Council Opinion of 17 February 2005 on the updated stability programme of France, 2004-2008
Date: 2005-02-17
Institutions: Council of the European Union
Subjects: France, code of conduct, economic convergence, stability programme

3.6.2005

EN

Official Journal of the European Union

C 136/9

COUNCIL OPINION

of 17 February 2005

on the updated stability programme of France, 2004-2008

(2005/C 136/04)

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 surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

On 17 February 2005 the Council examined the updated stability programme of France, which
covers the period 2004 to 2008. The programme broadly complies with the data requirements of
the revised ‘code of conduct on the content and format of stability and convergence programmes’.
However, it does not provide projections for total employment growth according to the national
accounts definition, which are compulsory. Accordingly, France is invited to achieve full compliance
with the data requirements.

The macroeconomic scenario underlying the programme envisages real GDP growth at 2.5 % from
2004 to 2008, a rate marginally above potential. On the basis of currently available information,
this scenario seems to reflect plausible growth assumptions, although the Commission's projections
for growth are slightly lower. The programme's projections for inflation also appear realistic.

On 3 June 2003, the Council decided that an excessive deficit existed in France and recommended
that this be corrected by 2004 at the latest. In its Communication to the Council on ‘the situation of
Germany and France in relation to their obligation under the excessive deficit procedure following
the judgement of the Court of Justice’ adopted on 14 December 2004 (2), the Commission concluded
that 2005 should be considered the relevant deadline for the correction of the excessive deficit since
the Council conclusions of November 2003 had produced legal effects until annulled by the Court.
The primary aim of the budgetary strategy of the programme is to bring the deficit below 3 % of
GDP by 2005. The programme is also aimed at ensuring a continuous decline in the general govern-
ment deficit in the subsequent years. The deficit is projected to decline steadily by 0.6-0.7 percen-
tage point of GDP per year from 2005 to reach a level of 0.9 % of GDP in 2008. Compared with
the previous programme, the current update broadly confirms the planned adjustment against a
slightly more favourable macroeconomic scenario. According to Commission calculations based on
the projections of the programme and the commonly agreed methodology, the cyclically-adjusted
balance would also improve by about 0.6-0.7 percentage point per year from 2005, and would
reach -0.7 % of GDP in 2008. As in previous updates, the medium-term budgetary strategy is based
on the setting of multi-annual targets for the increase in government expenditures in real terms that
imply a reduction of the expenditure-to-GDP ratio notably as a consequence of the implementation
of structural reforms.

(1) OJ L 209, 2.8.1997, p. 1
(2) Document COM(2004) 813 of 14 December 2004.

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Official Journal of the European Union

3.6.2005

(4)

(5)

(6)

Based on current information, measures taken by the French authorities should be sufficient to bring
the deficit to 3 % of GDP in 2005. However, the budgetary situation in France remains vulnerable.
Correction of the excessive deficit requires effective implementation of all the measures envisaged
and of additional measures in the event of adverse developments. Moreover, since the projected
decline of the deficit in 2005 stems notably from a one-off payment amounting to ½ % of GDP, the
underlying budgetary adjustment projected for 2005 is relatively modest. In the years after 2005,
the budgetary outcome could be worse than projected in the programme. In particular, the deficit
objective for 2006 appears at risk under current policies, given that tax cuts are announced for that
year and that major one-off revenues will vanish. Also since the expenditure targets in the previous
updates were missed by a large margin, the expenditure as well as deficit targets set for the period
2006-2008 appear difficult to achieve under current policies. Structural reforms have been imple-
mented (Loi Organique relative aux Lois de Finances, independent alert committee for governance of
the health care system). These reforms constitute clear steps in the right direction and should contri-
bute to the attainment of budgetary objectives.

In view of this risk assessment, the budgetary stance in the programme does not seem to provide a
sufficient safety margin against breaching the 3 % deficit threshold with normal macroeconomic
fluctuations before 2007; nor is it sufficient to ensure that the Stability and Growth Pact's medium-
term objective of a budgetary position of close to balance is achieved within the programme period.

The debt ratio is estimated to have reached 64.8 % of GDP in 2004, above the 60 %-of-GDP Treaty
reference value. The programme projects the debt ratio to decline from 2006 onwards and to reach
62 % of GDP in 2008. The evolution of the debt ratio is subject to the same risks as the deficit
targets.

(7) With regard to the long-term sustainability of the public finances, France still appears to be at some
risk. The implementation of major structural reforms of the pension and health systems in 2003
and 2004 respectively put it on a better footing. However, further efforts (additional budgetary
consolidation and reforms) would be needed in the years ahead in order to ensure fully the sustain-
ability of government finances.

(8)

The economic policies as reflected in the 2004 update are partly consistent with the recommenda-
tions in the Broad Economic Policy Guidelines, specifically those with budgetary implications.
France has implemented important structural reforms, notably concerning the health and pension
systems, which place it in a better position to face the consequences of an ageing population. The
cyclically-adjusted deficit in 2004 will be reduced by 0.4 % of GDP, lower than recommended.
Nevertheless higher than expected State revenues were fully allocated to deficit reduction. As a
whole, although significant, the medium-term adjustment planned in the 2004 update is subject to
uncertainties, and will not fully lead to a close-to-balance budgetary position over the period
covered by the programme.

In view of the above assessment, the Council is of the opinion that France should:

(i) do the necessary to ensure the correction of the excessive deficit in 2005;

(ii) make sure that the budgetary consolidation continues in the years after 2005 so as to reach a close to

balance budgetary position in 2008; and

(iii) continue structural reforms and control expenditure in order to secure the respect of the multi-annual

expenditure targets set in the programme.

3.6.2005

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Official Journal of the European Union

C 136/11

Comparison of key macroeconomic and budgetary projections

2004

2005

2006

2007

2008

Real GDP
(% change)

HICP inflation
(%)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

Government gross debt
(% of GDP)

SP Dec 2004

COM Oct 2004

SP Dec 2003

SP Dec 2004

COM Oct 2004

SP Dec 2003

SP Dec 2004

COM Oct 2004

SP Dec 2003

SP Dec 2004

COM Oct 2004

SP Dec 2003

SP Dec 2004 (1)

COM Oct 2004

SP Dec 2003 (1)

SP Dec 2004

COM Oct 2004

SP Dec 2003

2,5

2,4

1,7

2,2

2,3

1,5

-3,6

-3,7

-3,55

-0,7

-0,7

-0,6

-3,4

-3,5

-3,2

64,8

64,9

62,8

2,5

2,2

2,5

1,8

2,0

1,5

-2,9

-3,0

-2,9

0,1

-0,1

0,1

-2,7

-2,8

-2,6

65,0

65,5

63,2

2,5

2,2

2,5

1,5

1,8

1,5

-2,2

-3,3

-2,2

0,8

-0,4

0,9

-2,0

-3,1

-1,9

64,6

66,3

62,8

2,5

n.a.

2,5

1,5

n.a.

1,5

-1,6

n.a.

-1,5

1,5

n.a.

1,6

-1,4

n.a.

-1,3

63,6

n.a.

61,8

2,5

n.a.

n.a.

1,5

n.a.

n.a.

-0,9

n.a.

n.a.

2,2

n.a.

n.a.

-0,7

n.a.

n.a.

62,0

n.a.

n.a.

Note:
(1) Commission services calculations on the basis of the information in the programme

Sources:
Stability programme; Commission services autumn 2004 economic forecast; Commission calculations