Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Franceand delivering a Council opinionon the updated Stability Programme of France, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: France, budget deficit, economic policy, employment policy, social rights, tax system

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 806 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of France 

and delivering a Council opinion 

on the updated Stability Programme of France, 2011-2014 

{SEC(2011) 719 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of France 

and delivering a Council opinion 

on the updated Stability Programme of France, 2011-2014 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and 148(4) thereof, 

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 
policies1, and in particular Article 5(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  European  Commission's 
proposal  to  launch  a  new  strategy  for  jobs  and  growth,  Europe  2020,  based  on 
enhanced coordination of economic policies, which will focus on the key areas where 
action 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

On 13 July 2010, the Council adopted a recommendation on the broad guidelines for 
the economic policies of the Member States and the Union (2010 to 2014) and on 21 
October  2010,  adopted  a  decision  on  guidelines  for  the  employment  policies  of  the 
Member States,3 which together form the “integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

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3  

OJ L 209, 2.8.1997, p. 1. 
OJ C , , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On 25 March 2011, the European Council also invited the Member States participating 
in  the  Euro  Plus  Pact  to  present  their  commitments  in  time  to  be  included  in  their 
Stability or Convergence Programmes and their National Reform Programmes. 

On 3 May 2011, France submitted its 2011 Stability Programme update covering the 
period 2011-2014 and its 2011 National Reform Programme. In order to take account 
of the interlinkages, the two programmes have been assessed at the same time.  

France was relatively less affected than other EU Member States by the economic and 
financial  crisis,  with  a  decline  of  2.7%  in  GDP  in  2009,  partly  due  to  sizeable 
economic  stabilisers  and  a  relatively  low  degree  of  openness  of  its  economy,  which 
reduced  the  impact  to  some  extent  on  France  of  the  collapse  in  world  trade.  The 
banking  sector  also  proved  to  be  resilient.  In  2010,  the  economy  recovered  and, 
overall, GDP growth came out at 1.5%. However, the economic crisis has substantially 
impacted  France's  public  finances.  Due  to  the  automatic  stabilisers  and  discretionary 
fiscal  stimulus,  the  general  governement  deficit  rose  from  3.3%  of  GDP  in  2008  to 
7.5% in 2009. Similarly, the crisis has exacerbated the insufficient utilisation of labour 
and  the  structural  weaknesses  of  the  French  labour  market,  where  there  was  a 
relatively high level of unemployment of 9.7% in 2010. In addition, the trade balance 
of goods has gradually deteriorated during the last decade, highlighting the challenges 
of French companies in terms of cost and non-price competitiveness.  

Based  on  the  assessment  of  the  updated  Stability  Programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underpinning  the  budgetary  projections  is  too  favourable.  Expected  growth 
levels are slightly higher than the most recent projections of the Commission services 
for  2011  and  2012  and  they  remain  well  above  the  potential  growth  in  later  years. 
After  a  better-than-expected  deficit  of  7%  of  GDP  in  2010,  the  programme  plans  to 
bring it down to 3% in 2013, which is the deadline set by the Council for correcting 
the  situation  of  excessive  deficit,  and  to  continue  consolidation  thereafter.  Starting 
from a debt of 82% of GDP in 2010, the debt ratio is set to increase until 2012 (86%), 
after which it will decline slightly. The deficit and debt adjustment paths are subject to 
downside risks, which include the possibility of a macroeconomic scenario that could 
turn  out  to  be  less  favourable,  a  lack  of  specification  of  measures,  and  the  fact  that 
targets  have  often  been  missed  in  the  past.  Therefore,  in  the  absence  of  further 
measures it cannot be ensured that the excessive deficit will be corrected by 2013. The 
medium-term objective (MTO) of a balanced budget in structural terms is not likely to 

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(9) 

be  reached  within  the  programme  period.  The  average  annual  fiscal  effort  over  the 
2010-2013  period,  based  on  the  trend  of  the  (recalculated)  structural  balance,  is 
slightly  below  what  was  called  for  in  the  Council  recommendation  (above  1%  of 
GDP). 

Implementation  of  fiscal  consolidation  remains  a  major  challenge.  Avoiding 
expenditure slippages by means of a strengthened fiscal effort based on fully specified 
measures  is  vital  to  re-establishing  a  sustainable  fiscal  position,  especially  since  the 
2013  target  does  not  provide  any  safety  margin  below  the  3%  of  GDP  threshold. 
Moreover, it would be appropriate to use all windfall revenues to accelerate the deficit 
and debt reduction. To improve the long-term sustainability of public finances, France 
adopted a new pension reform in 2010. The planned measures, including the gradual 
increase  in  the  minimum  retirement  age  from  60  to  62  and  the  phasing  out  of  early 
retirement  schemes,  should  have  an  impact  on  the  low  employment  rate  of  older 
workers. Moreover, the pension system is expected to be in balance by 2020. A deficit 
is  likely  to  appear  thereafter  unless  further  measures  are  taken.  The  latest  pension 
reform  has  also  created  a  new  public  body,  the  "Comité  de  pilotage  des  régimes  de 
retraite",  which  is  in  charge  of  presenting  annual  assessments  of  the  budgetary 
situation of pension accounts and, if there is any likelihood of a deterioration, of taking 
corrective measures.  

