 % of GDP in 2018.
Graph 1.5:
Net lending/borrowing by institutional sectors –
France
0
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Trade balance of services
Exports of services
Imports of services
0
8
6
4
2
% of GDP
Source:
Eurostat – Balance of payments
In addition, the fast–rising imports of services
are eroding the trade surplus in services.
While
still on the positive side, the trade balance in
services declined by EUR 16 billion (0.7 % of
GDP) from 2012 to 2015 to reach its lowest value
since 1999 (Graph 1.4) (
2
). This decline occurred
because, while exports of services grew fast
(see Section 4.4), imports were growing even
faster, accounting for the bulk of the change in the
trade balance developments in recent years.
Imports have been growing particularly fast in
technical, trade-related and other business services
since 2013, while the balance in tourism has
deteriorated since 2014, presumably as a
consequence of the recent terrorist attacks.
Tourism is the service sector where France has the
highest revealed comparative advantage (
3
). Thus,
developments in this sector have a large impact on
(
2
) According to national accounts statistics the trade balance
in services has even turned negative since 2014 and stood
at EUR −8.8 bn in 2015.
3
( ) Revealed comparative advantages are calculated based on a
formula developed by Balassa (1966) which indicates a
country's relative advantages or disadvantages in exports
by sector. It reflects the contribution to the trade balance of
each sector, on the scale of total trade in goods and services
in value, corrected by the overall trade balance.
0
-2
-4
-6
-8
-10
08
09
10 11 12 13 14 15 16(f) 17(f) 18(f)
General government
Households and NPISH
Non-financial corporations
Financial corporations
Financial and non-financial corporations
Total economy
Source:
Eurostat, Commission 2017 winter forecast
Net borrowing of the nation is also set to
deteriorate, to −2.4 % of GDP in 2018.
In
France, all institutional sectors except households
were net borrowers in 2015 (Graph 1.5). The net
lending of households remains insufficient to fully
finance net borrowing by the general government
and by corporations. In particular, France is the
only major EU economy in which non-financial
corporations are net borrowers, while the net
borrowing of the public sector is higher than in the
euro area as a whole. Over the forecast period, the
deterioration in the net borrowing of the total
6
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1. Economic situation and outlook
economy stems from a fall in the net lending of
households and a rise in net borrowing by
corporations.
Private indebtedness
Graph 1.6:
160
Private debt in France and in the euro area
% of GDP
Based on the measures presented in the draft
budgetary plan, the government deficit is expected
to further decrease to 2.9 % of GDP in 2017. The
structural balance is projected to improve by only
0.2 % of GDP in both 2016 and 2017, well below
the recommended efforts in March 2015 (Council
of the European Union, 2015). Moreover, at
unchanged policy the deficit is projected to
increase to 3.1 % of GDP in 2018.
The general government debt is projected to
keep rising until 2018.
The public debt-to-GDP
ratio reached 96.2 % of GDP in 2015, compared
with 92.6 % for the euro area on average. Such
difference is expected to widen further in the
coming years (see Section 4.1). Despite this trend,
sovereign yields remain very close to historical
lows driven by the expansionary monetary policy
of the ECB. These low yields have resulted in
interest expenditure decreases while preventing
negative spillovers to the financial sector and the
real economy.
Social developments
140
120
100
80
60
40
20
0
FR
2009
EA
FR
2015
EA
Households
Non financial corporations
MIP threshold
Source:
Eurostat
The level of consolidated private debt has
steadily increased since 1998 to reach 144.3 %
of GDP in 2015.
Both household debt and non-
financial corporation debt continued to grow at a
relatively rapid pace throughout the crisis and
beyond. By contrast, in the euro area, private debt
has been falling since 2009, as a number of
European economies have experienced significant
deleveraging. As a result, private debt in France
now exceeds the euro area average. While
household debt remains below that of the euro
area, the debt of French non-financial corporations
exceeded the euro area average by 7.5 pps. in
2015. Non-financial corporation debt, combined
with still low profitability, is a potential source of
concern for France, should this trend persist.
Public finances
Modest economic growth has led to a stagnation
of real household income in France.
Between
2012 and 2015, real GDP per capita grew more
slowly in France than in the EU and in the euro
area (0.43 %, against 1.16 % in the EU and 0.81 %
in the euro area). The poverty rate stabilised at
13.5 % in 2015 and the population at risk of
poverty or social exclusion reached 17.7 % of the
total population, below the level observed in the
EU and the euro area. Also, the intensity of
poverty, as calculated by national figures, has
recorded a slight increase to 20.1 % in 2014 after
having decreased from a peak of 21.2 % in 2012 to
19.8 % in 2013.
Income inequality remains relatively low in
France compared to the EU average (
4
).
It has
slightly decreased since 2011, partly reversing an
upward trend since 2007 (
5
). This decrease has
(
4
) As measured by the Gini index and by the income quintile
share ratio. The Gini index considers the shape of the
whole income distribution and takes values between 0 and
1 with higher values indicating a higher degree of income
inequality. The income quintile share ratio is the ratio of
total income received by the 20 % of the population with
the highest income to that received by the 20 % of the
population with the lowest income.
(
5
) The Gini index of disposable income went down from 30.8
in 2011 to 29.2 in 2015, while the income quintile share
The general government deficit is projected to
fall below the 3 % of GDP reference value in
2017, although its durable correction is at risk.
According to the Commission 2017 winter
forecast, the general government deficit is
expected to decrease from 3.5 % of GDP in 2015
to 3.3 % in 2016 due to slow expenditure growth
contained by low inflation and low interest rates.
7
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1. Economic situation and outlook
been due to the tax benefit system, whilst market
income inequality — that is inequality of incomes
before taxes and transfers including pensions —
has been rising since 2012 and is now somewhat
above the EU average (
6
). Over the same period,
the lower 10 % of income earners have benefitted
from slightly better income developments than the
median household — contrary to what happened
between 2000 and 2012 — and their income gap
with median earners is smaller than in many other
EU countries (
7
). The French benefit system has
also helped to reduce the risk of relative poverty,
which is close to the EU average before social
transfers and rather low after transfers (
8
). By
contrast, households' net wealth (
9
) inequality is
relatively higher than income inequality and was
among the highest in the EU (ECB, 2016).
The significant rise in youth unemployment and
long-term unemployment over the past 10
years, however, may increase the risks for the
economic performance of France stemming
from higher inequality.
The segmentation of the
labour market and inequalities in access to
education (see also Section 4.3) play an important
role in inequality outcomes and perceptions. This
raises concerns about possible risks of hysteresis
effects and further pain for low income earners.
(
6
)
(
7
)
(
8
)
(
9
)
ratio fell from 4.6 in 2011 to 4.3 in 2015. The 2015 EU
average is 31.0 and 5.2 for the Gini index and the income
quintile share ratio respectively.
The difference between the Gini coefficient before and
after taxes and transfers was 50.2 in 2015 before social
transfers and pensions were taken into account, and 29.2
after social transfers and pensions – a gap of 21. This gap
exceeds the EU average of 19.9.
The real S10 income growth was significantly lower than
the real mean income growth between 2000 and 2012, but
higher since 2012. For the latest year available, the ratio
S50/S10 is below the EU average.
The relative poverty is measured by the at-risk-of-poverty
rate, defined as the share of individuals whose equivalised
disposable income falls below 60 % of the median income.
Difference between total assets and total liabilities.
8
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1. Economic situation and outlook
Table 1.1:
Key economic, financial and social indicators – France
2004-2008 2009
1.9
-2.9
1.9
0.2
1.6
2.4
3.3
-9.1
3.5
-11.3
5.0
-9.4
2.0
-2.3
1.7
0.9
2.1
0.1
-0.4
0.3
0.8
0.6
-0.2
-0.3
-0.6
0.1
-6.6
-19.2
169.9
-5.7
-4.1
1.8
9.8
8.8
112.8
43.9
68.9
-0.4
18.1
2.8
7.5
6.4
2.1
2.2
3.0
1.1
1.8
-0.3
0.9
0.3
28.5
18.3*
10.7
.
.
.
8.4
3.2
20.4
69.7
19.0
9.3
-2.9
44.4
.
66.0
-1.5
-1.1
-0.3
0.1
0.5
0.3
-0.8
-1.2
2.6
0.1
-14.8
-21.6
181.6
-7.2
0.4
2.6
10.8
3.3
130.4
52.5
77.9
1.0
17.0
4.6
-4.9
6.3
0.1
0.1
1.8
-1.8
3.5
3.4
0.5
0.4
27.7
17.5
1.6
10.1
4.6
4.3
9.1
3.0
23.6
70.3
18.5
8.4
-7.2
43.9
.
79.0
2010
2.0
1.8
1.3
2.1
9.0
8.9
-1.4
1.0
1.8
0.3
-0.1
0.2
0.5
0.3
-0.8
-1.6
-1.4
0.1
-9.3
-23.1
190.5
-10.7
-10.1
1.3
10.4
4.6
131.9
53.7
78.2
0.9
17.8
4.2
3.6
6.3
1.1
1.7
3.1
1.8
1.0
-0.1
-1.6
-4.1
27.8
18.4
5.7
10.7
8.3
4.5
9.3
3.5
23.3
70.3
19.2
9.9
-6.8
44.1
-5.8
81.7
2011
2.1
0.5
1.0
2.1
6.9
6.3
-0.4
1.0
1.0
1.1
0.0
0.2
0.5
0.3
-1.0
-2.0
-2.4
0.1
-8.7
-22.3
182.9
-7.7
-2.5
0.7
10.0
6.4
135.3
54.8
80.5
-1.0
17.5
3.9
3.9
6.4
0.9
2.3
2.5
1.3
1.0
0.0
0.2
-0.7
28.0
20.1
0.7
10.9
5.6
4.6
9.2
3.6
22.7
70.1
19.3
9.4
-5.1
45.2
-5.0
85.2
2012
0.2
-0.2
1.6
0.2
2.5
0.7
-1.1
0.9
0.3
-0.6
0.5
0.1
0.5
0.3
-1.2
-1.4
-0.3
0.0
-12.8
-26.4
182.0
-8.9
-4.5
0.7
9.5
4.4
138.5
55.2
83.3
-1.8
16.8
3.5
-1.9
6.2
1.2
2.2
2.4
-0.1
2.3
1.1
-1.9
-3.2
28.2
20.3
2.1
13.3
3.4
4.5
9.8
3.7
24.4
70.7
19.1
8.4
-4.8
46.5
-4.2
89.5
2013
0.6
0.5
1.5
-0.8
1.9
2.1
-1.4
0.9
0.4
0.2
-0.1
0.1
0.5
0.3
-0.9
-1.1
1.1
0.1
-16.6
-26.2
176.3
-6.7
1.9
-0.5
8.7
2.2
137.8
55.7
82.1
-1.9
16.8
3.1
-2.6
6.1
0.8
1.0
1.6
0.3
1.1
0.3
3.1
1.6
28.4
19.1
1.8
13.1
6.0
4.6
10.3
4.0
24.9
71.1
18.1
8.1
-4.0
47.4
-3.4
92.3
2014
0.6
0.7
1.2
-0.3
3.3
4.7
-1.7
0.9
0.6
0.5
-0.5
0.2
0.4
0.3
-1.1
-1.1
1.1
0.1
-16.9
-30.8
192.5
-7.7
0.6
1.7
8.7
2.9
142.4
56.0
86.4
-2.5
17.1
3.2
-1.7
6.0
0.5
0.6
1.2
0.2
0.8
0.3
0.6
0.3
28.7
19.5
5.4
13.1
4.6
3.6
10.3
4.2
24.2
71.1
18.5
9.6
-4.0
47.8
-3.0
95.3
2015
1.3
1.5
1.4
1.0
6.1
6.6
-1.3
0.9
1.4
0.1
-0.3
0.2
0.4
0.3
-0.2
-0.7
2.6
0.1
-16.4
-32.3
192.8
-3.42
-1.0
-0.1
8.9
4.5
144.3
56.6
87.7
-1.9
17.7
3.4
-1.3
5.8
0.6
0.1
1.1
0.8
0.2
-0.4
-4.2
-4.5
28.9
22.1
3.1
13.8
6.8
3.5
10.4
4.3
24.7
71.3
17.7
8.6
-3.5
47.9
-2.7
96.2
2016
1.2
1.9
1.6
2.8
1.0
3.7
-1.3
1.1
2.0
0.0
-0.9
0.3
0.5
0.3
.
.
1.2
.
.
.
.
.
.
.
.
.
.
.
.
-1.9
18.1
3.5
.
.
0.8
0.3
0.9
.
