COMMISSION STAFF WORKING DOCUMENT In-depth review for FRANCE in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
Date: 2013-04-10
Institutions: European Commission
Subjects: France, competitiveness, economic growth, economic recession, economic reform, labour market, macroeconomics, public debt, trade balance

EUROPEAN 
COMMISSION 

Brussels, 10.4.2013  
SWD(2013) 117 final 

COMMISSION STAFF WORKING DOCUMENT 

In-depth review for FRANCE 

in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP 

Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

{COM(2013) 199 final} 
{SWD(2013) 113 final} 
{SWD(2013) 114 final} 
{SWD(2013) 115 final} 
{SWD(2013) 116 final} 
{SWD(2013) 118 final} 
{SWD(2013) 119 final} 
{SWD(2013) 120 final} 
{SWD(2013) 121 final} 
{SWD(2013) 122 final} 
{SWD(2013) 123 final} 
{SWD(2013) 124 final} 
{SWD(2013) 125 final}

EN 

   EN 

 
 
 
 
 
  
 
 
 
 
Table of Contents 
Executive summary and conclusions........................................................................................................4 
Introduction...............................................................................................................................6 
1. 

2. 

2.1. 

2.2. 

Macroeconomic situation and potential imbalances .................................................................6 

Macroeconomic scene setter .....................................................................................................6 

Sustainability of external positions ...........................................................................................6 

2.2.1. 

Evolution of the current account...............................................................................................7 

2.2.2. 

Financing of the current account deficit ...................................................................................9 

2.2.3. 

Contribution of the institutional sectors..................................................................................10 

2.3. 

Competitiveness and trade performance .................................................................................10 

2.3.1. 

French market shares ..............................................................................................................10 

2.3.2.  Geographic orientation............................................................................................................12 

2.3.3. 

Product orientation..................................................................................................................12 

2.3.4. 

Price and cost developments ...................................................................................................14 

2.3.5. 

Labour market rigidities and competitiveness ........................................................................15 

2.3.6. 

The role of non-cost competitiveness .....................................................................................15 

2.4. 

Private sector indebtedness .....................................................................................................16 

2.4.1.  Households..............................................................................................................................17 

2.4.2.  Non-financial private companies ............................................................................................17 

2.5. 

2.6. 

3. 

3.1. 

Public sector indebtedness ......................................................................................................18 

Asset market development ......................................................................................................21 

In-depth analysis of selected topics ........................................................................................22 

Cost and non-price competitiveness .......................................................................................22 

3.1.1. 

Components of cost competitiveness......................................................................................22 

3.1.2.  Non-price competitiveness......................................................................................................24 

3.1.3. 

Recent measures to strengthen competitiveness .....................................................................26 

3.2. 

Financial situation of non-financial corporations ...................................................................28 

3.2.1. 

The profit share of NFCs ........................................................................................................28 

3.2.2.  NFC indebtedness ...................................................................................................................29 

3.2.3. 

Low profitability and investment............................................................................................31 

3.3. 

Labour market rigidities..........................................................................................................33 

3.3.1. 

Evolution of the labour cost ....................................................................................................34 

3.3.2. 

Segmentation of the labour market .........................................................................................35 

3.3.3. 

Impact of the crisis on the labour market................................................................................36 

3.3.4. 

Reforms engaged on the labour market ..................................................................................38 

4. 

Policy challenges ....................................................................................................................41 

2 

 
 
REFERENCES.......................................................................................................................................44 

3 

 
 
 
EXECUTIVE SUMMARY AND CONCLUSIONS  

In last year's In-Depth Review (IDR), the Commission concluded that France was experiencing serious 
macroeconomic imbalances, in particular as regards developments related to export performance and 
competitiveness. In the new Alert Mechanism Report (AMR) published on 28 November 2012, the 
Commission found it useful, also taking into account the identification of a serious imbalance in May, 
to examine further the persistence of imbalances or their unwinding. To this end this IDR takes a 
broad view of the French economy in line with the scope of the surveillance under the Macroeconomic 
Imbalance Procedure (MIP). The main observations and findings from this analysis are: 

•  The  resilience  of  the  country  to  external  shocks  is  diminishing  and  its  medium-term 
growth  prospects  are  increasingly  hampered  by  long-standing  imbalances.  In  2008  and 
2009, the French GDP decreased by 0.1% and 3.1% a much smaller slump than in most euro 
area countries. Since then, in the midst of tensions on sovereign spreads and on the banking 
system, France has remained among the few EU Member States which avoided a recession in 
2010 and 2011. However, the resilience of the economy has been put to the test and a number 
of imbalances, both internal and external, have built up in the last few years. 