(10)  The  current  employment  protection  legislation  is  still  too  strict:  the  conditions  for 
economic  dismissals  are  subject  to  legal  uncertainty,  while  there  are  major 
redeployment  obligations  that  apply  to  large  collective  dismissals  (Plans  de 
sauvegarde de l'emploi). This is leading to labour market outcomes where workers on 
indefinite  labour  contracts  (majority  of  the  labour  'stock')  benefit  from  a  relative 
degree of security and workers on temporary labour contracts (majority of the inflow 
into  the  labour  market)  are  exposed  to  uncertainties.  Hence,  the  share  of  temporary 
contracts is significantly higher for young workers, and there are few transitions from 
temporary contracts to permanent contracts. This segmentation also applies to access 
to  vocational  training.  There  is  consequently  a  high  turnover  and  a  limited 
accumulation of human capital in these workers. Young workers and the  low-skilled 
are  therefore  exposed  to  disproportionate  risks  in  the  labour  market.  The  aim  of  the 
2008  Labour  Market  Modernisation  Act  was  to  modernise  social  dialogue  and  to 
address  the  issue  of  labour  market  dualism.  However,  the  reform  did  not  tackle 
contractual segmentation and generally fell short of the measures needed to resolve the 
dualism of the French labour market.  

(11)  The French unemployment rate was slightly above the EU average in 2010 and long-
term  unemployment  is  on  the  rise  (3.9%  in  2010  vs.  2.9%  in  2008).  In  this  context, 
public  employment  services  should  play  an  important  role  in  supporting  the 
unemployed  in  their  search  for  a  job.  In  France,  the  new  one-stop  shop  public 
employment  service  Pôle  Emploi  has  so  far  shown  mixed  results.  In  2009-2010,  its 
main  objective  was  mainly  focused  on  the  merger  of  the  two  pre-existing 
administrative  entities.  Outsourcing  of  placement  services  has  so  far  yielded  mixed 
results in achieving the return to work targets set by Pôle Emploi. At the same time, 
Pôle  emploi  resources  dedicated  to  individualised  support  of  job  seekers  remain 
underdeveloped  (71  full-time  equivalents  per  10 000  unemployed,  which 
is 
significantly below the levels recorded in some peer countries).  

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(12)  The  French  current  account  deficit  has  gradually  deteriorated  during  the  last  decade, 
reflecting the decline in the trade balance of goods, partly due to a decrease in labour 
cost  competitiveness  after  the  single  minimum  wage  was  reintroduced  in  the  2003-
2005  period (the previous reform of the 35 hours working week had resulted in five 
different  minimum  levels).  Some  improvements  have  been  made  to  the  indexation 
procedure (creation of an advisory commission of independent experts, elimination of 
discretionary hikes) leading to a moderation of the increase in the minimum wage. As 
a result, the proportion of employees that are paid the minimum wage has decreased 
substantially,  enabling  better  wage  differentiation.  However,  the  French  minimum 
wage is still among the highest in the European Union when compared to the median 
salary even if the tax-wedge is much lower than for the average salary due to cuts in 
employers' social security contributions.  

(13)  France  has  one  of  the  highest  tax  and  social  security  burdens  on  labour  in  the  EU, 
while  the  tax  on  consumption  remains  relatively  low.  Moreover,  environmental  tax 
revenues as a share of GDP are also well below the EU average. Rebalancing the tax 
system by switching taxation from labour towards consumption and the environment 
is likely to have a beneficial effect on jobs as well as on environmental objectives.  

(14)  Tax  and  social  security  exemptions  (including  ‘niches  fiscales’)  in  France  are  very 
high  (around  11%  of  GDP)  and  pose  a  threat  to  the  consolidation  of  its  public 
finances. In addition, understanding and exploiting the benefits of the system requires 
firms and households to invest in extensive expertise. While tax expenditures are used 
to implement a given economic policy, there is no systematic assessment whether they 
have  managed  to  fulfil  the  objectives  pursued.  Eventually,  their  substitutability  with 
public  expenditures  has  allowed  the  French  authorities  to  formally  meet  existing 
spending rules. A decrease of the budgetary cost of tax expenditures (partly linked to 
the reduction of their number) by around 0.75% of GDP over the period 2011-2013 is 
foreseen  by  the  French  authorities.  However,  the  precise  tax  expenditures  to  be 
abolished have not yet been identified as from 2012. 

(15)  Competition in the retail sector is still hampered by administrative restrictions on the 
opening of large retail outlets, and a ban on resale below cost. In the services sector, 
there are still barriers to competition for several regulated professions, which could be 
tackled  either  by  reviewing  the  entry  conditions,  or  by  gradually  doing  away  with 
certain quotas (numerus clausus) and the exclusive rights that these professions hold.  