0.5
-0.4
0.0
1.2
.
.
.
.
.
.
9.9
.
25.2
.
.
.
-3.3
47.6
-2.5
96.4
forecast
2017
1.4
1.2
1.2
3.1
3.1
3.1
-1.1
1.2
1.6
-0.1
-0.1
0.3
0.5
0.4
.
.
-0.9
.
.
.
.
.
.
.
.
.
.
.
.
-2.3
18.0
3.2
.
.
0.9
1.5
1.5
.
0.7
-0.2
-0.4
-1.1
.
.
.
.
.
.
9.9
.
.
.
.
.
-2.9
47.7
-2.3
96.7
2018
1.7
1.6
1.2
4.1
4.0
4.8
-0.6
1.3
2.1
0.0
-0.3
0.3
0.6
0.4
.
.
0.3
.
.
.
.
.
.
.
.
.
.
.
.
-2.4
18.1
3.1
.
.
1.2
1.3
1.9
.
1.1
-0.2
-0.7
.
.
.
.
.
.
.
9.6
.
.
.
.
.
-3.1
47.5
-2.7
97.0
Real GDP (y-o-y)
Private consumption (y-o-y)
Public consumption (y-o-y)
Gross fixed capital formation (y-o-y)
Exports of goods and services (y-o-y)
Imports of goods and services (y-o-y)
Output gap
Potential growth (y-o-y)
Contribution to GDP growth:
Domestic demand (y-o-y)
Inventories (y-o-y)
Net exports (y-o-y)
Contribution to potential GDP growth:
Total Labour (hours) (y-o-y)
Capital accumulation (y-o-y)
Total factor productivity (y-o-y)
Current account balance (% of GDP), balance of payments
Trade balance (% of GDP), balance of payments
Terms of trade of goods and services (y-o-y)
Capital account balance (% of GDP)
Net international investment position (% of GDP)
Net marketable external debt (% of GDP) (1)
Gross marketable external debt (% of GDP) (1)
Export performance vs. advanced countries (% change over 5 years)
Export market share, goods and services (y-o-y)
Net FDI flows (% of GDP)
Savings rate of households (net saving as percentage of net disposable income)
Private credit flow, consolidated (% of GDP)
Private sector debt, consolidated (% of GDP)
of which household debt, consolidated (% of GDP)
of which non-financial corporate debt, consolidated (% of GDP)
Corporations, net lending (+) or net borrowing (-) (% of GDP)
Corporations, gross operating surplus (% of GDP)
Households, net lending (+) or net borrowing (-) (% of GDP)
Deflated house price index (y-o-y)
Residential investment (% of GDP)
GDP deflator (y-o-y)
Harmonised index of consumer prices (HICP, y-o-y)
Nominal compensation per employee (y-o-y)
Labour productivity (real, person employed, y-o-y)
Unit labour costs (ULC, whole economy, y-o-y)
Real unit labour costs (y-o-y)
Real effective exchange rate (ULC, y-o-y)
Real effective exchange rate (HICP, y-o-y)
Tax rate for a single person earning the average wage (%)
Tax rate for a single person earning 50% of the average wage (%)
Total Financial sector liabilities, non-consolidated (y-o-y)
Tier 1 ratio (%) (2)
Return on equity (%) (3)
Gross non-performing debt (% of total debt instruments and total loans and
advances) (4)
Unemployment rate
Long-term unemployment rate (% of active population)
Youth unemployment rate (% of active population in the same age group)
Activity rate (15-64 year-olds)
People at risk of poverty or social exclusion (% total population)
Persons living in households with very low work intensity (% of total
population aged below 60)
General government balance (% of GDP)
Tax-to-GDP ratio (%)
Structural budget balance (% of GDP)
General government gross debt (% of GDP)
(1) Sum of portfolio debt instruments, other investment and reserve assets
(2,3) Domestic banking groups and stand-alone banks
(4) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU
foreign-controlled branches
(*) Indicates BPM5 and/or ESA95
Source:
European Commission
9
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2.
PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS
growth of size-related regulations, but their scope
has been limited overall.
The composition of the tax burden has
somewhat improved, but distortive features
remain and the potential for simplifying the tax
system remains largely untapped.
The total tax
burden on companies increased between 2010 and
2013, with policy measures such as the CICE, the
responsibility and solidarity pact and the phase-out
of the C3S started to reverse the trend in 2014.
These measures have been partly financed by an
increase in VAT rates and environmental taxation,
but the burden of taxation continues to fall less on
consumption than it does in other EU countries.
While some tax expenditures were phased out at
the beginning of the period, overall the tax system
has not been simplified, with tax expenditures
rising as a share of GDP.
Overall, France has made some (
11
) progress in
addressing
the
2016
country-specific
recommendations, which are all relevant to the
macroeconomic imbalance procedure (MIP).
Since the publication of the CSRs, few
consolidation strategy measures have been taken
on the expenditure side and tools to rein in
spending growth have not been strengthened
significantly. Progress in addressing CSR 1 has
therefore
been
limited.
The
continued
implementation of the CICE and the responsibility
and solidarity pact (RSP) and the adoption in
August 2016 of the Labour Act suggest substantial
progress with CSR 2. Progress in implementing
CSR 3 has been limited. Employment prospects
offered by the initial vocational training system are
not satisfactory, while the reform of the
unemployment benefit system is still pending.
Some progress has been made in improving the
business environment (CSR 4). Competition has
improved in some service sectors, some very
preliminary steps are being taken to rationalise the
innovation support system and the simplification
of companies administrative, fiscal and accounting
rules is ongoing. By contrast, no action has been
taken since the end of 2015 to further reform size-
related criteria in business regulations. Finally,
(
11
) Information on the level of progress and actions taken to
address the policy advice in each respective subpart of a
CSR is presented in the Overview Table in the Annex. This
overall assessment does not include an assessment of
compliance with the Stability and Growth Pact.
Progress
with
implementing
the
recommendations addressed to France in
2016 (
10
) has to be seen in a longer-term
perspective since the introduction of the
European Semester in 2011.
As regards public
finances, the general government deficit was
reduced from 4.8 % of GDP in 2012 to 3.3 % in
2016 and was 1.5 pp. higher than in the rest of the
euro area in 2016. In terms of fiscal structural
reforms the sustainability of the pension schemes
has been improved, the territorial reform has
provided a framework to realise efficiency gains at
local level and the fiscal governance has been
strengthened with the setting-up of the High
Council of Public Finances. However, less
progress has been made concerning the
identification of efficiency gains in public
spending, raising concerns about the durability of
the deficit correction.
Measures have been adopted to improve the
functioning of the labour market.
The cost of
labour has been reduced, notably thanks to some
fiscal measures (Sections 4.3 and 4.4). At the same
time, the 2013
accord national interprofessionnel
(ANI), the 2014 reform of the unemployment
benefit system, and the Labour Act of 8 August
2016 have aimed to tackle some of the major
rigidities hampering the good functioning of the
labour market, although the social partners' take-up
of the flexibility they offer is key in determining
their impact on the labour market segmentation.
Moreover, no ad-hoc increases of the minimum
wage have been adopted since 2012, although its
indexation mechanism has not been reviewed. The
implementation of the 2014 reform of the
vocational training system is ongoing.
The French authorities have taken some action
to improve the middle-ranking business
environment.
A number of service sectors have
been reformed and access to regulated professions
has been eased in some cases. Efforts to reduce red
tape for firms have been stepped up, notably
through the multi-year simplification programme
which has been in effect since 2013. The social
dialogue law of 2015 and the 2016 budget law
have attempted to soften the impact on firms’
(
10
) For the assessment of other reforms implemented in the
past, see in particular section 4.
10
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2. Progress with country-specific recommendations
progress in improving the efficiency of the tax
system as called for by CSR 5 has been limited.
The statutory corporate income tax rate is starting
to be reduced in 2017 for some SMEs, but the
turnover tax (C3S) has not been entirely phased
out and no further steps have been taken to
broaden the tax base on consumption. Apart from
government plans to introduce a withholding tax
for personal income tax, very little has been done
to streamline the tax system or to broaden the tax
Table 2.1:
Summary Table on 2016 CSR assessment
base on consumption. The scrapping of taxes
yielding little or no revenue continues to progress
at a very slow pace while tax expenditures keep
increasing in number and in value.
France
CSR 1:
Ensure a durable correction of the excessive deficit
by 2017 by taking the required structural measures and by
using all windfall gains for deficit and debt reduction.
Specify the expenditure cuts planned for the coming years
and step up efforts to increase the amount of savings
generated by the spending reviews, including on local
government spending, by the end of 2016. Reinforce
independent public policy evaluations in order to identify
efficiency gains across all sub-sectors of general
government. (MIP relevant)
CSR 2:
Ensure that the labour cost reductions are sustained
and that minimum wage developments are consistent with job
creation and competitiveness. Reform the labour law to
provide more incentives for employers to hire on open-ended
contracts. (MIP relevant)
Overall assessment of progress with 2016
CSRs: Some
Limited progress
Limited progress in reinforcing and identifying savings and
efficiency gains generated by the spending reviews and
public policy evaluations.
(1)
Substantial progress
Substantial progress in ensuring that labour cost reductions
are sustained.
Some progress in ensuring that minimum wage
developments are consistent with job creation and
competitiveness.
Substantial progress in reforming the labour law to provide
more incentives for employers to hire on open-ended
contracts.
Limited progress
Some progress in improving the links between the education
sector and the labour market.
No progress in reforming the unemployment benefit system.
CSR 3:
Improve the links between the education sector and
the labour market, in particular by reforming
apprenticeships and vocational training, with emphasis on
the low-skilled. By the end of 2016, take action to reform the
unemployment benefit system in order to bring the system
back to budgetary sustainability and to provide more
incentives to return to work. (MIP relevant)
CSR 4:
Remove barriers to activity in the services sector, in
particular in business services and regulated professions.
Take steps to simplify and improve the efficiency of
innovation policy schemes. By the end of 2016, further
reform the size-related criteria in regulations that impede
companies' growth and continue to simplify companies'
administrative, fiscal and accounting rules by pursuing the
simplification programme. (MIP relevant)
CSR 5:
Take action to reduce the taxes on production and
the corporate income statutory rate while broadening the tax
base on consumption, in particular as regards VAT. Remove
inefficient tax expenditures, remove taxes that are yielding
little or no revenue and adopt the withholding personal
income tax reform by the end of 2016. (MIP relevant)
Some progress
Some progress in easing access to and exercise of activity in
the services sectors.
Limited progress in improving the efficiency of innovation
policy schemes.
No progress in reforming the size-related criteria in
regulations that impede companies' growth.
Some progress in pursuing the simplification programme.
Limited progress
Limited progress in reducing taxes on production and the
corporate income tax while broadening the tax base on
consumption.
Some progress in modernizing the tax system, mainly
through adopting the withholding personal income tax. The
phasing out of tax expenditure and taxes yielding little or no
revenue is progressing very slowly.
(1) The overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact.
Source:
European Commission
11
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2. Progress with country-specific recommendations
Box 2.1:
Contribution of the EU budget to structural change
The total allocation of the European Structural and Investment Funds (ESI funds) in France amounts to EUR
28 billion under the current financial framework 2014-2020. This is equivalent to around 0.2 % of annual
GDP (calculated over the period 2014-2017) and to 4.7% of the expected national public investment (
1
). By
31 December 2016, an estimated EUR 6.8 billion were allocated to concrete projects. This represents around
25 % of the total allocation of ESI funds.
Financing under the European Fund for Strategic Investments (EFSI), Horizon 2020, the Connecting Europe
Facility and other directly managed EU funds is additional to the ESI funds. By end 2016, France has signed
agreements for EUR 1.9 billion for projects under the Connecting Europe Facility. The European Investment
Bank Group approved financing under EFSI amounts to EUR 4 billion as of end-2016, which is expected to
trigger nearly EUR 21 billion in total investments.
In 2015 and 2016, ESI Funds supported progress in a number of structural reforms via ex-ante
conditionalities (
2
) and targeted investment. Examples include smart specialisation strategies in the area of
research and innovation, in ultra-peripheral regions, the existence of waste management and the water sector
actions plans.
The relevant CSRs focusing on structural issues were taken into account when designing the 2014-2020
programmes. These included improving access and quality of initial and continuous education and training;
reinforcing active labour market policy for the most vulnerable; addressing early-school leaving; reducing
poverty and social exclusion; and increasing investment in research and innovation in the specialisation
domains identified in regional innovation strategies. To date, almost 199 000 young people have been
supported under measures financed under the Youth Employment Initiative (YEI); of whom nearly 52 000
are in employment, education or training after the end of the YEI support. The YEI supported in particular
the
Garantie Jeunes,
a specific intensive counselling and training scheme that targeted people who are not in
education, employment, or training (NEETS).
