Country Report – France
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EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 1009 final COMMISSION STAFF WORKING DOCUMENT Country Report France 2019 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 EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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(2019) 150 final} EN EN CONTENTS Executive summary 4 1. Economic situation and outlook 8 2. Progress with country-specific recommendations 18 3. Summary of the main findings from the MIP in-depth review 22 4. Reform priorities 27 4.1. Public finances and taxation 27 4.2. Financial sector 38 4.3. Labour market, education and social policies 40 4.4. Competitiveness reforms and investment 50 Annex A: Overview Table 65 Annex B: Commission Debt Sustainability Analysis and fiscal risks 74 Annex C: Standard Tables 75 Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for France 81 References 85 LIST OF TABLES Table 1.1: Non-cost competitiveness of the largest export sectors for France 12 Table 1.2: Key economic and financial indicators 17 Table 2.1: Assessment of 2018 CSR implementation 20 Table 3.1: Outward spill-over heat map for France 23 Table 3.2: MIP Assessment Matrix (*) – France 2019 24 Table 1: Spillover effects of structural reforms — France closing half of the structural reform gaps 26 Table 4.2.1: Financial soundness indicators – all banks in France 38 Table 4.3.1: Employment growth by sector 43 Table C.1: Financial market indicators 75 Table C.2: Headline Social Scoreboard indicators 76 Table C.3: Labour market and education indicators 77 Table C.4: Social inclusion and health indicators 78 1 Table C.5: Product market performance and policy indicators 79 Table C.6: Green growth 80 LIST OF GRAPHS Graph 1.1: Contributions to GDP growth (2011-2020) 8 Graph 1.2: Potential GDP growth breakdown 9 Graph 1.3: Trade balance breakdown 10 Graph 1.4: Net lending/borrowing by sector 10 Graph 1.5: Breakdown of unit labour cost rate of change 11 Graph 1.6: French export potential by sectors 13 Graph 1.7: Non-financial corporations' debt and benchmarks 14 Graph 1.8: Housing —- Valuation gaps 15 Graph 1.9: Change in GDP per head (percentage points), France 2007-2016 – Regional convergence 16 Graph 2.1: Overall multiannual implementation of 2011-2018 CSRs to date 18 Graph 4.1.1: Composition of government expenditure (% of total expenditure, 2017) 27 Graph 4.1.2: Contributions to the change in the public debt ratio in France 28 Graph 4.1.3: Projections of French public debt over the medium term under alternative scenarios 29 Graph 4.1.4: Impact of the reclassification of SNCF of public debt projections 30 Graph 4.1.5: Tax wedge on labour, single earner, average wage (2017) (in % of labour cost) 36 Graph 4.2.1: Annual growth rate of loans 38 Graph 4.3.1: Trends in self-employment, part-time and temporary employment 40 Graph 4.3.2: Beveridge curve: 2003Q2-2018Q2 41 Graph 4.3.3: Wage benchmark 42 Graph 4.3.4: Nominal unit labour cost dynamics 42 Graph 4.4.1: Public, corporate and foreign investment in France 50 Graph 4.4.2: Investment rate by firms 51 Graph 4.4.3: Business investment prospects in France 51 Graph 4.4.4: Total factor productivity (TFP) growth decomposition 52 Graph 4.4.5: France: targets and emissions under the effort-sharing legislation (percentage change from 2005) 58 Graph 4.4.6: Evolution of Électricité de France S.A. (EdF) indebtedness from 2005 to 2017 58 Graph 4.4.7: Regional expenditure for R&D in France 61 Graph 4.4.8: France: SBA performance, state of play and development from 2008 to 2018 63 2 LIST OF BOXES Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in France 21 Box 3.1: Spillovers of structural reforms — the case of France 26 Box 4.1.1: Assessing the budgetary and distributional effects of alternative scenarios to reform the immovable property tax in France 37 Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 49 Box 4.4.1: The Investment Plan for Europe - in France 54 Box 4.4.2: Investment challenges and reforms in France 55 3 EXECUTIVE SUMMARY While economic activity slowed down in France, average. The employment rate continued to the reform process continued (1). After a year of increase and reached 71.6 % in the third quarter of strong economic growth in 2017, temporary 2018. The unemployment rate continued to decline factors weighed on economic activity at the gradually, reaching 9.1 % in 2018. However, it beginning of 2018 and social protests at the end of remains well above the EU average (7.0 %) and 2018 hindered the economic recovery that the euro area average (8.2 %). Segmentation is occurred over the summer. At the same time, entrenched in the French labour market. Almost