•  The  on-going  deterioration  of  export  performance  has  resulted  in  increasing  external 
vulnerabilities. The trade balance has been decreasing since 1997 to a deficit of 2.5% of GDP 
in 2011. While the increasing energy bill has also contributed to this development, France has 
lost ground in non-energy goods and services. As a consequence, the current account balance, 
which was still at a surplus of 2.8% of GDP in 1998, recorded growing deficits from 2005 on, 
reaching 2.0% in 2011. The evolution of the current account is mirrored by a sharp increase in 
the  external  debt  which  reached  36%  of  GDP  in  2011.  Should  these  trends  continue,  they 
would increasingly push down France's medium-term growth prospects. 

•  Both  cost  and  non-price  developments  have  contributed  to  important  losses  of  export 
market  shares.  The  market  share  of  French  exports  decreased  by  11.2%  between  2006  and 
2011, still clearly beyond the 6% threshold. The appreciation in unit labour costs over the last 
few years has put the profitability of firms under pressure. To limit price hikes, exporters have 
reduced  their  margins,  in  particular  in  the  manufacturing  sector.  This  limited  the  resources 
they  could  dedicate  to  improve  non-price  competitiveness  such  as  innovation.  The  reduced 
number of exporting firms, their relatively small size, as well as factors related to the business 
environment are also impediments for export performance. 

•  Rigidities on the labour market hinder the adjustment capacity of the economy and slow 
down  developments  in  productivity.  The  high  tax  wedge  has  a  negative  effect  on  labour 
demand  and  on  the  number  of  hours  worked.  The  increasing  tax  burden  on  labour  has  also 
contributed  to  rising  labour  costs.  Furthermore,  a  highly  segmented  labour  market  results  in 
uncertainties  for  a  large  share  of  employees,  reducing  incentives  to  increase  their  human 
capital and hence productivity. More generally, rigidities in the labour market may limit the 
potential  for  reallocation  of  workers  across  sectors  and  occupation.  The  recent  agreement 
between social partners is a welcome step in the right direction and could have an impact on 
the way the labour market operates. Still, continued efforts to fully develop social dialogue are 
needed in order to implement further reforms that will tackle labour market rigidities. 

•  The  low  profitability  of  companies,  in  particular  in  the  manufacturing  sector,  together 
with  their  high  indebtedness,  represents  a  threat  to  the  overall  competitiveness  of  the 
French  economy.  The  profit  margin  of  French  companies  is  the  lowest  in  the  euro  area. 
Specifically,  operating  surplus  in  the  manufacturing  industry  has  experienced  a  significant 

4 

 
 
 
drop  in  the  last  ten  years  as  companies  were  unable  to  pass  on  production  cost  increases  to 
final  prices.  Additionally,  the  increasing  indebtedness  in  the  private  sector  may  affect  the 
ability to invest and innovate. In that respect, the 3.1% contraction in equipment investment 
seen in 2012 is a worrying signal.  

•  The  high  and  increasing  public  debt  is  reducing  the  capacity  of  public  finances  to  face 
potential adverse  shocks and could result in negative spill-overs to the whole economy. 
While risks to medium-term sustainability appear moderate, sensitivity tests show that adverse 
economic events may have a significant negative impact on debt dynamics. Rising debt levels 
could adversely affect the country's banking system and thus have a negative impact on firms' 
financing  costs.  More  generally,  rising  debt  service  could  drive  out  more  productive 
government  expenditure  and  result  in  higher  taxes.  Finally,  France's  public  sector 
indebtedness  represents  a  vulnerability,  not  only  for  the  country  itself  but  also  for  the  euro 
area as a whole.  

•  A  consistent  set  of  reforms,  addressing  both  fiscal  and  structural  imbalances,  has  been 
initiated  by  the  government  to  restore  competitiveness  in  the  medium  term.  The 
commitments  of  the  French  authorities  to  achieve  a  sizeable  structural  effort  despite 
disappointing  economic  growth,  together  with  withering  tensions  in  the  euro  area,  have 
contributed  to  strengthening  market  perceptions  of  the  public  debt.  A  wide  set  of  initiatives 
has been launched to foster competitiveness, including through measures to reduce the cost of 
labour  (the  "Pacte  pour  la  compétitivité,  la  croissance  et  l'emploi")  and  to  further  develop 
flexicurity. While these reforms are steps in the right direction, they will not be sufficient to 
solve the competitiveness issues and, in view of the challenges ahead, further policy response 
will be needed. 