(
1
) National public investment is defined as the sum of gross capital formation, investment grants, and national
expenditure on agriculture and fisheries.
(
2
) Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities,
which aim at improving framework and conditions for the majority of public investments areas. For Members States
that did not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the
temporary suspension of all or part of interim payments.
12
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3.
SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-
DEPTH REVIEW
The 2017 Alert Mechanism Report (European
Commission, 2016b) called for further in-depth
analysis to monitor progress in the unwinding of
the excessive imbalances identified in the 2016
MIP cycle. The selection was motivated by the fact
that France was identified with excessive
imbalances in spring 2016 after an in-depth
analysis, so that a new in-depth review is needed to
assess how these imbalances evolve. The identified
excessive macroeconomic imbalances related to a
weak competitiveness and a high and increasing
public debt, in a context of low productivity
growth. Other vulnerabilities were identified,
including as regards the segmentation of the labour
market, the innovation capacity, the limited
efficiency of public spending and the complex tax
system, which weighs significantly on production
factors, as highlighted in the Review of progress
on policy measures relevant for the correction of
macroeconomic
imbalances
(European
Commission, 2017c). These vulnerabilities have
cross-border relevance.
Analyses included in this Country Report
provide an In-Depth Review (IDR) into how the
identified imbalances have developed.
In
particular, IDR-relevant analysis is found in the
following sections: sources of imbalances related
to public debt are covered in section 4.1; the
situation of the financial sector in section 4.2;
sources of imbalances related to competitiveness in
section 4.4; and vulnerabilities associated with
market performance of the services sector in
section 4.5. Potential spillovers to the rest of the
euro area are discussed in box 3.1.
Imbalances and their gravity
net international investment position remains
contained at −16 % of GDP (after −17 % in 2014).
Graph 3.1:
Export market shares in value and in volume –
France and euro area
110
105
100
95
90
85
80
75
70
65
60
1999 = 100
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
FR (in value)
EA (in value)
FR (in volume)
EA (in volume)
Source:
Eurostat, IMF
Cost competitiveness deteriorated markedly
from 1999 to 2013.
Unit labour costs increased at
a faster pace in France in both nominal and real
terms. From 1999 to 2008, the loss of cost
competitiveness was largely due to containment of
unit labour costs in the rest of the euro area, in
particular in Germany. From 2008 to 2013, there
was a disconnection between the trend in nominal
unit labour costs and the GDP deflator in France,
in a context of low productivity growth. This
resulted in a further decline in the relative cost
competitiveness in that period, this time for
domestic reasons.
Weak non-cost competitiveness has also
weighed on export performance.
Despite reform
efforts, the French business environment continues
to be characterised by a relatively high regulatory
burden. Complex labour regulations, high
corporate tax rates and a complex tax system
continue to weigh on firms. Rigidities persist in a
number of sectors and prevent the downward
adjustment of tariffs to the detriment of
downstream industries that use these services.
Increased size-related social and fiscal obligations
give rise to threshold effects and discourage firms
from growing with implications for labour
French export performance has deteriorated
significantly over the past 15 years.
Since 1999,
its export market shares have fallen by 36.8 % in
value (Graph 3.1), compared to 20.4 % for the euro
area as a whole. In volume, the decline is also
significant (−25.4 %, against −11.0 % in the euro
area). This loss in export market share, linked to a
deterioration of both cost and non-cost
competitiveness, has weighed on growth
outcomes. At the same time, external sustainability
is not a concern for France in the near term as its
13
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3. Summary of the main findings from the MIP in-depth review
productivity and competitiveness. The low
profitability of non-financial corporations also
weighs on France’s non-cost competitiveness,
through its impact on the quality of investment.
Although corporate investment is relatively high
and supported by favourable macroeconomic and
framework conditions, it tends to be concentrated
in less productive purposes thereby weighing on
productivity growth.
The high public debt-to-GDP ratio is a major
source of vulnerability and compounds the risks
stemming from the weak competitiveness of the
French economy.
High public debt weighs on
growth prospects by crowding out productive
public expenditure and requiring a higher tax
burden. However, in the current context of also
high (though stable) private sector debt, still weak
growth, low inflation and heightened uncertainty,
not only is public deleveraging more difficult, but
also high public debt makes France more
vulnerable as it might give rise to negative
feedback loops to the real economy and the
financial sector should a new wave of negative
shocks materialise. Moreover, sustainability risks
in the medium term are high, partly due to the
projected increase in age-related expenditure.
Given the size of the French economy, such a
situation could also entail potentially negative
spillovers to the rest of the euro area (see also
Box 3.1 on euro area spillovers).
Evolution, prospects and policy responses
by 2.5 % over 3 years and 0.9 % once the Tax
credit for competitiveness and employment (CICE)
is taken into account, compared to 2.1 % in the rest
of the euro area. Productivity picked up slightly in
2015 (rising by 0.8 %), but remained below both
long-term trends and the euro area average. Part of
the decline in productivity growth can be
explained by the measures aimed at boosting
employment growth, which often focused on low-
qualified employment. However, potential growth
has also declined since 2008.
Graph 3.2:
118
115
112
109
Real compensation per employee and
productivity in France
1999=100
106
103
100
97
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Real comp. per employee (GDP deflator)
Real comp. per employee (GDP deflator), incl. CICE
Productivity
Source:
Eurostat
Export performance remains subdued.
Export
market shares have stabilised since 2012 but
export growth stalled in 2016 and is expected to
fall well short of both world trade and French
export market growth. The current account deficit
rose to −1.2 % of GDP in 2016 according to
annualised monthly data (after −0.2 % in 2015)
and is expected to deteriorate further. Taking into
account the relative position of the French
economy in the business cycle, the cyclically-
adjusted current account deficit is worse than the
headline indicator.
Cost competitiveness is improving without
having fully regained past losses.
The labour tax
cuts and continued wage moderation have allowed
a slowdown of labour costs, but low productivity
growth is preventing cost competitiveness from
recovering faster. In 2015, unit labour costs rose
Despite
recent
reforms,
substantial
improvements in non-cost competitiveness are
still to materialise.
Although France has improved
its overall regulatory performance, its business
environment continues to be middle-ranking. In
the Doing Business survey (World Bank, 2017),
France fell from 28th to the 29th position (out of
190 economies assessed), and ongoing reforms do
not appear to be significantly improving business
perceptions. Regulatory bottlenecks continue to
affect firms’ economic performance. As regards
investment, equipment investment is slowly
gaining ground supported by fiscal incentives for
amortisation, but R&D investment continues to be
concentrated in sectors of declining economic
importance as measured by their share in total
value added (motor vehicles, computers,
electronics, and pharmaceuticals), which has
implications for the long-term growth potential of
the whole economy. Non-financial corporate profit
14
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3. Summary of the main findings from the MIP in-depth review
margins have somewhat recovered since 2013, in
part due to the labour tax wedge cuts and to lower
oil prices, but they remain below their pre-crisis
level.
Some action has been taken to improve
competitiveness.
France has taken some measures
to address the rigidity of the wage setting process
through the labour law adopted in 2016, which
provides for company-level majority agreements
on working time. The impact of this law on the
competitiveness of the French economy, however,
will depend on its implementation and the extent to
which the social dialogue at firm level will be able
to transform the new legal possibilities granted by
law into tangible action. Also, while no ad-hoc
increase in the minimum wage has been adopted
since 2012, no revision of its indexation
mechanism has been undertaken and the French
labour market remains both segmented and
insufficiently linked with the vocational training
system. As regards the business environment,
competition has been improved in a number of
services sectors, including legal professions, retail
trade and passenger transport services. Some effort
is also being made to simplify firms'
administrative, fiscal and accounting rules through
the multiannual simplification programme.
However, the tax system remains a drag on
competitiveness despite recent reforms. Corporate
taxes are still high and France has abandoned the
phase-out of the last tranche of the turnover tax
(C3S), while the tax base on consumption remains
narrow.
Public debt is projected to keep rising due to
still high deficits.
The general government debt-
to-GDP ratio is expected to increase to 97 % of
GDP in 2018, which implies growing divergence
in indebtedness vis-à-vis the euro area due to a
slower pace of deficit reduction than in the rest of
the EU (see Sections 1 and 4). The budgetary
strategy, which is to meet just the nominal
headline deficit targets, basically relies on
favourable macroeconomic conditions and interest
rate windfalls. Such a strategy is risky as, on the
one hand, it does not ensure durable correction of
the excessive deficit and, on the other hand, there
are significant consolidation needs in the coming
years to bring down the public debt.
Spending dynamics prove hard to contain.
Despite France's efforts to contain spending
increases in recent years, the consolidation
measures in the 2017 budget law have been scaled
down compared to the plans included in the April
2016 stability programme. Overall, the current
primary expenditure ratio, this is expenditure
minus the interest burden and public investment,
has continued increasing since 2012. While
spending reviews identified a considerable amount
of potential saving measures, the budgetary
measures adopted as a result of the spending
reviews have had a limited yield and have not
contributed so far to significantly improve public
spending efficiency. Furthermore, as demonstrated
in last year's country report, in key areas of public
policy, e.g. pensions and healthcare, France
achieves good results but other Member States
reach same or better outcomes at a lower cost. In
turn, the tax burden is high, with the tax system
remaining too complex and heavily reliant on
production factors, which reins in growth.
High sustainability risks show up in the
medium term mainly due to the high initial
deficit and debt ratio.
Despite the high debt ratio,
short term sustainability risks are considered as
low (see section 4.1). France is able to issue long-
term debt at very low rates also bearing in mind
the expansionary monetary policy stance of the
ECB. However, the high initial deficit and debt
and the projected increase in age-related
expenditure over the next 15 years lead to a
significant sustainability gap in the medium term.
Overall assessment
France faces important sources of imbalances
related to a weak competitiveness and high and
increasing public debt, in a context of low
productivity
growth.
The
substantial
improvement in export performance in 2015 has
proved short-lived. The current account, close to
balance in 2015, is expected to deteriorate
significantly in the coming years. Cost
competitiveness is improving but has not regained
past losses. Wage moderation continues, but the
decline in productivity growth prevents a faster
recovery of France’s cost competitiveness. The
product market reforms of the last years and
continued efforts to reduce red tape on firms could
contribute to an improvement of non-cost
competitiveness but there is still substantial scope
to increase market competition, simplify
regulation, and reduce the tax burden for
15
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3. Summary of the main findings from the MIP in-depth review
companies. Public debt remains high and
increasing, which represents a major imbalance, as
it weighs on growth prospects and reduces the
fiscal space to offset adverse macroeconomic
shocks. Public debt reduction is thus important to
help improve overall French macroeconomic
performance and avert medium-term sustainability
risks.
Policy measures have been taken in recent years
in particular to reduce the labour tax wedge.
However, policy challenges remain, in particular
as regards the regulatory impediments to firms’
growth, the initial and continuous system of
vocational training and the reform of the
unemployment benefit system. In addition, the
spending review has not delivered the expected
results to address the growing public debt-to-GDP
ratio.
16
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3. Summary of the main findings from the MIP in-depth review
Box 3.1:
Euro area spillovers
The large size of the French economy and its strong trade and financial integration with the rest of the
euro area, in particular with neighbouring countries, makes France a potentially important source of
spillovers for several other Member States.
France represents an important export destination and import
partner for many EU countries. Exports to France account for almost 13 % of the GDPs of Belgium and
Luxembourg, while in the case of Ireland, Malta, the Netherlands, Slovakia, Portugal and the Czech
Republic the same indicator ranges between 4 % to 7 %. Trade integration with large euro area economies
such as Germany, Spain and Italy is likewise significant (Graph 1, lhs). Financial linkages between France
and the euro area are likewise strong (Graph 1, rhs). In 2014, Ireland, Belgium and the Netherlands had
gross financial exposures to France via equity and debt instruments totalling 50 % or more of their
respective GDP. The large economies of the UK, Italy and Germany also had large financial exposures to
France in the range of 10 % to 30% of their GDP. Overall, the euro area shows total financial exposures to
France worth more than 25% of GDP, mostly through the form of debt.