policy actions that had been undertaken are 85 % of new hires are on temporary contracts and expected to improve the performance of the French the transition rate to permanent contracts is among economy by better linking the education and the lowest in the EU. Involuntary part-time work is training system to labour market needs and by also very high, at 43.2 % of total part-time work in reducing red tape for firms. Measures to simplify 2017. Labour market slack (a measure of the the tax system are ongoing and systemic reforms underemployed that includes people available to of the healthcare and pension system have been work but not seeking, those seeking work but not announced for 2019. Planned savings on immediately available and all involuntary part- government spending including through the new time employed) coexists with a structural skills spending review process launched in October 2017 mismatch, as skills shortages are emerging, (Action Publique 2022) still have to be especially in some sectors. implemented. The labour market remains fragmented, impeding a faster improvement in Growth in consumption is expected to recover labour market conditions for all categories of gradually. In 2018, private consumption workers. Barriers to competition in the services rebounded somewhat over the summer after three sector continue to hamper its performance and quarters of sluggish growth. Demonstrations at the high taxes on production remain. The efficiency of end of 2018 had a negative impact on the public support to innovation could be further economy, mitigating the positive effects on improved. consumption of fiscal measures that had been adopted. Private consumption is set to continue its Economic growth is forecast to moderate, while gradual recovery in 2019-2020 backed by remaining above potential. After expanding at improving labour market conditions. 2.2 % in 2017, GDP growth decreased to 1.5 % in 2018 and is forecast to expand by 1.3 % in 2019 Investment remains at a high level, and by 1.5 % in 2020. The GDP growth rate would accompanied by the Great plan for investment still remain above its potential, which is gradually 2018-2022. Investment represented 22.5 % of GDP recovering after having dropped from an average in 2017. After several years of contraction, of 1.8% from 2000 to 2008 to just 1.0% in 2009. government investment increased again in 2016 Potential growth is now forecast to reach 1.3 % by and is expected to continue increasing up to 2020. 2020, driven by slowly improving productivity and Business investment should ease gradually while robust investment. remaining dynamic. Housing investment, by contrast, slowed down markedly in 2018 and is set Labour market conditions continue to improve, to remain subdued. Under the Great plan for although at a slower pace compared to the EU investment 2018-2022 (Grand plan d’investissement 2018-2022), France has also (1) This report assesses France’s economy in light of the planned measures for a total of EUR 57 billion to European Commission’s Annual Growth Survey published on 21 November 2018. In the survey, the Commission calls sustain the greening of the economy, address skills on EU Member States to implement structural reforms to mismatch, foster innovation and digitise public make the European economy more productive, resilient and services. inclusive. In so doing, Member States should focus their efforts on the three elements of the virtuous triangle of economic policy — boosting investment, pursuing Net exports contributed to growth over the last structural reforms and ensuring responsible fiscal policies. two years, but the net international investment At the same time, the Commission published the Alert position continued to deteriorate. In 2017, net Mechanism Report (AMR) that initiated the seventh round of the macroeconomic imbalance procedure. The AMR exports contributed to growth for the first time found that France warranted an in-depth review, which is since 2012. However, the value of trade balance presented in this report. slightly declined for two main reasons: (i) dragged 4 Executive summary by its energy component and (ii) worsened by the planned increase in fuel tax and adopt further net export of manufactured goods. At the same measures to increase the purchasing power of low- time, the current account improved, but remained income households. The authorities have estimated below the value needed to stabilise the net that introducing these measures in this year’s investment international position (that is the budget will lead the general government headline difference between external financial assets and deficit to reach 3.2 % in 2019, thus reducing to liabilities) in 10 years.