The IDR also discusses the policy challenges stemming from these developments and what could be 
possible avenues for the way forward. The measures included in the competitiveness pact recently 
adopted by the authorities represent a significant step in the right direction. Further efforts will need to 
be done, targeting in particular innovation capacity and export potential of companies. Specific 
attention should be also dedicated to ensure that increasing indebtedness of companies does not hinder 
their investment capacity. Further measures addressing the cost of production, for example through 
higher competition in service, should be considered. Finally, the agreement reached by social partners 
on flexicurity is an important first step, but still needs to be translated into law, a critical step to ensure 
the effectiveness of the reform.  

5 

 
 
1. 

INTRODUCTION 

On 28 November 2012, the European Commission presented its second Alert Mechanism Report 
(AMR), prepared in accordance with Article 3 of Regulation (EU) No. 1176/2011 on the prevention 
and correction of macroeconomic imbalances. The AMR serves as an initial screening device helping 
to identify Member States that warrant further in depth analysis to determine whether imbalances exist 
or risk emerging. According to Article 5 of Regulation No. 1176/2011, these country-specific “in-
depth reviews” (IDR) should examine the nature, origin and severity of macroeconomic developments 
in the Member State concerned, which constitute, or could lead to, imbalances. On the basis of this 
analysis, the Commission will establish whether it considers that an imbalance exists and what type of 
follow-up it will recommend to the Council. 

This is the second IDR for France. The previous IDR was published on 30 May 2012 on the basis of 
which the Commission concluded that France was experiencing macroeconomic imbalances, in 
particular as regards developments related to export performance and competitiveness. Overall, in the 
AMR the Commission found it useful, also taking into account the identification of a serious 
imbalance in May, to examine further the risks involved and progress in the unwinding of imbalances 
in an in-depth analysis. To this end this IDR takes a broad view of the French economy in line with the 
scope of the surveillance under the Macroeconomic Imbalance Procedure (MIP). 

2. 

MACROECONOMIC SITUATION AND POTENTIAL IMBALANCES 

2.1.  Macroeconomic scene setter 

Compared to peers in the euro area, the French economy weathered quite well the economic 
crisis in 2008 and 2009, but the resilience of the country would be diminishing. During those two 
years, GDP contracted by 0.1% and 3.1%, compared to a growth of 0.4% in 2008 and a contraction of 
4.4% in 2009 for the euro area. Resilience of public and private consumption in particular helped 
alleviate the consequence of a strong contraction in international demand. In 2010 and 2011, GDP 
growth rebounded to 1.7% for both years. However, the continuing lack of confidence by both 
companies and households, in a context where room for fiscal stimulus dwindled, led to a gradual 
erosion of growth which came to a standstill in the last quarter of 2011. As a consequence of the 
slowdown, unemployment soared with the number of registered unemployed reaching 3 million 
people in August 2011.  

In 2012, GDP growth stalled and the increasing unemployment, together with a slow return of 
confidence and continuing fiscal consolidation, are expected to continue weighing on domestic 
demand and to postpone the recovery to the medium run. In its winter forecast, the Commission 
expects GDP to rise by a meagre 0.1%  before returning to significant positive figures from 2013 on. 
The difficult situation on the labour market and tax rises implemented in the 2013 budget are set to 
limit the potential for rebound in private consumption. Despite the slowdown in international demand 
addressed to France, sluggish domestic demand is expected to contain imports and to translate into a 
moderate and one-off improvement of the external position of France. Symmetrically, in 2014 the 
gradual recovery of domestic demand would result in higher imports, therefore a widening trade 
deficit. Still, the measures that have been implemented to support export competitiveness in the last 
few months would contribute to somewhat limiting the deterioration of the external position in the 
outer year. Sustainability of external positions 

6 

 
 
The in-depth review published by the Commission in May 2012 concluded at the existence of 
imbalances linked in particular to the developments in the external position of France. Indeed, over the 
last few years, the current account and the trade balance have exhibited increasing deficits.  