Graph 1:
Trade and financial linkages between France and other EU countries
16
14
% of trading partner GDP
French imports per country of origin
(top 15 EU countries)
120
% of trading partner GDP
Exposures of EU countries to French
liabilities (top 15 EU countries, excluding
LU)
100
12
10
8
6
4
2
0
80
60
40
20
0
Goods
Services
Equity
Debt
(1) Data for goods correspond to 2014. Data for services correspond to 2012. Data for financial exposures are
European Commission 2014 bilateral data covering all economic sector, based on correspond to 2014 based on
Hobza and Zeugner (2014).
Source:
United Nations (lhs), Hobza and Zeugner (2014) (rhs).
Structural reforms in France can have positive cross-border economic effects.
Model
simulations suggest that product and labour market reforms in France can have important domestic
and cross-border macroeconomic effects by boosting productivity and employment. By bridging
half of the gap with the three best EU performers in these reform areas, France can raise GDP by
3.7% after 5 years, and by 6.7% after 10 years based on the Commission’s QUEST model. At the
same time, spillovers to the rest of the euro area would be positive, even in the short run. GDP in
the rest of the euro area would increase by 0.1% relative to the baseline after 5 years and by 0.2%
after 10 years. The simulated structural reforms focused on decreasing mark-ups and entry barriers
in services and manufacturing, increasing the labour market participation rate for the elderly, the
low-skilled and female workers, raising the share of medium- and high-skilled labour force, tax
and unemployment benefit reforms, active labour market policies and innovation subsidies.
(Varga and in 't Veld, 2014). This positive effect would remain in the long run (Graph 1, lhs).
(Continued on the next page)
17
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3. Summary of the main findings from the MIP in-depth review
Box (continued)
Graph 2:
Macroeconomic effects of structural reforms in France
15
GDP effects and spill-overs from structural reforms
in France
1
0.05
GDP effects and spill-overs from an increase in VAT
offset by a growth-friendly policy mix
0.009
0.007
0.006
0.005
0.004
0.003
0.002
0.001
% deviation, rest of EA and EU
0.8
10
0.6
0.4
5
0.2
0
5
10
15
20
0
0.04
0.035
0.03
0.025
0.02
0.015
0.01
0.005
0
1
2
3
4
5
6
7
8
9
10
France (left axis)
rest of EA (right axis)
0
France (left axis)
rest of EA (right axis)
(1) Left-hand side simulations are based on Varga and in't Veld (2014), percentage deviations from baseline
Source:
European Commission
A growth-friendly tax shift as discussed in Section 4, can also yield positive effects for both
France and the rest of the euro area.
Graph 2 (rhs) shows the effects on GDP of a tax shift
whereby an increase in VAT worth 0.4% of GDP is fully offset by an equivalent reduction in
social security contributions and corporate income taxes, as well as an increase in transfers to
liquidity-constrained households. The weights on the three offsetting components are 71%, 25%
and 4% respectively, in line with the simulations shown in Box 4.1.1. While in absolute terms the
effects are overall small owing to the small size of the shock, euro area spill-overs are positive and
felt immediately on the first year of the reform. In relative terms, spill-over effects to the rest of
the euro area can represent close to one fifth of the domestic effect when measured in terms of the
GDP of the respective geographical areas. More generally, addressing existing economic and fiscal
challenges in France would not only benefit the domestic economy but also feed into the euro area
confidence cycle and provide a stimulus to the fragile and slowing-recovering euro area economy.
Conversely, France's economic prospects largely depend on developments in its main trade and
financial partners in the euro area, which underlines the need for coordinated policy action and
rebalancing efforts at euro area level.
18
% deviation, rest of EA and EU
0.045
0.008
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3. Summary of the main findings from the MIP in-depth review
Table 3.1:
MIP Assessment Matrix (*) – France 2017
Gravity of the challenge
Evolution and prospects
Policy response
Imbalances (unsustainable trends, vulnerabilities and associated risks)
Competitiveness
Since 1999, France lost export market
shares by 36.8 %.
External sustainability is not a concern for
France in the near term as its NIIP remains
contained at −16 % of GDP (after −17 %
in 2014).
Cost competitiveness is improving but has
not
yet
regained
past
losses
(see Section 4.4). Over the past ten years,
ULC increased at a slightly higher pace in
France relative to other EA countries.
The structural decline in productivity
growth
reinforces
the
challenges
associated with a weak competitiveness.
The low profitability of non-financial
corporations also weighs on non-cost
competitiveness, through its impact on the
quality of investment.
Similarly to other EU economies,
export market shares have stabilised
in recent years (+1.5 % from 2012 to
2015 in cumulated terms). Export
performance improved substantially in
2015, but this improvement has
proved
short-lived
in
2016
(see Section 4.4).
The current account, close to balance
in 2015 (−0.2 % of GDP), is expected
to deteriorate significantly over the
coming years.
Annual ULC growth has kept
decelerating since 2012 thanks to
labour tax cuts and continued wage
moderation (see Section 4.4). In 2015,
the depreciation of the euro, combined
with
subdued
HICP
inflation
developments, led to a renewed
decrease of the REER headline
indicator.
While labour productivity picked up
in 2015 (+0.8 %), it remained below
both long-term trends and the euro
area average, preventing a faster
recovery
of
France's
cost
competitiveness (see Section 4.4).
Despite a recent increase, the
corporate profit share of the French
non-financial companies remains
below its pre-crisis level.
The French authorities implemented the
CICE and the Responsibility and
Solidarity Pact (RSP). Both measures
should lower labour taxes by EUR 30 bn
by 2017 and corporate taxes by
EUR 10 bn. Studies using firm-level data
for the period 2013-2014 found a positive
effect of the CICE on profit margins and
employment, while an impact on
investment, R&D and exports is expected
to materialise over the medium-term
(see Section 2 and Section 4.3). The
CICE transformation in permanent
reductions in employers' social security
contributions is announced for 2018,
while its rate applicable on the 2017
payroll with budgetary implications in
2018 has been extended from 6 % to7 %.
France has taken some measures to
address the rigidity of the wage setting
process, notably through the El Khomri
law adopted in 2016. The impact of this
law on the competitiveness of the French
economy, however, will depend on its
implementation and if the social dialogue
within firms will be able to transform into
concrete actions the new legal
possibilities granted by the El Khomri
law (see Section 2 and Section 4.3).
While no ad-hoc increase in the minimum
wage has been adopted since 2012, no
revision of its indexation mechanism has
been undertaken (see Section 2).
(Continued on the next page)
19
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3. Summary of the main findings from the MIP in-depth review
Table (continued)
Public debt
Already at a very high level, government
debt continued to increase to 96.2 % of
GDP in 2015. Such a high debt level and
its upward trend constitute a vulnerability
for the economy and reduce the fiscal
space available to respond to future
shocks.
The high public debt also weighs on
growth prospects by crowding out
productive public expenditure and
requiring a higher tax burden.
Potential growth is estimated at 0.9 % in
2015 while inflation is also low. Low
nominal growth makes it also more
difficult for France to bring down its
public debt.
Although the financial sector does not face
immediate risks, pressures from the
combination of a high public and private
debt may increase in the future under
adverse economic conditions.
The government has used low government
bond yields to lengthen the maturity of
sovereign bonds by around 5 months,
which is a mild mitigating factor for
refinancing problems. The
widely
diversified French debt investor base in
terms of type of investors as well as
geographically could also be a mitigating
factor.
Public debt is projected to increase to
97.0 % by 2018. The structure of
public debt financing, both in terms of
maturity and diversification, does not
give rise to short-term risks.
France is able to issue long-term debt
at very low rates. However, in a
somewhat longer perspective, debt
dynamics between France and the rest
of the euro area are diverging, mainly
due to the higher French primary
deficit.
The debt trajectory and the
sustainability gap at horizon 2031
point to high indebtedness risks in the
medium term.
The Commission 2017 winter forecast
projects the headline deficit target to
be met in 2016. For 2017, the
Commission projects a headline
deficit of 2.9 % of GDP. While
slightly below the 3 % reference value
in the Treaty, this is 0.2 pp. higher
than planned by the French authorities
and 0.1 pp. higher than the deficit
target recommended by the Council.
The budgetary strategy envisaged by
France is risky. It relies mainly on
cyclical factors and lower interests
payments on government debt. Therefore,
the projected structural efforts for 2016
and 2017 fall clearly short of the
recommended effort set by the Council.
Moreover, not all measures are
sufficiently specified resulting in a higher
Commission deficit forecast for 2017.
Expenditure-based consolidation has seen
a setback in the course of 2016 and
expenditure trends could rise again in the
future showing the limit of the across-the-
board spending cuts and expenditure
containments based on norms.
Conclusions from IDR analysis
France is characterised by a weak competitiveness and a high and increasing public debt, in a context of low productivity growth. Associated
vulnerabilities have cross-border relevance.
The substantial improvement in export performance in 2015 has proved short-lived and the current account, close to balance in 2015, is expected
to deteriorate significantly over the coming years. Cost competitiveness is improving but has not yet regained past losses. Wage moderation
continues, but the decline in productivity growth prevents a faster recovery of France's cost competitiveness. Non-financial corporate profit
margins have somewhat recovered since 2013, but remain below their pre-crisis level, weighing on non-cost competitiveness. Besides, public
debt is projected to reach 97.0 % of GDP in 2018. The spending reviews have not contributed so far to significantly improve public spending
efficiency, necessary to alleviate the tax burden and improve the efficiency of the rest of the economy.
Policy measures have been taken in recent years, in particular to reduce the labour tax wedge. However, policy challenges remain, in particular
as regards the regulatory impediments to firms’ growth, the initial and continuous system of vocational training and the reform of the
unemployment benefit system. In addition, the spending review has not delivered the expected results to address the growing public debt-to-
GDP ratio.
(*) The first column summarises "gravity" issues which aim at providing an order of magnitude of the level of imbalances. The
second column reports findings concerning the "evolution and prospects" of imbalances. The third column reports recent and
planned relevant measures. Findings are reported for each source of imbalance and adjustment issue. The final three
paragraphs of the matrix summarise the overall challenges, in terms of their gravity, developments and prospects, policy
response.
Source:
European Commission
20
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4.
REFORM PRIORITIES
4.1. PUBLIC FINANCES AND TAXATION
General government debt sustainability (
12
)*
Graph 4.1.1:
Difference in debt dynamics between France
and the euro area
15
Debt dynamics between France and the rest of
the euro area continue to diverge although the
increase in French debt is slowing.
The
Commission 2017 winter forecast puts the general
government debt in France at about 8 pp above the
euro area level. The higher general government
deficit in France explains most of this difference,
although real economic growth, interest
expenditure and stock-flow adjustments have
partly compensated for the higher primary deficits
in recent years (Graph 4.1.1). The lower interest
expenditure has contributed significantly to
reducing the deficit and debt since 2011 and this is
expected to continue over 2016 and 2017.
However, the declining interest rate burden is
expected to come to a halt once interest rates and
inflation normalize. Therefore, without further
consolidation and sustained growth, the reduction
in the public debt-to-GDP ratio is not guaranteed
and debt dynamics between France and the euro
area will continue to diverge.
The high public debt ratio does not seem to pose
significant sustainability challenges in the short
term.
The short-term sustainability indicator
S0 (
13
) does not flag any significant risk overall,
although the short-term fiscal sub-index flags high
risk due to the high level of gross financing needs,
of the primary deficit and of public debt. In spite
of the weaknesses revealed by the fiscal sub-index
of the S0 indicator, the rating outlook for French
government debt is AA stable for the three major
rating agencies.
(
12
) This section is based on the 2015 Ageing Report (European
Commission, 2015a) and the Debt Sustainability Monitor
2016 (European Commission, 2017a).
* An asterisk indicates that the analysis in the section
contributes to the in-depth review under the MIP (see
section 3 for an overall summary of main findings).
(
13
) S0 is a composite indicator aimed at evaluating the extent
to which there might be a fiscal stress risk in the upcoming
year, stemming from the fiscal, as well as the macro-
financial and competitiveness sides of the economy. A set
of 25 fiscal and financial-competitiveness variables proven
to perform well in detecting fiscal stress in the past is used
to construct the indicator. Countries are deemed to face
potential high short-term risks of fiscal stress, whenever S0
is above an estimated critical threshold.
10
5
0
-5
-10
11
12
13
14
15
16
17
18
Primary balance
Growth effect (real)
Stock flow adjustments
Interest expenditure
Inflation effect
Gross debt ratio
Source:
European Commission, 2017 winter forecast
Sound debt management strategies reduce the
short term risks.
All French debt is denominated
in euro so there is no currency risk. Moreover, the
average maturity of debt instruments has increased
to nearly 7.5 years, reflecting longer issuance
maturities, which allows securing low interest rates
over the coming years. While the share of short-
term debt has declined, it remains relatively high
(8.3 % of total). The investor base is diverse and
broadly equally distributed between residents, the
euro area and the rest of the world. While holdings
by foreign investors have slightly declined to 60 %
of total French debt, the high share held by non-
residents could be a source of vulnerability.
