French Economy

Topics: Gross domestic product, Inflation, European Union Pages: 14 (4917 words) Published: February 1, 2012
French Economy General Overview:
The French economy is the fifth largest in the world and accounts for about a fifth of euro area GDP. France weathered the global crisis better than most advanced economies. This is explained by the economy being less open than e.g. Germany, a fairly solid financial sector, a large public sector and substantial fiscal stimulus. Exports amount to about 20% of GDP – about half of the euro area average – while government expenditures amount to about 55% of GDP. The government budget deficit as a share of GDP is higher than the euro area average and the debt-to-GDP ratio is only marginally below the euro area average. During the summer France announced austerity measures, aimed at ensuring fiscal sustainability. Significant reforms and privatizations have taken place in the past decades, but the government continues to own shares in corporations in a range of sectors. Key export markets are located in Europe, with Germany, Italy and Spain being the most important ones. About one third of all exports are going to economies outside Europe. The share of exports to Asia is small, but gradually increasing. Tourism is important (France is the most visited country in the world). France runs a current account deficit and has a large foreign debt. France is the leading agricultural producer and exporter in Europe. Nevertheless agriculture accounts for less than 4% of employment and 2% of GDP. The unemployment rate, which peaked in January 2010, is below the euro area average, but it increased in Q2 2011 and is now close to the previous peak. The labor force is highly educated. GDP per capita: EUR 30,913, 7th highest in the euro area (2010)

Projected Growth:
The French economy started to expand in mid-2009 and its robust growth in early 2011 was a pleasant surprise, thanks to strong consumption and inventory-building. Unemployment remains high, but is coming down. The IMF projects that the French economy will grow about 2 percent over the next two years, even as the country undertakes consolidation policies to reduce its deficit and public debt. Private consumption should remain the engine of growth and will be aided, as it was in the first quarter, by recovering investment spending. Risk to Economy:

But the country does face risks. Spillover from the sovereign debt crisis in some euro area countries such as Greece is a threat, as is uncertainty about energy and commodity prices. “The Greek situation has increased markets’ attention to fiscal debt and deficits in all countries. It just further underlines the importance for France to continue on the fiscal consolidation path that it is already embarked on and to ensure that market credibility is maintained,” said Anne-Marie Gulde-Wolf, who heads the IMF team that conducted the annual review of the French economy.

Reforms to encourage growth:

Although the near term is reasonably encouraging, over the medium term, France, like all other advanced European countries, has a problem with potential growth. Its population is not aging as fast as in many other advanced economies, but France faces a number of structural issues with which it must deal, such as declining export market shares and high built-in unemployment, especially among young and unskilled workers. Furthermore, to protect macroeconomic stability, France needs to achieve taxing and spending levels that can be sustained over the long run and make its financial system more resilient to new crises.

French Economic Stability:
Costs incurred from the global recession— revenue losses and stimulus spending as well as financial sector support—coupled with aging-related spending pressures have taken a heavy toll on public finances. The crisis brought France’s public debt to above 80 percent of gross domestic product (GDP), and debt servicing costs to about 2½ percent of GDP in 2010 (see Chart 1). While the fiscal stimulus during the crisis was...
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