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Brussels, 28 May 2008

Commission encourages France to pursue budgetary consolidation as well as reforms

While acknowledging the reforms started in France in the last 12 months, the European Commission on Wednesday advised the government to carry out this process hand in hand with budgetary consolidation. This dual approach will allow for a rise in the country's growth potential and will reverse the building up of the national debt since the early nineties. This is economic and budgetary policy advice for France, the principle of which is provided for in the 2005 revision of the Stability and Growth Pact agreed by all European Union countries.

"France has started an impressive number of reforms over the last year which were long due and, if continued, should contribute to increasing the country's growth potential, leading to a continued reduction of unemployment through the creation of more and better jobs. However, this process needs to be accompanied by a renewal of the budgetary consolidation that came to a halt in 2007 leaving no room for manoeuvre. Only by moving towards balanced budgets can the public debt be reduced and budgetary resources be freed up for growth-enhancing measures. I hope that budgetary consolidation and structural reforms will go hand in hand, " said Joaquin Almunia, Economic and Monetary Affairs Commissioner.

The Commission today adopted a recommendation providing advice on France's economic and budgetary policy. This is in accordance with the revised Stability and Growth Pact (SGP)[1] which foresees that “the Commission will issue policy advice to encourage Member States to stick to their adjustment path towards the 'medium-term budgetary objective'”. France's medium-term objective is a balanced budget in structural terms (i.e. cyclically adjusted and net of one-off and other temporary measures).

France corrected its budget deficit to below 3% in 2005 (2.9%) leading to the abrogation of the excessive deficit procedure early in 2007. However, last year's nominal budget deficit was 2.7% which in structural terms indicates no improvement vis-à-vis 2006. According to the Commission's forecasts, progress in the period 2008-2009 is also expected to be very limited. The SGP requires that euro area countries that have not yet reached their medium-term objective[2] do so by reducing their deficit by a benchmark of 0.5 percentage points a year.

After falling to 63.6% in 2006, the ratio of the French debt to national GDP has begun to increase again. In the early 90s when the Maastricht Treaty, which sets limits on deficit and debt, was agreed, the French debt ratio was less than 40%.

In the last 12 months, the French government has launched a series of reforms aiming to increase the potential GDP growth which currently stands at around 2%.

Last year the government launched a general review of public policies ("Révision générale des politiques publiques") to improve the efficiency of public services and ultimately reduce public spending by three percentage points by 2012. It recently adopted a draft law to modernise the labour market ('Loi de modernisation du marché du travail') and a draft law on the modernisation of the French economy ('Loi de modernisation de l'économie') aimed at fostering competition in product and services markets.

While such planned reforms and others are welcome and could ultimately boost potential growth, many are at an early stage.

The Commission believes that reforms and budgetary consolidation go hand in hand. Budgetary consolidation increases the budgetary margin of manoeuvre by freeing up resources for growth-enhancing measures.

This is why the Commission is recommending that France should pursue with determination the ongoing structural reform process aimed at increasing France's growth potential and competitiveness, including through the implementation of the two above-mentioned laws.

At the same time, the Commission recommends that France carry out the necessary consolidation of public finances to support that process of structural reform, namely through an ambitious implementation of the recommendations in the "Révision générale des politiques publiques", further reform of the health insurance system and the review of the pension system (as foreseen in the 2003 pension reform);

In particular, France is advised to implement rigorously the Council policy invitations of 12 February 2008[3] on the updated Stability Programme for the period 2007 to 2012.

The full text of the policy advice can be found at:

[1] See report titled ‘Improving the implementation of the Stability and Growth Pact’ adopted by the ECOFIN Council on 20 March 2005 and endorsed by the European Council in its conclusions of 22 March 2005. A subsequent Code of Conduct specifies that the Commission policy advice shall be given in accordance with Article 211.

[2] Most EU countries target a balanced budget. Some, fast-growing and with a low debt, can afford a small deficit while others generally aim for a surplus. Many EU , and most of the euro area members, have already achieved their medium-term objective.


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