However, investor appetite is still high. Traditional
investors in search of higher yields have turned to
riskier investments, but are expected to readjust
their holdings once interest rates increase. French
debt is a sought-after investment for capital and
liquidity requirements reasons and diversification
purposes, as it offers the possibility of holding
nominal and inflation linked bonds issued in euros.
However, France's public debt faces high
sustainability risks in the medium term.
The
debt sustainability analysis for France shows that
in the baseline scenario assuming no policy change
public debt would be roughly stable at some 97 %
of GDP until 2021. However, it would begin to
21
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4.1. Public finances and taxation
rise again thereafter, to reach 103.5 % of GDP in
2027, the last projection year. This public debt
shows that the fiscal effort is insufficient to offset
the increasing costs of an ageing population and
the unfavourable snow-ball effect, mainly due to
the rising interest rate burden. Based on these
projections, the S1 sustainability indicator, which
measures sustainability risks at horizon 2031, flags
a high medium-term risk. This indicator implies
that a cumulative gradual improvement in the
French structural primary balance of 4.7 pps. of
GDP, relative to the baseline scenario, would be
required over 5 years to reduce the debt ratio to
60 % of GDP by 2031.
The high medium-term sustainability risks are
primarily due to high initial indebtedness and
unfavourable initial budgetary position.
Specifically, 2.8 pps. of the required fiscal
adjustment would be due to debt ratio's distance
from the 60 % reference value, 1.5 pps. to the
unfavourable initial budgetary position (defined as
the gap to the debt-stabilising primary balance)
and the remaining 0.3 pps. to the projected
increase in age-related public spending. Public
debt projections are especially sensitive to interest
rate developments: a 1 pp. increase in the interest
rate of newly issued bonds and rolled-over debt,
other things being equal, would lead to a 6-point
increase in the public debt-to-GDP ratio (around
EUR 190 bn.) compared to the baseline projection
by 2027 (Graph 4.1.2), thereby aggravating the
sustainability gap significantly.
Despite medium-term challenges, sustainability
risks appear contained in the long run.
The S2
indicator, which measures sustainability risks at an
infinite horizon, calculated under a baseline no-
fiscal policy change scenario, indeed points to a
relatively small required fiscal adjustment (0.8 pp.
of GDP), to ensure that the debt ratio remains on a
sustainable path over the long run horizon. This is
primarily due to the projected fall in age-related
spending from the late 2030s (contribution of -
1.0 pp. of GDP to S2), offset by the unfavourable
initial budgetary position (1.8 pp. of GDP). It is the
projected decrease of public pension expenditure,
in particular, that drives down ageing costs (- 1.7
pp. of GDP), given the reforms implemented in
this area in the past. However, the adjustment
implied by the S2 indicator could lead to debt
stabilising at relatively high levels. Consequently,
the indicator has to be treated with caution for
high-debt countries in relation to the SGP
requirements. Moreover, long-term risks could
arise under more adverse scenarios, such as in the
lower total factor productivity growth scenario for
pension expenditures, or the Ageing Working
Group risk scenario for healthcare and long-term
care expenditures.
Graph 4.1.2:
Public debt projections of French public debt
under different scenarios
110.0
105.0
100.0
95.0
90.0
85.0
Baseline no-policy change scenario
Standardized (permanent) negative shock (-1p.p.) to the
short- and long-term interest rates on newly issued and
rolled over debt
Standardized (permanent) positive shock (+1p.p.) to the
short- and long-term interest rates on newly issued and
rolled over debt
Source:
European Commission, Debt Sustainability Monitor
2016.
Favourable demographic dynamics and past
reforms mean that pension expenditure is
projected to decline in the long run.
Pension
spending in France is among the highest in the EU,
at 14.9 % of GDP versus 11.3 % in the EU in
2013, and so is the benefit ratio, 51.3 % in France
versus 46.9 % in the EU, defined as the average
pension as a share of the economy-wide average
wage. Pension expenditures are projected to
remain broadly constant at a high level in the
medium-term and to decline only in the long term.
A relatively moderate increase in the old-age
dependency ratio (by 14.9 pps.) represents a
relatively favourable demographic trend compared
to other EU countries that allows containing
pressure on pension expenditure. The average
effective exit age from the labour market (61 in
2014), which is low in a EU perspective, is also
projected to increase progressively to 63 in 2060 as
a result of recent reforms described in the 2016
Country Report (European Commission, 2016c).
However, the savings envisaged from the foreseen
increase in the retirement age might be partly
offset by rises in other types of public expenditure,
22
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4.1. Public finances and taxation
such as invalidity or unemployment-related
expenditure in the short term. Despite the
favourable long-term financial prospects of the
French public pension system, some special
regimes that allow early retirement continue to
weigh negatively on the balance of the pension
system.
Quality of fiscal consolidation*
Given the already high revenue ratio, the
government adopted an expenditure based
consolidation strategy.
Between 2012 and 2017,
the deficit is projected to decline from 4.8 % to
2.9 % of GDP according to the Commission 2017
winter forecast (ibid.). Over the same period, the
revenue ratio is projected to increase by 1.3 % of
GDP to 53.3 % of GDP. This ratio is forecast to be
8.5 % of GDP higher than the EU average in 2017,
with the high tax burden weighing on economic
activity (see the taxation sub-section, below). The
expenditure-to-GDP ratio is set to decline by 0.6
pp over 2012-2017, helped by lower interest rates
(Graph 4.1.3). A quarter of the planned deficit
reduction would thus be due to changes in
expenditure, in particular from the reorientation
towards an expenditure-based consolidation
strategy since the budget 2015. However, at
56.2 % of GDP in 2017, the expenditure ratio
would remain 9.7 % of GDP higher than in the EU.
The largest contributor to the decline in the
expenditure ratio is the interest burden (-0.8 pp
over 2012-2017), with broadly neutral effects on
economic activity.
Interest rates are projected to
increase somewhat in the short term but remain
low by historical standards. However, the low
interest rate environment is not expected to prevail
in the medium term. For example, in the ageing
projections, the interest burden is projected to
gradually rise from 1.8 % of GDP in 2017 to 3 %
of GDP by 2025.
Expenditure growth was also contained by a
reduction in public investment.
The second
largest contributor to the fall in public expenditure
is public investment which declined by 0.6 % of
GDP over the same period. Public investment cuts
typically have a stronger negative effect on
economic activity than cuts in other expenditure
items, with a multiplier for public investment of
2.5 points in the long run. However, the economic
impact of the decline in public investment has
likely been less strong than suggested by the
normal multipliers (
14
). Public investment was
mainly cut by local authorities, who are
responsible for more than 50 % of total public
investment, and has mainly affected the least
efficient projects, thereby leaving the existing
public capital stock unaffected. Local investment
displays a clear cyclical pattern linked to the local
electoral cycle, but this time round the cycle seems
to have been amplified by the cut in the global
State transfers to local authorities of 0.5 % of GDP
since 2014. Nonetheless, while in a first phase the
cut in global dotations has impacted investment.
Since recently, operational expenditure of local
authorities started declining from a growth rate of
3.0 % in 2013 to 0.9 % in 2015.
Primary current expenditure increased due to a
strong increase in subsidies.
The primary current
expenditure ratio is projected to increase from
49.0% of GDP in 2012 to 50.1% of GDP in 2017.
This increase in the expenditure ratio once the
interest burden and capital expenditure is filtered
out, puts into question to durability of the
expenditure containment strategy. One important
driver of spending has been an increase in
subsidies, due to the introduction of the
crédit
d'impôt pour la compétitivité et l'emploi
(CICE),
which is a tax credit on the salary mass of firms
introduced in 2014, focused on the lower end of
the wage scale. The effect of the increase in
subsidies on economic activity is closer to a
targeted cut in social contributions, which is a
relatively efficient way of strengthening economic
activity as opposed to other types of subsidies.
The spending reviews were scaled back in 2016.
In place since 2015, the spending reviews
identified a fraction - less than 2 % - of the overall
planned expenditure savings of EUR 50 billion
over the period 2015-2017. Based on the first wave
of reviews, savings with a total yield of EUR 325
million were included in the 2016 budget. The
second review exercise took place in 2016, but the
proposals in the draft budget 2017 relied on
measures identified already in the 2015 spending
review exercise. The planned savings would yield
EUR 400 million. In general, it appears that only a
(
14
) IMF (2014) World Economic Outlook, October 2014. For a
more in-depth discussion, see Cour des Comptes (2015)
La
situation et les perspectives des finances publiques,
Juin
2015.
23
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4.1. Public finances and taxation
subset of the savings identified in the spending
reviews appear in the budget. This is partly
because more than 50 % of the spending reviewed
in 2016 concerned local authorities, and they are
autonomous in managing their budgets. In general
no mechanism exists to ensure that the different
administrations act on the recommendations of the
spending reviews.
Graph 4.1.3:
Changes in the composition of public
expenditure
2%
contained in comparison to other EU Member
States although health care expenditure would
remain one of the highest in the EU. In the light of
cost pressures, an ageing population and the
increased prevalence of chronic diseases, a more
coordinated use of care is being encouraged. In
other countries, but to some extent also in France,
this is done through greater use of primary care
and more effective referrals from family doctors to
steer demand to other types of care and organise
appropriate and cost-effective channels of
treatment.
Graph 4.1.4:
Healthcare expenditure as a share of GDP in
selected countries (2005-2015)
1%
% of GDP
0%
0.1%
-0.6%
12.0
-0.8%
-1%
11.0
-2%
2012-2015
2015-2017
2012-2017
Subsidies
Interest
Other
Public Investment
Intermediate consumption
Social transfers in kind (health care,…)
Compensation of employees
Social transfers (pensions, unemployment, ...)
Total
10.0
% GDP
9.0
8.0
7.0
Source:
Ameco database, European Commission
6.0
05
06
07
08
09
10
11
12
13
14
15
Efficiency and effectiveness of the health
system (
15
)*
France
Germany
Italy
Spain
Source:
OECD Health statistics 2016
The French health system performs well in a
European perspective.
The population enjoys
high life expectancy at birth (82.3 years in 2015,
one of the highest in the EU). The healthcare
system performs well in terms of overall
accessibility as it is characterised by fee-for-
service payment of doctors, unrestricted freedom
of choice for patients and a traditional focus on
hospital based care.
However, healthcare spending is relatively high
in a European perspective.
French health
expenditure was at 11 % of GDP in 2015 which is
similar to the level of expenditure in Germany
(Graph 4.1.4). In the long run, the increase in
health care expenditure is expected to be relatively
( ) This section is largely based on Commission services and
Economic Policy Committee, Joint Report on Health Care
and Long-Term Care Systems & Fiscal Sustainability
(2016).
15
A range of reforms has been implemented in
recent years to keep health care expenditure
under
control.
Key
reforms
included
improvements in access to health insurance for
those most vulnerable, improvements in hospital
efficiency, better data collection and monitoring
and better control of pharmaceutical expenditure,
greater use of primary care and improvements in
care coordination from primary to secondary care.
In tandem with the reforms, the enforcement of the
healthcare expenditure norm, the ONDAM
(Objectif
National de Dépenses d'Assurance
Maladie),
has allowed for a contained growth of
health expenditure in recent years.
Low spending on prevention could weigh on the
overall efficiency and effectiveness of the
French health system.
France spends 1.9% of
total health resources on prevention, versus
24
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4.1. Public finances and taxation
average spending on prevention of 3% in the EU.
Low spending on prevention can lead to higher
healthcare costs in the longer run, certainly as it is
accompanied by low vaccination levels for certain
preventable diseases and comparatively high
prevalence of risky behaviour such as alcohol and
tobacco consumption.
Fiscal frameworks*
Finally, the ONDAM and the norm of the state
cover about half of public expenditure.
Taxation*
The fiscal framework has been strengthened in
the last few years, although weaknesses still
remain.
Since the founding in 2012, the High
Council of Public Finances (HCFP) (
16
), the
systematic positive bias in the macroeconomic
forecasts underpinning the draft budgets has
disappeared. In September 2016, the HCFP issued
a more critical opinion than in previous years on
the macroeconomic scenario underpinning the
2017 draft budgetary plan (Haut Conseil des
Finances Publiques, 2016). There is no formal
mechanism in place to reconcile divergent views
between the HCPF and the Ministry of Finance,
and in the that case, the Ministry of Finance did
not adjust the macroeconomic scenario
underpinning the 2017 DBP following the HCFP's
opinion .