2.1.1.  Evolution of the current account 

The current account has gradually deteriorated over the last decade to reach a record deficit of 
2.0% of GDP in 2011, revealing weaknesses in the French adjustment to a persistent 
deterioration of competitiveness. Since 1997, the current account balance has been on a downward 
trend. It turned negative in 2005 and has deteriorated significantly since then. Only in 2009, in a 
context of decreasing GDP in France and of sharp reduction in world trade, did the current account 
deficit experience a significant contraction (from -1.7% of GDP in 2008 to -1.3% in 2009). However, 
as the economy returned to growth in 2010 and 2011, so did the current account deficit. Although its 
2011 record level remains below the alert threshold (-4%) the negative dynamics is a cause for 
concern. In 2012, monthly balance of payments data suggest a further deterioration of the current 
account deficit, mainly due to lower income balance, and despite a slight improvement in the trade 
balance. 

Graph 1: Components of Net Lending/Borrowing 
(% of GDP) 

Graph 2: Trade Balance Contributions by Broad 
Category 

6

4

2

0

-2

-4

-6

-8

P
D
G

f
o
%

Total goods

Intermediate goods

Fuel

Consumer goods

Capital goods

-6.0

-4.0

-2.0

0.0

2.0

Balance of  trade in goods, % GDP

2000-2001

2010-2011

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Capital account (KA)
Current transfers
Income balance
  Trade balance - services
  Trade balance - goods
Trade balance
Current account balance (CA)
Net lending/borrowing (CA+KA)

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 
The development in the current account mainly reflects the increasingly negative contribution of 
goods, and in particular energy to the trade balance. Trade for goods and services recorded a 
deficit of EUR 38.9 billion in 2011 (-2.5% of GDP) compared to a surplus of EUR 23.8 billion in 2001 
(+1.6% of GDP). This was mainly driven by the deterioration of the net trade in goods. The 
comparatively stable domestic demand during the crisis translated into a steady imports expansion 
while goods exports as a share of GDP still remain below their level in the early 2000s. The growth in 
net imports of energy over the last 10 years has contributed to this development (see Graph 2). 
Between 2001 and 2011, exports and imports of energy1 expanded at a rapid pace, due in particular to 
increasing oil prices. As a consequence, the already large energy goods trade deficit in 2001 swelled 
considerably, to represent EUR 62.1 billion in 2011, 2.7 times its level 10 years before. The energy-

1 

Based on COMEXT data (SITC), including "Electricity", "Coal, coke and briquettes", "Gas, natural and 
manufactured" as well as "Petroleum, petroleum products and related material" 

7 

 
 
 
 
 
 
                                                            
related trade deficit hence accounts for 70% in the merchandise trade deficit. This negative 
contribution of energy, which explains part of the trade deficit development, is not specific to the 
French case. In the EU-27 as a whole, net import of energy was multiplied by 2.9 between 2001 and 
2011, representing a deficit of EUR 384 billion in 2011, hence leading to a total trade deficit of EUR 
162 billion. However, while in the EU as a whole the increasing energy related deficit was met by 
higher trade surplus in other categories of goods, the French trade balance in non-energy products, 
including in particular capital goods, deteriorated rapidly (from a surplus of EUR 17 bn in 2001 to a 
EUR 26 bn deficit in 2011). On the other hand, net trade in services remained resilient throughout the 
last decade. After a decrease up to 2005, net trade in services has rebounded both in nominal terms and 
as a percentage of GDP since then.  

A relative stabilisation of the trade deficit was seen in 2012, losses in competitiveness will 
continue to weigh on external balance in the medium term. Monthly balance of payment data for 
2012 show an improvement of the goods balance EUR 2.2 bn in 2012 (EUR 6.6 bn based on custom 
data) mainly due to strong sales in the aeronautic sector (exports increased by 18%, leading to record 
surplus of EUR 20.3 bn for the aeronautic and spatial sector). The service balance also grew by EUR 
5.5bn. Looking forward, the waning domestic demand, together with the carry-over of strong export 
performance in the second part of 2012 will result in a contraction of the trade balance deficit in 2013. 
These would however not result from an improvement in competitiveness. Once the economy returns 
to growth, notwithstanding the support from the aeronautical sector seen in 2012, the trade balance 
should continue to deteriorate as import growth would outpace that of exports. In the long term, recent 
measures taken to support competitiveness and develop a more flexible labour market should 
contribute to improving the competitiveness of exports. However, it is worth highlighting that a 
number of countries have also engaged in far-reaching structural measures to support competitiveness. 
In particular, France's southern peers, Spain and Italy, have implemented significant reforms, 
including on the labour market, hence putting additional pressure on France's capacity to regain 
market shares. 