(16)  France has made a number of commitments under the Euro Plus Pact4. On the fiscal 
side,  France  has  undertaken  to  swiftly  implement  the  2010  pension  reform.  With  a 
view to strengthening fiscal sustainability, France will also change its constitution to 
introduce  binding  multiannual  budget  planning.  To  increase  labour  participation, 
various measures are being considered to increase active labour market policies (e.g. 
apprenticeship  to  ease  the  school-to-work  transition  of  younger  workers,  additional 
childcare facilities by 2012 to improve female employment prospects, strengthening of 
the public employment services for jobseekers). The competitiveness measures focus 
on  improving  the  higher  education  system  and  promoting  R&D  and  innovation 
("investissements  d'avenir"),  as  well  as  reducing  the  administrative  burden  by 
implementing  a  comprehensive  programme  of  administrative  simplification.  These 

4 

More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 719. 

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commitments  refer  to  three  of  the  four  areas  of  the  Pact,  leaving  out  the  financial 
sector. Although they are taken in those areas where the main French challenges lie, 
many  of  them  (particularly  those  concerning  fiscal  governance  or  support  to  higher 
education and R&D) are confirmations of existing public policies/reforms. The reform 
agenda  does  not  seem  fully  consistent  with  the  extent  of  the  macroeconomic 
challenges  faced  in  the  labour  market  or  the  business  environment.  In  addition,  the 
envisaged  constitutional  reform  is  subject  to  political  uncertainty.  These  Euro  Plus 
Pact commitments have been assessed and taken into account in the recommendations. 

(17)  The  Commission  has  assessed  the  Stability  Programme  and  National  Reform 
Programme,  including  Euro  Plus  Pact  commitments  for  France5.  It  has  taken  into 
account  not  only  their  relevance  to  sustainable  fiscal  and  socio-economic  policy  in 
France  but  also  their  conformity  with  EU  rules  and  guidance,  given  the  need  to 
reinforce  the  overall  economic  governance  of  the  European  Union  by  providing  EU 
level input into future national decisions. In this light, the Commission considers that 
the fiscal consolidation strategy needs to be made more specific, particularly for 2012 
and beyond, in order to ensure that the excessive deficit is corrected by 2013 and the 
debt  is  brought  onto  a  downward  path.  Any  windfall  revenues  should  be  used  to 
accelerate  the  deficit  and  debt  reduction.  A  shift  from  labour  towards  environmental 
and consumption taxes, and a streamlining of tax expenditure, would bolster fiscal and 
environmental  objectives  and  improve  the  business  environment.  Further  steps  in 
2011-12 should focus on  adapting  the  employment protection  legislation to  reducing 
the dualism of the labour market, and on strengthening public employment services in 
order  to  provide  comprehensive  support  to  jobseekers.  Existing  policy  on  minimum 
wage  moderation  should  be  pursued.  Competition  should  be  fostered  in  regulated 
professions and retail trade.  

(18) 

In  light  of  this  assessment,  also  taking  into  account  the  Council  Recommendation 
under Article 126(7) Treaty on the Functioning of the European Union of 2 December 
2009, the Council has examined the 2011 update of the Stability Programme of France 
and  its  opinion6  is  reflected  in  particular  in  its  recommendation  under  (1)  set  out 
below. Taking into account the European Council conclusions of 25 March 2011, the 
Council has examined the National Reform Programme of France, 

HEREBY RECOMMENDS that France should take action within the period 2011-2012 to:  

(1) 

(2) 

Ensure the recommended average annual fiscal effort of more than 1% of GDP over 
the  period  2010-2013  and  rigorously  implement  the  correction  of  the  excessive 
deficit by 2013; specify the necessary corresponding measures and use any windfall 
revenues  to  accelerate  the  deficit  and  debt  reduction;  continue  to  review  the 
sustainability of the pension system and take additional measures if needed.  

Undertake renewed efforts, in accordance with national practices of consultation with 
the  social  partners,  to  combat  labour  market  segmentation  by  reviewing  selected 
aspects  of  employment  protection  legislation;  ensure  that  any  adaptations  in  the 
minimum wage are supportive of job creation, especially for the young and the low-
skilled. 

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SEC(2011) 719. 
Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

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(3) 

(4) 

Encourage access to training in order to help maintain older workers in employment 
and create incentives to support return to employment. Step up active labour market 
policies  and  introduce  measures  to  improve  the  organisation,  decision-making,  and 
procedures  of 
to  strengthen  services  and 
individualised support provided to those at risk of long-term unemployment. 

the  public  employment  service 

Increase  the  efficiency  of  the  tax  system,  including  through  a  move  away  from 
labour  towards  environmental  and  consumption  taxes,  and  implementation  of  the 
planned  reduction  in  the  number  and  cost  of  tax  and  social  security  exemptions 
(including 'niches fiscales').  

(5) 

Take  further  steps  to  remove  unjustified  restrictions  on  regulated  trades  and 
professions, in particular in services and the retail sector. 

Done at Brussels, 

For the Council 
The President 

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