Although the expenditure norms are an
effective means to control expenditure, they are
becoming more difficult to meet.
The norms are
becoming more ambitious every year as
expenditure growth rates for the respective
spending categories decrease. At the same time,
new spending announcements are projected to
increase spending on a permanent basis, whereas
the savings allowing the norms to be met are
across-the-board spending cuts. Consequently, in
2017 the ceilings for the norms had to be raised for
State and health expenditure. All these
developments point to the limits of the existing
rules, as they become harder to obey without
taking structural measures. Furthermore, the cut in
transfers from the State to local authorities has
been reduced, leading to an upward revision of the
indicative spending norm for local authorities
(ODEDEL). At the same time, no correction
mechanism or alert committee exists to oversee the
ODEDEL and prevent local expenditure overruns.
(
16
) Created as an independent fiscal body by the organic law
of 17 December 2012
The tax wedge on labour has fallen
substantially at the lower end of income
distribution, but remains high at the average
wage.
Between 2012 and 2015, the tax wedge was
reduced by around 1 ppt. at the average wage and
by more than 3 pps. for workers earning 50% of
the average wage. This change in trend is mainly
due to the introduction of the CICE and the RSP.
The tax wedge for very low income earners (50%
of the average wage), at 31.6%, was below the EU
average of 32.7% in 2015. For income earners at
the average wage, the tax wedge, at 48.7%,
remained above the EU average of 40.7% and one
of the highest in the EU, which may undermine the
functioning of the labour market.
Although
employers'
social
security
contributions are falling, they are still relatively
high.
At the average wage, France has the highest
employers' social security contributions in the EU
as a share of total labour costs paid by the
employer, which explains the relatively high tax
wedge. This partly stems from the social security
system being financed through employer's
contributions, which is only partially the case in
other countries. High employers' social security
contributions are also conducive to a large tax
burden on companies.
The high level of taxes weighing on companies
represents an obstacle to private investment
and hampers companies' growth
(European
Commission, 2016e). The effective average
corporate tax rate was the highest in the EU in
2016 (38.4 %) (ZEW, 2016). French corporate
income tax combines a high nominal rate (38 % in
2014 including the surcharge, the highest in the
EU), and relatively little revenue as a share of
GDP (2.7 % of GDP in 2014, against 2.4% in the
EU, for a nominal rate of 22.9% for the same year)
because of generous tax credits and relatively low
profit margins. Finally, the debt-equity tax bias in
corporate financing remains the highest in the EU
in 2016. Due to a less favourable tax treatment,
investments financed by equity need to earn 5
percentage points more in return than investments
financed by debt to yield the same after-tax return
(ZEW, 2016).
25
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4.1. Public finances and taxation
Other taxes on production (
17
) are particularly
high
(Graph 4.1.5). They stood at 3.1 % of GDP in
2015 (
18
), above Italy (2.0%), Spain (1.1%) or
Germany (0.4%), although it is generally accepted
that such taxes are particularly distortive since they
disregard the economic performance of the firm
and directly affect profit margins. These taxes have
not been curbed by recent policy measures and
have continued to increase in GDP terms since
2011, in spite of the phase-out of part of the
turnover tax (C3S). Local-level taxes account for
roughly two thirds of such taxes and have been
increasing as a share of GDP since the reform of
local government taxation. However, this increase
in tax revenue has stemmed mainly from a base
effect in recent years (Cour des Comptes, 2016b).
Graph 4.1.5:
Composition of total taxes on companies,
2015
insurance products and implicit rents on the main
property are taxed according to rental values which
have not been updated since the 1970s, while real
estate capital gains are not taxed. By contrast,
capital gains on securities are taxed according to
the progressive personal income tax regime.
Furthermore, specific tax regimes such as the full
exemption of savings products (e.g.
Livret A),
the
deductibility of interest from the corporate income
tax basis or the capital gain tax create a relative
distortion between fixed-income instruments (and
especially deposits) and shares. Such distortions
negatively affect growth, investment and financial
stability. To counterbalance some of these
discrepancies, the tax system also includes a high
number of tax rebates and specific schemes to
encourage investment in innovation, SMEs and
start-ups; one more has been introduced by the
2017 finance law.
The relative complexity of the tax system is a
barrier to a well-functioning business
environment.
France has a high tax burden
coupled with many tax breaks, reduced rates and
various tax schemes to address specific objectives.
It results in detailed rules and derogations that may
increase compliance costs and may create
uncertainties (France Stratégie, 2016b; Michel
Taly, 2016). Total tax expenditure is sizeable in
France at more than 3 % of GDP (CICE excluded).
Indicators commonly used to measure the
complexity level of a tax system show a
contrasting picture for France. In 2015, the country
scored well in terms of the number of hours
needed to comply with taxes (World Bank, 2016).
However, the administrative cost to tax authorities
of collecting taxes, as a percentage of tax
collected, was above the EU average in 2013
(latest data available) (OECD, 2015b). Looking at
trends, tax complexity has increased in recent
years. The General Tax Code (Code
général des
impôts)
expanded by 61 % (in number of pages)
between 2002 and 2015 (Cour des Comptes,
2016c).
The burden of taxation continues to fall less on
consumption than it does in other EU countries.
In 2014, France ranked 27th in the EU in terms of
tax revenues from consumption as a percentage of
total taxation (24.1 %) below neighbouring
countries such as Germany, Italy, or Spain, and the
Nordic countries (Graph 4.1.7).
18
16
14
% of GDP
12
10
8
6
4
2
0
France
Germany
Italy
Spain
Other taxes on production (households
excluded)
Employers' actual social contributions - CICE
retrieved
Taxes on the income or profits of corporations
including holding gains
Source:
National Tax Lists 2016 and AMECO
Capital taxation in France is high compared to
other Member States and favours "lower-risk"
products investments like housing and deposits
over "riskier" investments like shares.
At
10.5 % in 2014, France's ratio of taxes on capital-
to-GDP was the third highest in the EU, above the
EU average (8.2 %). The overall tax burden on
capital increased by 1.3 pp. between 2010 and
2013, then stabilised in 2014. Furthermore, capital
taxation favours investment in housing and life
insurance. A reduced rate of 7.5 % applies to life
(
17
) Other taxes on production include more than 40 taxes
mainly on capital and on labour.
18
( ) This figure excludes producer households.
26
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4.1. Public finances and taxation
The VAT system is characterised by middle-
ranking standard rate and low reduced rates
applied to a large base.
France applies a standard
rate (20 %) which is middle-ranking as compared
with neighbouring countries (above Luxemburg
(17 %) and Germany (19 %), but below Belgium
(21 %), Italy (21 %) and Spain (21 %)), but
relatively low reduced rates – the 5.5 % reduced
rate is lower than that of neighbouring countries.
In addition, reduced rates are applied to a large
base, (European Commission, 2016c). In 2014, the
revenue foregone from applying reduced rates
represented 10 % of the theoretical total VAT
liability which would have resulted from a
perfectly flat system, above the 5.3 % EU average
(CASE, 2016). Furthermore, VAT compliance is
worsening (CASE, 2016).
Graph 4.1.6:
Taxes on consumption as percentage of total
taxation in 2014
30
29
28
As a result the taxation gap between diesel and
petrol is closing but still remains.
% of total taxation
27
26
25
24
23
22
2014
France
Italy
Germany
Spain
Sweden
EU-28
Denmark
Finland
Source:
Taxation Trends in the European Union 2016
In terms of environmental taxation. recent tax
increases have not yet closed the gap with the
EU average.
Revenues from environmental taxes
steadily increased from 2009 onwards to reach
2.1% of GDP in 2014 (ranking 23rd in the EU), the
level that it had back in 2004. This remains below
the EU-28 average (2.5%), and, as a percentage of
total taxation (4.5%), France ranked 28th in the EU
in 2014. Environmental taxation is set to continue
to rise as the carbon tax will increase significantly
until 2030. In addition, excise duties on diesel have
increased in 2017 (by 0.01 EUR per litre) while
they have decreased on petrol by the same amount.
27
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4.1. Public finances and taxation
Box 4.1.1:
Effects of a tax shift from taxes on production factors to indirect taxes
The Council recommended France to reduce taxes on companies while broadening the tax base on
consumption, in particular as regards VAT. This box simulates a 0.5 point increase in the implicit
VAT rate (that would yield additional revenues of 0.4 % of GDP) using the DG ECFIN’s DSGE
model QUEST III (Ratto
et al.,
2009), assuming that these additional revenues (excluding second-
round and behavioural effects) are used to finance three policy alternatives and that VAT
compliance is constant. According to the calculation performed by the Joint Research Centre using
the EUROMOD model, an equivalent VAT reform has a negligible impact on tax incidence.
If the VAT increase is used to finance a reduction in social security contributions borne by
entrepreneurs, a short-term negative response by private investment and consumption is observed,
the latter eventually offset by an increase in employment and real wages. This tax shift brings
about a long-lasting increase in GDP and a reduction in the general government deficit (Graph 1).
If the VAT increase is used to finance an equivalent reduction in corporate income tax, GDP also
rises, driven by higher private investment. By contrast, private consumption and employment
decline with respect to the baseline. The general government balance deteriorates persistently due
to the increase in public transfers indexed to inflation.
A mixed policy option could consist of using the additional VAT revenues to finance cuts in social
security contributions (by 71 % of the additional VAT revenues) and corporate income tax rates
(by 25 %), while devoting the rest to raising social transfers targeted to financially-constrained
consumers. In that case, persistent GDP and employment increases are observed, jointly with
permanent fiscal consolidation and public-debt reduction.
Graph 1:
Impulse responses to an increase in VAT offset by three policy alternatives
%
GDP
%
Private investment
%
Private consumption
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
-0.02
2.00
1.50
1.00
0.50
0.00
0.02
0.00
-0.02
-0.04
-0.06
-0.08
-0.10
-0.12
-0.14
-0.50
-0.16
2021
2014
2015
2016
2017
2018
2019
2020
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2021
2022
2022
Social contributions
Mixed option
%
Corporate tax
Social contributions
Mixed option
Corporate tax
Social contributions
Mixed option
% of GDP
Corporate tax
Employment
% of GDP
General government balance
Public debt
0.10
0.10
0.05
0.00
-0.05
1.00
0.80
0.60
0.40
0.08
0.06
0.04
0.02
0.00
0.20
0.00
-0.20
-0.40
-0.15
-0.60
-0.02
-0.04
-0.10
2015
Social contributions
Mixed option
Corporate tax
Social contributions
Mixed option
Corporate tax
Social contributions
Mixed option
Corporate tax
Source:
European Commission
Furthermore, VAT compliance is worsening.
The compliance gap, which provides an estimate of revenue loss due to fraud, tax evasion, bankruptcies and miscalculations, has increased to 14 % of total VAT tax liabilities in 2014, against 12 % in 2013. Since 2011, the compliance gap in France has increased by 5 pps. of the total VAT tax liabilities (CASE, 2016). This is higher than in Spain (9 %) or Germany (10 %), but lower than in Italy (28 %).
28
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
2016
2017
2018
2019
2020
2023
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4.2. FINANCIAL SECTOR
The French banking sector seems relatively
sound.
Domestic banks represent more than 90 %
of the French banking sectors total assets. The four
largest French banking institutions are considered
of global systemic importance by the Financial
Stability Board. Overall, French banks appear
somewhat more profitable than their counterparts
in the euro area, with a return on equity which
amounted to 6.8 % in 2015 compared to 4.4 % on
average in the euro area. French banks rely more
than their peers in the euro area on non-interest
rate income given the importance of investment
banking activities. They also benefit from
relatively low impairments. Moreover, French
banks are able to re-price liabilities more easily to
lower interest rates than their euro area peers
whereas asset repricing is occurring more slowly
than in the rest of the euro area (see Box 1.3 in
IMF 2016) implying that margins have suffered
less than for euro area peers from the low interest
rate environment. With a Tier 1 ratio of 13.8 %,
the capitalisation of French banks appears broadly
in line with that of their euro-area counterparts
(14.2 %) and slowly improving over time. Their
loan portfolio is less risky, with non-performing
loans representing a stable 3.5 % of the total
portfolio in Q1-2016 (vs. 5.6 % in the euro area).
Substantial progress has been made over the last
year in terms of stable funding, with a loan-to-
deposit ratio close to 102.7 % in 2015. Lower
dependence on short-term wholesale funding is an
asset when interbank markets experience
difficulties.
In an environment of low net interest income
across the euro area, banks' profitability is
under pressure from a structurally high cost-to-
income ratio.