The recent deterioration in the income balance, although still in surplus in 2011, makes the 
rebalancing of the current account even more difficult. On the positive side, the income balance of 
the current account, which was stable between 2006 and 2009 at 1.7% of GDP, improved significantly 
in 2010 and 2011 to 2.4% of GDP. This development is linked primarily to increasing net revenues 
from French investment abroad (by EUR 10.5bn in 2010 and EUR 2.7bn in 2011). Current transfers 
include in particular workers' remittances and transfers of the government, in particular to the 
European Union. They presented a deficit of 1.8% of GDP in 2011 and have remained almost constant 
since 2009. Capital transfers are generally insignificant in the French balance of payment. Since 2005, 
the only significant contribution was recorded in 2007 (EUR 1.9 bn) when a French company sold oil 
developments permits. Based on monthly balance of payment data for 2012, the upward-trending 
income balance experienced a sharp turnaround: the overall balance decreased by 38% compared to 
2011. This resulted from higher revenues paid by French residents on portfolio investments which 
outpaced the growth in revenues from French investment abroad. Payment on foreign portfolio 
investments in France have risen rapidly in the last few years (+39% between 2006 and 2011), 
reflecting the importance of these investments in the overall financing of the current account deficit. 
Such a development is not a surprise in an economy with a persistent current account deficit, and it is 
likely to prevail over time, with long-lasting negative consequences on the current account balance. 

8 

 
 
Graph 3: Decomposition of Net International 
Investment Position 

Graph 4: Net Lending / Borrowing by sector 

40

20

0

-20

-40

-60

P
D
G

f
o
%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112*
Net portfolio investment
Changes in reserves (net)
Other investment (net)
Net direct investment
Net financial derivatives
Net external debt (neg. sign)
Net int'l investment position (NIIP)
Marketable debt (portfolio debt instr. and other investment, net)

8

6

4

2

0

-2

-4

-6

-8

P
D
G

f
o
%

-10

99 00 01 02 03 04 05 06 07 08 09 10 11

Households
Financial corporations
Total Economy

General government
Non-Financial corporations

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

2.1.2.  Financing of the current account deficit 

The net international investment position (NIIP) of France showed a deficit of -15.9% of GDP in 
2011, the most negative in the last 15 years. A clear deterioration can be observed since 2007, when 
it stood at -1.5% (see Graph 3). In 2011, as in 2008, most of the deterioration in the NIIP came from 
negative valuation effects which strongly impacted the value of foreign assets held by French 
residents. A decomposition of the financial account of the balance of payment shows that, while net 
direct investment by French companies remained higher than inflows of foreign direct investment, the 
current account deficit was financed by inflows of portfolio and other investments (thus mainly debt). 
The negative balance on portfolio and other investments has widened sharply since 2002 to represent -
36.4% of GDP in 2011. Foreign holding of French bonds, and in particular treasury bonds, are the 
main contributor to the recent developments in net portfolio investment. This resulted in a rapid 
increase in external net debt in France, which represented 36.1% of GDP in 2011. 

On top of the increasingly negative external position, the strong net exposure to peripheral euro-
area countries remains as a risk. France appears to play an intermediary role in gross financial flows 
between the euro area and the rest of the world. An estimated breakdown of net foreign assets by 
partner regions in 2010 (see Graph 5) shows that France's net external liabilities towards non-euro area 
central banks and other non-EU creditors represents 17% and 25% of GDP respectively (see European 
Commission, 2012a). The net liabilities towards these two categories of foreign bond holders widened 
considerably since 2007, and reflect the foreign demand for French bonds as reserve and 'safe' euro- 
denominated assets. In particular, the net inflows of non-EU capital seem to have been mainly directed 
towards treasury bonds, hence contributing to financing the increasing budget deficit while keeping 
interest rates at a low level. On the other hand, France is a net creditor to the euro area 'deficit' 
countries for 34% of its GDP. Again, the net assets towards this group of countries are mainly 
composed of debt, mostly inter-bank loans or bonds. Taking into account the evolution in these 
positions since 2006, the economy thus received net inflows from both private and public creditors in 
non-EU countries and channelled them to euro area deficit countries. This development resulted in a 
significant exposure of French residents, and in particular of the main French banking institutions, 

9 

 
 
 
 
 
 
 
toward debt, both private and public, in peripheral euro-area economies, a situation that entails 
significant risks and requires further monitoring. 

