Council Opinion

of 12 February 2001

on the updated stability programme of France, 2002-2004

(2001/C 77/05)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 12 February 2001, the Council examined the updated stability programme of France which covers the period 2001-2004.

Economic growth has been robust over the past two years, broadly in line with the projections of the 1999 updated stability programme. In 2000, the French economy registered a third consecutive year of strong GDP growth with relatively low inflation. The unemployment rate continued to decline and reached 9,2 % in November, down from 10,9 % one year earlier. Despite this sharp fall in unemployment, wage and price developments remained very moderate. Headline inflation increased from 0,5 % in 1999 to 1,7 % in 2000 mainly due to higher oil prices.

The Council notes that, building on a more favourable outcome than expected in 1999 and an expenditure growth slower than initially projected, the general government deficit for 2000, estimated at 1,4 % of GDP, will be lower than initially expected; the government debt ratio in 2000, estimated at 58,4 % of GDP, was also lower than targeted by one percentage point. The broad economic policy guidelines which aim at using better than expected revenues to achieve faster reduction in the government deficit. Therefore, the Council finds that a better budgetary outcome could have been achieved in 2000, taking into account the favourable economic and public finances developments.

The budgetary projections of the updated programme are based, as in the past, on two macroeconomic scenarios, a cautious scenario, in which potential growth stays at its current level of 2,5 % a year, while in the favourable scenario, potential output is estimated to gradually increase to 3 % due to stronger investment and employment growth. From 2001, real GDP growth is projected to follow one of the two non-inflationary scenarios. The favourable one is presented as the economic policy target and the most likely projection. In both cases, inflation is projected to stay at a low level over the entire period.

The Council considers that the two macroeconomic scenarios of the programme provide a plausible range of values for GDP growth between 2002-2004 and that the macroeconomic performance of France in recent years indicates a probable rise in the capacity of the French economy to sustain higher non-inflationary growth than in the past, resulting from a rise in capital accumulation and a fall in structural unemployment; the Council considers, in view of the above, the macroeconomic projections of the favourable scenario as attainable.

The updated programme is projecting a general government surplus of 0,2 % of GDP in 2004 under the favourable scenario and a deficit of 0,5 % under the cautious one. The government debt ratio is expected to decrease from 58,4 % in 2000 to 54,5 % or 53 % according to the alternative macroeconomic scenarios. These developments reflect mainly structural progress; however, the Council regrets that a deficit remains in 2004 under the cautious scenario. Even if the projected budgetary position provides an adequate safety margin against breaching the 3 % of GDP deficit threshold in normal circumstances - in conformity with the requirements of the stability and growth pact - the Council considers that the French Government should seek a situation of budgetary balance in 2004 also under the cautious scenario and to advance the timing of budgetary surplus ahead of 2004 under the favourable one. This would be in line also with its recommendation on the 1999 updated stability programme.

The Council welcomes that an important tax reform is being implemented without compromising the global fiscal trend. This reform is in line with the recommendations of the broad economic policy guidelines concerning the measures aimed at improving the functioning of the labour market. The Council commends the budgetary strategy based on control of real expenditure growth; however, the Council considers that a budgetary policy based on expenditure ceilings requires an effective system to rein in spending as soon as any slippage is detected especially in the field of health care expenditure; consequently the Council invites the French Government to introduce the appropriate mechanism enabling the respect of the expenditure norms. The Council notes that the increase in expenditure included in the Finance Law for 2001, 1,8 % in real terms, accounts for a significant part of the norm for the cumulated increase for the period 2001 to 2003 fixed at 4 % in real terms in the 1999 updated programme. Moreover the Council notes that the norm for the cumulated increase in expenditures has been revised upwards, real spending being allowed to increase by 4,5 % in real terms from 2002 to 2004. In the view of the Council, a lower increase in expenditure would be desirable to allow a faster reduction in the government deficit.

The Council considers, further, that available budgetary margins should be used, as a matter of priority, in strengthening the budgetary position and preparing for future challenges, notably the budgetary burden from the ageing of population. In this respect, further progress with pension reform would be welcome.

(1) OJ L 209, 2.8.1997, p. 1.