The interest rates set by the
government on regulated savings instruments like
the Livret A or the "Plan
Epargne Logement"
appear relatively high and squeeze banks' interest
margins. This is especially true for the latter,
where the interest rate is fixed for the whole term
of the contract and currently stands at 2.5 % for the
existing stock of "Plan
Epargne Logement".
The
overall impact on banks' profitability is however
limited as deposits make up a relatively small
share of total liabilities (see above). In order to
address their high cost-to-income ratio, one of the
highest in the EU, banks are expected to continue
investing in digitalisation and to close branches,
although no massive lay-offs seem to be planned in
the short-term.
There has been some correction in house prices
since 2011.
Housing prices fell by 9 % between
their peak in the third quarter of 2011 and the first
29
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4.2. Financial sector
quarter of 2016, although prices stabilised in recent
quarters. The correction observed since 2011 has
led to some correction in house prices with respect
to fundamentals. However, valuation metrics
continue to signal some risk of overvaluation.
Compared to the historical trends, price-to-rent and
price-to-income ratios suggest an overvaluation of
more than 20 %. Based on rental prices per square
meter, French house prices do not seem overvalued
compared to other euro area markets (see Dujardin
et al., 2015). Moreover, another metric based on
the relationship between house price, total
population, housing investment, real disposable
income per capita and the real long-term interest
rate suggests an overvaluation of only 3 %. The
latter metric is more strongly linked to supply and
demand fundamentals and confirms the qualitative
analysis also made in the 2015 Country Report
(European Commission, 2015c). More specifically,
structurally strong demand supported by positive
demographic trends and the absence of excess
housing supply together with prudent credit supply
by banking institutions suggest that downward
price pressure is limited and further downward
adjustment, if any, will be very gradual.
Mitigation measures exist to contain the impact
of house price developments on the financial
sector.
The decline in house prices since 2011 led
to a moderate rise of the loan-to-value ratio to
85 % for new loans and to 68 % for the existing
stock. However, credit standards are based on
revenue rather than housing value and more than
half of housing loans are secured by a guarantee
from a bank or an insurer, which reduces the
importance of the value of the collateral when
assessing credit risk. Therefore, in line with the
analysis in the Country Report 2015 (ibid.), a
moderate adjustment in house prices does not seem
to pose a considerable risk to the financial sector.
In contrast to residential real estate prices,
commercial real estate prices have significantly
increased over the past few years. As a result, the
Haut Conseil de Stabilité Financière (HCSF) asked
banks, insurance companies and investment funds
to perform stress tests. Depending on the results,
the authorities could consider macro-prudential
measures where appropriate.
The relatively low guaranteed interest rate and
the strong development of unit-linked business
mitigate the risks of the low interest rate
environment for French life insurers.
In contrast
to other Member States, the French insurance
industry has proposed very low guaranteed interest
rates on their traditional life insurance products.
For many years, this rate has been as low as 0 %,
so that the average guaranteed rate is now close to
0.51 %. This special circumstance has allowed
French insurers to suffer much less from the fall in
interest rates than insurers in other Member States,
where guaranteed interest rates have been much
higher. To compensate for this low guaranteed
interest rate, policyholders are remunerated by a
minimum mandatory profit sharing. While the
average return (including profit sharing) on life
insurance contracts of 2.34 % seems relatively
high, the mandatory minimum for profit sharing
does not seem to threaten life insurers at the
moment, thanks to some flexibility in the
modalities. At the same time, the surge in the unit-
linked business, which accounts for the majority of
new production, has allowed insurers to transfer
risks to the policyholders.
Graph 4.2.1:
Funding of non-financial corporations
80
70
60
% of GDP
FR
EU
0.04
0.03
0.03
0.02
0.02
0.01
50
40
30
20
10
0.01
0.00
0
Debt securities
Listed shares
MFI loans
Gross operating surplus:
corporations
Source:
ECB, AMECO (December 2015)
As in the rest of the euro area, SME access to
capital markets remains a challenge.
Capital
markets for large corporations are functioning
smoothly. The stock market is very deep and is
dominated by non-financial corporations. Market
debt funding of non-financial corporations has
been increasing and reached EUR 555 billion, i.e.
25.4 % of GDP in 2015, from less than 15 % in
2008. For SMEs, access to liquidity can be more
problematic as in the rest of the euro area. Banks
account for 61 % of funding, excluding equity, for
30
Venture capital (rhs)
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4.2. Financial sector
all non-financial corporations in France, but this
figure rises to 96 % for SMEs. The French
authorities are trying to improve market access for
SMEs by various means, such as ensuring that
financial
information
requirements
are
proportionate, developing financial analysis on
SMEs and supporting institutionalisation of
crowdfunding. They are also expecting positive
effects from the Capital Markets Union.
31
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1728516_0035.png
4.3. LABOUR MARKET, EDUCATION AND SOCIAL POLICIES
Unemployment is slowly decreasing from the
peak reached in 2015, although it remains high
for some categories of workers.
Having risen
steadily since 2008 (Graph 4.3.1), the
unemployment rate fell in 2016 (from 10.4 % in
2015 to 10.0 % in 2016) and is forecast to decrease
further in the coming years. However, in 2016 the
unemployment rate remained higher than in the
EU (8.6 %). Unemployment remains higher for
low-skilled (
19
) workers (17.4 % against 16.3 % in
the EU), especially if young (39.2 % compared to
28 % in the EU). The non-EU-born, representing
9.6 % of the working age population in 2015, are
facing increasing difficulties in accessing the
labour market; the unemployment rate for them
was 19.4 % in 2015, up from 19.0 % in 2014
(17.9 % in the EU in 2015).
Graph 4.3.1:
Unemployment rate in France, 2006-2015
45
40
35
30
(%)
compared to 42.5 % in 2014, while in both the EU
and euro area it had started to fall in 2015 (48.1 %
and 51.2 %). Very long–term unemployment (over
two years) also keeps increasing, to 22.0 % of the
unemployed in 2015, compared to 20.9 % in 2014.
There is a gender gap in the labour market.
In
2015, the employment rate was higher for men
(74 %) than women (66.6 %), while a higher share
of women worked part-time (30 % compared to
7.3 % of men). Moreover, the gender pay gap
(15.5 % in 2014) has only marginally decreased in
recent years. In turn, differences in work patterns,
wages and career lengths may have an impact on
women’s pension entitlements, which are 35 %
lower than men’s entitlements. The law of 4
August 2014 on real equality between women and
men and the November 2016 inter-ministerial
action plan aimed to promote gender equality in
the labour market. However, the joint taxation
system (quotient
conjugal)
creates disincentives
for second earners – mainly women – to enter the
labour market and to increase their working time
(OECD, 2012, 2016c; Landais, Piketty and Saez,
2011).
The employment situation of the non-EU-born
is deteriorating and the labour market inclusion
of second generations remains challenging.
The
employment rate of the non-EU-born residing in
France further decreased between 2014 and 2015
(from 55.4 % to 54.9 %) and the resulting
employment gap with the EU-born increased (at
16.5 pp. in 2015 and at about 22 pp. if considering
women alone). Their lower employment rate is
explained by a lower level of education on average
than native-born residents, a lower activity rate for
non-EU-born women (57.8 % in 2015 vs 75 %
among native-born women) and a higher
unemployment rate for non-EU-born men (19.8 %
in 2015 compared to 9.8 % among EU-born men).
In addition, second generations (i.e. native-born
with two foreign-born parents, representing 6.9 %
of the working age population in 2015) remain
penalised on the labour market; even when
accounting for differences in individual
characteristics, their chance of having a job is 15.7
pp. lower (OECD, 2014a). Indeed, in 2014, native-
born residents, aged 15-64 and with two
foreign-born parents, had an unemployment rate of
14.5 %, and as high as 49.6 % for young people,
compared with 8.8 % and 18.7 % for native-born
residents with native-born parents. Several recent
25
20
15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
All
15-24 years, all
15-64, non-EU born
15-64, ISCED 0-2
15-24 years, ISCED 0-2
(1) The International Standard Classification of Education
(ISCED) is a statistical framework for organising information
on education maintained by the United Nations
Educational, Scientific and Cultural Organization (UNESCO).
An ISCED level between 0 and 2 corresponds to less than
primary, primary and lower secondary education.
Source:
Eurostat
Long-term unemployment is still rising, in
contrast with the EU trend.
The average length
of unemployment has kept increasing well above
the 2008 level. The figure was 580 days (1 year
and 7 months) in November 2016, up from close to
400 days in 2008. As a percentage of total
unemployment, long-term unemployment (12
months or more) remained high at 42.6 % in 2015
(
19
) The ‘low-skilled’ are defined as part of the active
population with a lower secondary education diploma or
less (ISCED 0-2 levels).
32
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4.3. Labour market, education and social policies
studies have stressed the persistence of
discrimination among people with a migrant
background in hiring processes and the potential
positive macroeconomic impact on GDP of
reducing the impact of discriminations.
Labour market segmentation and rigidity
Segmentation of the labour market is
entrenched.
The proportion of temporary
contracts has been gradually increasing, and
reached 16.8 % of the total number of employees
in the third quarter of 2016. While the percentage
of temporary employment is slightly above the EU
average, its duration has been rapidly shortening
over time; at the end of 2015, almost one fifth of
temporary contracts were for less than one month.
On the other hand, France also appears to have one
of the lowest rates of mobility according to the EU
Labour Force Survey, with an average seniority of
11 years.
Rehiring and job instability are typical of
temporary contracts of short duration.
In 2000,
temporary hires accounted for 75 % of total
hirings. In 2016, they represented 86.4 % of total
hirings, with temporary jobs of less than one
month representing 80 % of total temporary hires.
Moreover, more than two thirds of the new hires
are rehires with an old employer (Unédic, 2016);
about half of these were rehires with the last
employer - twice the proportion in 1995.
Temporary rehiring concerns both activities where
the nature of the job justifies temporary
employment (i.e. the so-called
contrat à durée
déterminée d’usage)
and activities which have
seen a recent rapid increase of temporary
employment (e.g. health, construction, retail trade
and public administration). The transition rate
from a fixed-term contract to an open-ended
contract remains very low, at 10.9 % in 2015
compared with 23 % across the EU.
Impact of labour market reforms
law also contains measures to increase the
effectiveness of collective bargaining, mainly by
reducing the number of branches, introducing the
majority principle for the adoption of collective
agreements, reforming the rules underpinning the
denunciation and
revision of
collective
agreements,
and
introducing
‘offensive
agreements’ that firms can use to adjust wages and
working time arrangements, while maintaining or
increasing the level of employment. In particular,
firms will be able to adopt a collective agreement
that will prevail over individual contracts, even in
terms of working time and pay.
According to preliminary assessments, the
Labour Act is expected to reduce segmentation
of the labour market and to have a milder
impact on the level of employment.
According
to Kant, Ballot and Goudet (2016) the new
definition of economic dismissal would decrease
unemployment by 150 000 jobseekers in the short
term and create 200 000 jobs over 2 years, with
strong substitution effects from short to longer-
term contracts. The same study estimates that the
decrease in the minimum overtime premium from
25 % to 10 % - that can now be agreed upon by
social partners at firm level - will have an initial
negative impact for the employment of workers
aged 25-64 over the first 2 years after the adoption
of the law, which would be compensated over the
following 2 years.
The incentives to recruit on longer-term
contracts have helped to address labour market
segmentation in smaller firms.
The SME
recruitment incentive programme (prime
à
l'embauche PME)
(
20
) had benefited about 670 000
new employees as of October 2016. Two thirds of
these were on open-ended contracts, while the
remaining third were fixed-term contracts of 6 or
more months. According to recent French Treasury
estimates, the effect of this incentive on
employment would be to create or maintain, on
average, up to 60 000 jobs per year.
(
20
) This programme allows for an annual, lump sum, bonus of
EUR 2000 paid quarterly over a two-year period to
companies with fewer than 250 employees, which have
hired new employees on an open-ended or fixed-term
contract of more than 6 months between 18 January and 30
June 2017 for wages up to 1.3 time the statutory minimum
wage.
The Labour Act of 8 August 2016 addresses
some of the rigidities of the labour market.
This
law paves the way for a reform of the Labour Code
aiming at clearer differentiation between rules to
be defined by regulation, branch-level and firm-
level agreement, with the express intent to extend
the perimeter of autonomous firm-level rules and
to clarify individual economic dismissal rules. The
33
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4.3. Labour market, education and social policies
The recent evaluations of the
'crédit d’impôt
pour la compétitivité et l’emploi'
(CICE) have
pointed to its positive effect on firms’ profit
margins and employment, while the effects on
investment, R&D and exports are expected to
take time to materialise.