Graph 5: Decomposition of Net International Investment Position by partner (2010) 

P
D
G

f
o
%

150

100

50

0

-50

-100

-150

BE

DE

NL

FI

DK

FR

SE

AT

UK

IT

SK

ES

EL

PT

France

Other euro area deficit countries

Other euro area surplus countries

Non-euro area EU27

Foreign central bank holdings of portfolio debt

Rest of the world

Total

Data source: Commission services (Eurostat) 

2.1.3.  Contribution of the institutional sectors 

The widening external deficit is fuelled by net borrowing needs of non-financial corporation and 
of the government. The contribution of the government to the overall external deficit increased with 
the eruption of the crisis. In 2009 and 2010, net borrowing by the government reached 7.6% and 7.1% 
of GDP respectively. In 2011, a better coverage of public expenditure by revenues resulted in a 
decrease in borrowing by the government. Public investment remained at a similar level compared to 
2010. The lower borrowing needs from the government were however offset by the increasing needs 
of private companies. In addition, non-financial corporations resumed investment while displaying 
continued low corporate savings in line with low profitability. The indebtedness in the non-financial 
corporate sector thus continued to expand (after a temporary lull in 2009 and 2010). The weakening of 
the current account balance is thus reflected in the net lending/borrowing of two sectors: the 
government, in line with still high fiscal deficits, and non-financial corporations, due to weak profits 
and savings compared to investment. On the other hand, households and financial corporations 
continue to be net lenders to the economy. Their level of savings and investments changed only 
marginally in 2011, with households remaining important net lenders to the other sectors.  

2.2. 

Competitiveness and trade performance 

2.2.1.  French market shares 

The significant and long lasting contraction of the world export market shares of France since 
2000, with its adverse impact on the current account remains a source of concern. The 5-year 
losses in export market share, the indicator defined in the AMR, have been above the 6% indicative 
threshold every year since 2000. Losses were most severe between 2003 and 2008, when market 
shares decreased by 21.5%. Since then, a relative stabilisation took place. The indicator has slightly 
recovered and, in 2011, the 5-year-change in market shares sets at a loss of 11.2%. Over the last few 
years, divergent trends can be observed between goods and services. While exports of goods have 

10 

 
 
 
 
 
consistently underperformed compared to peers (see Graph 6), France gained market shares in services 
in the last 3 years. In particular, travels appear to have contributed significantly to this good 
performance, reflecting the strong tourism sector in France. Services contribute positively to the 
overall export performance, but their lower weight in world exports (services represented close to 20% 
of total world trade in 20112) means that the impact is limited. Overall, the erosion in the export 
market shares since 2000 partly reflects the increasing weight of export-oriented emerging economies. 
However, the deterioration of the relative position of France compared to peers in the European Union 
shows that specific weaknesses weigh on French exports.  

Graph 6: Export market share – Goods, index 
2005=100 

Graph 7: Export market share – Services, index 
2005=100 

120

110

100

90

80

70

120

110

100

90

80

70

2005

2006

2007

2008

2009

2010

2011

2005

2006

2007

2008

2009

2010

2011

DE

ES

FR

IT

DE

ES

FR

IT

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

2 Source: UNCTAD data on total world exports 

11 

 
 
 
 
 
                                                            
2.2.2.  Geographic orientation 

Compared to its main peers in the EU, French exports appear slightly more oriented toward the 
EU 27 and in particular toward the euro area (see Table 1). Specifically, in 2011, they are quite 
close to the German and Italian performance as regards EU27, although the French bias towards the 
euro area is larger (about 8pp). This is probably partly the outcome of the different geographical 
position of each country, with France being a central country within the euro area, whereas Germany 
for example is closer to Eastern Europe, mostly outside the euro area. In France, as in peer economies, 
trade partners outside the EU represent an increasing share of exports between 2006 and 2011. Since 
2006, the share of French exports toward other EU 27 Member States has decreased by 4.6 percentage 
points. However, it remains higher than in Germany and in Italy. Conversely, exports to emerging 
economies, and in particular to the BRICs is lower than in these two economies (+36% against +50% 
for Germany and +41% for Italy). Compared to peers, Spanish exports also remain very much targeted 
towards the EU. However, the pace of market expansion to other economies, and in particular towards 
the BRICs appears much faster than for France.  

