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The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of France 2005 published on 16 June 2005.
What are the main challenges?
After a weak performance in 2000-03 output growth recovered in 2004, somewhat more strongly than in most euro zone countries. It reached 2¼ per cent but, as in the rest of the euro zone, weaker growth is likely in 2005-06, while unemployment remains stubbornly high, currently around 10%. The origins of poor labour market performance, a central challenge for French policymakers, lie in a combination of measures themselves designed to protect workers, notably a high minimum cost of labour and strict employment protection legislation, as well high tax wedges on labour; a lack of competition in a number of service sectors further inhibits employment creation. There is also a strong link with another key challenge for the authorities, a persistently high budget deficit leading to rising public sector debt: low utilisation of labour potential has a direct impact on government revenues and expenditures, while at the same time generating pressure to use short-term fiscal intervention to increase employment.
Growth, unemployment, and the budget deficit
1. Per cent of potential GDP.
Source: OECD Current Economic Outlook No. 77.
Aware of these difficulties, the authorities have made efforts in the last two years to restore sustainable public finances with substantial reforms of pensions and the health system and putting in place strict control of central government expenditure. Furthermore, the authorities have worked to increase potential growth in improving labour market functioning, for example by relaxing the 35 hour week legislation, increasing competition on certain markets and making the fiscal and administrative environment more favourable to enterprise development. Even so, with a low utilisation of labour potential and a still difficult budgetary position, the French economy remains in a fragile situation from which to deal with the long term challenges from population ageing.
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