Based on the analysis of
firm-level data for 2013-2014 by three groups of
researchers, the CICE has been found to have a
positive impact on employment and firms’ profit
margins, although its effect on employment did not
increase when its credit rate increased from 4 % to
6 %. By contrast, no impact has been found on
average wages, only on some categories of wages
within certain firms. Also, no effect on investment,
R&D and exports has been found, given that the
period for which firm-level data are available at
the moment is too short. No comprehensive
evaluation of all social contribution reduction
schemes is yet available to assess their
architecture, socioeconomic impact or budgetary
efficiency.
Unemployment benefit system
In addition, the benefit calculation favours a
succession of short-term work periods.
The
unemployment insurance system mimics the
functioning of an unemployment account, whereby
a worker brings with him the rights acquired and
not used in previous occupations, when moving
between different jobs. This feature provides
incentives for the unemployed to look for work
more intensively since they do not lose their entire
stock of benefits by taking up a job. Yet, the
method used to calculate the unemployment
benefit gives employees an incentive to combine
revenues from short-term employment with
unemployment benefits, particularly in those
sectors where the
contrats d’usage
are
allowed (Cahuc and Prost, 2015). This has
favoured particular schemes, such as those
concerning the
contrats d’usage,
interim and
entertainment sector workers, whose structural
deficit is partly financed by a structural surplus in
the general scheme for open-ended contracts.
The financing of unemployment insurance does
not encourage firms to take into account the
consequences of their high labour turnover on
the deficit in the insurance funds.
By levying
higher contribution rates from sectors with higher
turnover, the law of 14 June 2013 addresses the
problem of firms with more stable recruitment
patterns subsidising firms with less stable
recruitment patterns (
21
). However, compared to
systems where contributions are firm-specific and
depend on the extent to which laid-off employees
claim unemployment benefits, the French
unemployment insurance does not require firms to
internalise the cost that layoffs impose on
unemployment insurance funds. On the contrary, it
provides an incentive for those economic
activities,
usually characterised
by low
productivity, which make most use of short-term
contracts interrupted by short spells of
unemployment for workers.
(
21
) Under the law of 14 June 2013, employers pay higher
social contributions for temporary hires of less than 3
months. For standard temporary contracts, justified to meet
the need for temporary increases in production, the
additional contribution is 3 % for contracts of less than
1 month and 1.5 % for contracts of duration between 1 and
3 months; for the
contrats d’usage
of less than 3 months,
the additional contribution is 0.5 %, while those of longer
duration are not taxed more than permanent contracts.
Since 2008, the deficit of the unemployment
insurance organisation has been rising steadily,
due to both business cycle and structural
features of the unemployment insurance system.
The 2008-2009 and 2011-2012 crises led to an
increase in the number of jobseekers eligible for
unemployment benefits from 2 million in 2008 to
2.8 million in 2016. Consequently, the budget
performance of the unemployment insurance
(Unédic) steadily worsened. In September 2016,
the deficit in the unemployment benefit system
was projected at EUR 4.3 billion in 2016 against
EUR 4.4 billion in 2015, leading to a further
increase in the system’s debt to EUR 30 billion in
2016 and to EUR 33.8 billion in 2017 (Unédic,
2016). The dynamics of the unemployment
insurance deficit and debt reflect a number of
factors beyond cyclical considerations, including
the design of unemployment benefits and job
instability linked to widespread very short
employment spells. While the replacement rate is
comparable to that of countries with similar levels
of GDP per capita, unemployment benefits are
capped at very high levels (over EUR 7 000), the
minimum contribution period is among the lowest
(4 months in 28 months) and the duration of
benefits is among the longest (24 months after
contributing for 24 months).
34
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4.3. Labour market, education and social policies
Active labour market policies
Increased active labour market policy measures
targeting low-skilled young people have
succeeded in reducing low-qualified youth
unemployment only slightly.
The unemployment
rate for low-qualified young people decreased
from 40.3 % to 39.2 % between 2014 and 2015. To
address their difficulties in entering the labour
market the number of subsidised contracts
targeting low-skilled young people —
emplois
d’avenir, contrat initiative emploi (CUI-CIE)
and
contrat d’accompagnement dans l’emploi (CUI-
CAE)
— has been increased to reach 45 800 in the
market sector (+65 % between March 2015 and
March 2016) and remain stable at 101 300 in the
non-market sector. In the first quarter of 2016,
29.2 % of all young employed were on subsidised
contracts, as were 51.7 % of young employed
people without qualifications (DARES, 2016a).
Although these contracts have a positive short-
term effect on employment, they fail to foster
sustainable inclusion in the labour market; only
40 % of young people in the non-market sector
were employed 6 months after exiting a subsidised
contract and 66 % in the market sector, where
deadweight effect is more important (Cour
des
Comptes,
2016a). Also, some weaknesses were
identified in Youth Guarantee implementation in
terms of outreach, information and coordination
between actors (European Commission, 2016c).
In a flexicurity approach, training rights and
activation measures have been reinforced for
the more vulnerable.
The reinforcement of
training rights through the personal training
account for low-qualified workers and activation
measures for young unemployed people in
precarious situations, with the generalisation of the
Garantie Jeunes
scheme, is intended to support
personal transitions and economic adaptations.
Moreover, the personal activity account (compte
personnel d’activité,
CPA), introduced in January
2017, may reduce disparities related to
employment status, by attaching training rights
directly to workers.
Education and vocational training
year-old low achievers in the 2015 OECD
Programme for International Student Assessment
(PISA) is slightly above the EU average in all
three fields (22 % in science, 21 % in reading and
23 % in mathematics). Performance somewhat
worsened compared to 2012. The relationship
between socioeconomic background and student
performance remains strong. France shows one of
the largest gaps in the proportion of low achievers
in science between the lower and upper quarters on
the socioeconomic index of the 2015 PISA student
population (34.6 pp compared to an EU average
gap of 26.2 pp). There is also a large performance
gap between non-immigrants and first-generation
immigrants. Second-generation immigrants are
only partially catching up with non-immigrants.
There are large performance gaps between
schools in France. School composition often
reflects the residential concentration of people
with socioeconomic difficulties and migrant
background.
Disadvantaged children are unevenly
distributed across schools. Social diversity
decreases further for upper secondary education
levels (CNESCO, 2016a). Pupils with a
disadvantaged background tend to be steered more
often towards initial vocational education, as a
remedy for school problems, without regard to
their motivation. Indeed, initial vocational
education pupils account for 87 % of early drop
outs in France in 2013, while accounting for close
to 40 % in 2015 of all secondary school enrolment
(CNESCO, 2016c; DEPP, 2016d). Also, teachers
in ‘priority education networks’ targeting schools
in disadvantaged areas (réseaux
d’éducation
prioritaire)
tend to be younger, less experienced
and more likely not permanent appointees (OECD,
2015a).
Reform plans are being gradually implemented
to address these challenges through the
prevention of poor educational outcomes.
Begun
in 2013, the compulsory education reform seems to
go in the right direction, but its impact will depend
on actual implementation (MENESR, 2015;
CNESCO, 2016a). Full implementation of the
2014 priority education plan, further strengthening
support teaching staff among other measures, is
planned for 2017 with the creation of nearly 9000
new teaching posts at early education levels. Also,
to make the teaching profession more attractive, in
June 2016 the government announced an overhaul
of the salaries of teachers and staff to be rolled out
France faces wide performance gaps in basic
skills linked to students’ socioeconomic
background. Pupils with a migrant background
face additional difficulties.
The proportion of 15-
35
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4.3. Labour market, education and social policies
between 2017 and 2020 at a cost of EUR 1 billion.
Measures to improve school and career guidance
of pupils are being generalised, including the
‘Parcours Avenir’.
The initial system of vocational education and
training (VET) does not lead to an optimal
integration of young people in the labour
market.
France is one of the few OECD countries
where opting for VET does not provide better
employment outcomes than general education
(CNESCO,
2016b).
Production
sector
specialisations still offer better labour market
integration outcomes, while trade & sales and even
more secretarial training has a significantly lower
post-diploma employment rate, translating later
into a high unemployment rate (30 %). The figures
above cast doubt on whether the existing national
and local governance entities have been effective
in defining a range of education and initial training
based on economic needs and employment
prospects, rather than favouring available training
resources. In this respect, the 2014 VET reform
establishes new national and regional-level VET
and employment coordination bodies, while over
500 additional VET specialties in sectors with
good employment prospects have been announced
for the opening of the 2017 school year, along with
the creation of 1 000 specific teaching posts.
However, given the relative novelty of these
measures and announcements, their impact cannot
be assessed yet.
Apprenticeship presents better employment
outcomes than school-based initial VET.
Apprenticeship offers better labour market
integration perspectives, but is constrained by its
cost and its sensitivity to national and territorial
economic cycles, which affect company decisions
to hire apprentices (
22
). As a result, apprenticeship
represents only one fourth of initial VET. The
introduction of a low-qualified apprentice
premium and the increased public sector
commitment
have
recently
enabled
the
stabilisation of apprenticeship figures. Entry into
apprenticeship is also expected to be eased by its
gradual opening to professional qualifications.
Synergies between school and work-based VET
have also been initiated to reduce the drop-out rate.
(
22
) The cost of an apprentice (all levels) is 2.5 times that of a
school-based VET pupil in the production sector
(CNEFOP, 2016a; CNESCO, 2016b).
The continuous VET system has important
imbalances.
Continuous vocational training is
facing challenges as shown in France’s weak
results in the Programme for the International
Assessment of Adult Competencies (PIAAC)
survey, in numeracy, literacy and ICT skills. The
continuous VET system is mostly characterised by
imbalances in access to training depending on the
labour market status (
23
): the unemployed, low-
qualified, older workers and small business
employees (
24
) have less chance of receiving
training while jobseekers access to training stood
at 9.8 % in 2014. The reform of companies’
contributions to VET financing, part of the 2014
VET reform, in increasing coverage of SME
employees and the unemployed, aimed to improve
access to continuous training. It remains to be seen
if this law will have an impact on both access to
training and governance, together with the new
coordination bodies created at national (CNEFOP)
and regional level (CREFOP) to develop shared
diagnosis on training needs. These issues are even
more important given the recent measures taken to
sustain demand for training, such as the personal
training account scheme (Compte
personnel de
formation,
CPF) introduced on 1 January 2015,
included in the personal activity account (Compte
personnel d'activité,
CPA) set up by the Labour
Act of 8 August 2016 (
25
), and the
plan 500 000
formations
of January 2016 (
26
).
Social policies
France fares better than the EU average on
poverty, social exclusion and inequalities,
with
the poverty rate steadying at around 13.6 % and
decreasing to 17.7 % for the population at risk of
(
23
) Workers on temporary contracts (CDD) can expect on
average 8 hours of training per year, whereas workers with
long-term contracts (CDI) can expect on average 19 hours
of training per year.
(
24
) Only 20 % of companies with 10 to 19 employees invest in
training, whereas 60 % of companies with between 1 000
and 1 999 employees invest in training.
(
25
) The Labour Act of 8 August 2016 created the new personal
activity account, including the personal training account,
extended additional training rights to 400 hours for
unskilled employees (against 150 hours normally) and
unlimited rights for early-school leavers. At the same time,
it extended the personal training account to civil servants
and independent workers.
26
( ) By January 2016, 500 000 additional training courses for
jobseekers were under way, with the aim of doubling their
number to 1 million, with financing of EUR 1 billion from
the State and local coordination by the regions. By the end
of November 2016, 945 000 training courses had been run.
The plan will be further pursued in the first half of 2017.
36
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4.3. Labour market, education and social policies
poverty or social exclusion in 2015 against
respectively 17.3 % and 23.7 % for the EU. The
impact of social transfers (representing 19.3 % of
GDP in 2014) (
27
) on poverty reduction remains
high, at 43.1 % in 2015, compared with the EU
average of 33.5 %. The intensity of poverty, as
calculated by national figures, increased slightly to
20.1 % in 2014 after falling from a peak of 21.3 %
in 2012 to 19.8 % in 2013. Similarly to most
Member States, the 2020 objective for reducing the
number of people at risk of poverty or social
exclusion therefore will be very difficult to reach.
Inequality, as measured by the Gini index of
disposable income decreased from 30.8 in 2011 to
29.2 in 2015. The ratio of average income of the
bottom quintile to that of the first quintile of
income distribution decreased from 4.5 in 2012 to
4.3 in 2015.
However, some more vulnerable groups are