Table 1: Share of export in euro area top exporters by destination 2006-2011 

2011 

2006 

EU27 

EA17 

BRICs 

EU27 

EA17 

BRICs 

FR 

DE 

IT 

ES 

60.9 

59.3 

56.0 

66.6 

48.2 

40.9 

43.7 

56.5 

6.1 

10.5 

7.0 

4.1 

65.5 

63.6 

61.2 

71.2 

50.9 

43.4 

46.6 

57.2 

4.5 

7.0 

5.3 

2.9 

2.2.3.  Product orientation 

Exports are very much concentrated in five large export categories representing an important 
share of total exports. In 2011, as in 2006, the top 5 product categories  (according to the 
classification of products by activity 2008 based on NACE rev 2) are (i) air and spacecraft and related 
machinery, (ii) motor vehicles, (iii) pharmaceutical preparations, (iv) parts and accessories for motor 
vehicles and (v) refined petroleum products. Together, they represent 29.5% of exports in 2011, 
compared to a similar 29.7% in 2006 (34.3% in 2001 a year when sales of aircraft were particularly 
strong). This is significantly higher than the contribution of the 5 largest exports categories for Italy 
(representing 17.3% of exports) and slightly above the figure for Germany (28.4%). More generally, 
out of the 253 product categories included in the CPA classification, 80% of French exports in goods 
are concentrated in 59 product categories (compared to 70 in Italy, 57 in Germany and 71 in the euro 
area). 

Product specialisation played only a limited role in the export market share development in the 
last few years. In particular, France appears relatively well positioned on high-technology exports, 

12 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
including in particular the aeronautic sector. An analysis of revealed comparative advantages, 
conducted in particular in Fortes (2012), confirms the importance of high-tech sectors in French 
exports. This may be a sign that losses in market shares in France do not come from insufficient 
exports of high-tech goods but rather from relative weaknesses in the other segments where 
competition could focus more on prices. France has actually been unable to keep up with the 
developments in the product markets in which it has a presence both before and after the crisis.  

Graph 8: Decomposition of nominal export growth 

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0

-7.0

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

Pre-crisis

Post-crisis

France

Market share gains in product markets
Market share gains in geographical destinations
Initial product specialisation
Intial geographical specialisation

Data source: Commission services (Eurostat) 

The action plan of the government for export promotion presented in December 2012 focuses 
efforts on 4 sectors deemed as promising. These sectors, identified on the basis of a prospective 
study conducted by the Ministry of Finance and Economy, are healthcare, agro-food, information and 
communication technologies (ICT) and durable cities (including utilities, railway transportation and 
energy efficiency). These sectors have been selected based on their growth potential by 2022 taking 
into account the competitive position of France. A review of revealed comparative advantage indices 
show that foodstuff, transportation equipment and chemical (including pharmaceutical) are indeed 
among the sectors where France already has a strong competitive positioning. One could note however 
that aeronautics is not among the four sectors, although it is one of the main export categories. 
Moreover, the focus on ICT, a sector that is neither among the top exporting sectors in France nor one 
of those where France has a revealed competitive advantage may be rather motivated by the 
importance of the sector in world trade. In particular, ICT also plays a crucial role as an "enabling 
technology" (European Commission, 2009) as developments in this sector are driving the evolution of 
the overall production process for other goods and services.  

13 

 
 
 
 
 
 
 
Graph 9: Revealed comparative advantage index – 
Goods 

Graph 10: Share of high-tech products in exports 

Total goods
Miscellaneous
Transportation
Machinery / Electrical
Metals
Stone / Glass
Footwear / Headgear
Textiles
Wood & Wood Products

Raw Hides, Skins, Leather, &…

Plastics / Rubbers
Chemicals & Allied Industries
Mineral Products
Foodstuffs
Vegetable Products
Animal & Animal Products

-0.6

-0.4

-0.2

0.0

0.2

0.4

Trade in goods: Symmetric Revealed Comparative 
Advantage Index

2000-2001

2009-2010

s
t
r
o
p
x
e

l

a
t
o
t

f
o
%

30

25

20

15

10

5

0

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

High-tech exports

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

2.2.4.  Price and cost developments 

The losses in market share over the last decade have coincided with a deterioration of the cost 
competitiveness position, as measured through the evolution of unit labour cost (ULC) indicator. 
Since 2000, nominal ULC increased in France at a faster pace compared to that in the euro area and 
Germany in particular (see Graph 11) but still not as rapidly as in Italy and Spain, which have also 
experienced losses in market shares (-18.4% from 2006 to 2011 in Italy and -7.6% in Spain). While 
the rise in nominal ULC deteriorated cost competitiveness, the previous IDR noted that the upward 
trend in real wages outpaced productivity to the detriment of firms' profitability. This development is 
confirmed by the preliminary data for 2012 included in this year's vintage (see Graph 12).  

Graph 11: Evolution of nominal unit labour cost in 
the four main euro area exporters 

Graph 12: Real wages and productivity in France 

140.0

130.0

120.0

110.0

100.0

90.0

80.0

112.0

110.0

108.0

106.0

104.0

102.0

100.0

98.0

96.0

94.0

France

Italy

Euro area

Germany

Spain

Productivity

Real Compensation per Employee

Data source: Commission services (Eurostat) 
Both nominal labour cost and productivity increased at a faster pace in France than in the euro area. 
Looking at the real effective exchange rate (REER) based on ULC allows assessing the impact of 
these developments on the actual cost competitiveness vis-à-vis trade partners. Although the evolution 

Data source: Commission services (Eurostat) 

14 

 
 
 
 
 
 
 
 
 
of ULC aggravated developments in the REER, most of the evolution comes from variations in the 
nominal exchange rate (driven in particular by the Euro/USD exchange rate) as is the case for most 
euro area economies. The fact that REER based on ULC show similar developments in all euro area 
exporters, due in particular to the evolution in the nominal exchange rate, also points towards country-
specific non-cost issues to account for the divergence in export competitiveness. 

Graph 13: Decomposition of Real Effective Exchange Rate in France (against IC-35) 

)

%

(

h
t
w
o
r
g
R
E
E
R
o
t

s
n
o
i
t
u
b
i
r
t
n
o
C

6

4

2

0

-2

-4

-6

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

NEER

relative HICP (-)

REER (HICP)

REER (ULC)

Data source: Commission services (Eurostat) 

2.2.5.  Labour market rigidities and competitiveness 

Labour market rigidities can have a negative impact on export performance through various 
channels, beyond the effect of cost of labour on competitiveness. In a rapidly changing 
environment, labour market rigidities hamper reallocation of labour towards fast-growing sectors and 
make low-technology sectors less able to withstand price competition from more flexible emerging 
economies. The high level of protection provided by the employment protection legislation for 
permanent contracts may reduce the inter-sectorial adjustments which may need to take place between 
the tradable and the non-tradable sectors to correct current account imbalances. While the cost of 
economic dismissals in France does not stand out as particularly high, uncertainties associated with the 
procedure may induce companies to use more frequently interim workers. This increases flexibility but 
also contributes to labour market segmentation with less training offered and weak incentives to invest 
in human capital for some workers. Although efforts have been made by the authorities to develop 
partial unemployment to improve the flexibility for employers facing a temporary drop in activity, the 
complexity of the procedures and the lack of awareness of employers are key barriers to the 
development of these schemes. Finally, the high statutory minimum wage (representing 60% of the 
median wage) prevents downward wage adjustment, while its indexation formula may lead to both 
average wage pressure (Cette et al, 2012) and wage compression; both have an adverse effects on 
competitiveness and export capacity. 

2.2.6.  The role of non-cost competitiveness 

Last year's IDR concluded that, although cost competitiveness is a contributing factor, most of 
the deterioration in exports market shares originates in the loss of non-cost competitiveness. 
Although cost competitiveness deteriorated when compared to competitors, French export price 

15 

 
 
 
 
 
 
 
remained competitive, suggesting that losses in market shares might be also explained by quality 
related factors. However, given the increasing costs, exporters appear to have strived to maintain price 
competitiveness to the detriment of their operating margins. The deterioration in margin might be 
impeding companies' ability to invest and to innovate. As will be further reviewed in Section 3, 
although non-price competitiveness (including aspects such as the business environment, the 
propensity of French firms to export and to innovate) is considered as the primary driver for the poor 
export performance, cost issues may also have had both a direct impact, through prices, and an indirect 
one, through exporter's margins.  

The continuous losses in export market shares have prompted the adoption of a number of 
policy initiatives. Policies supporting exports generally focus on improving access to finance, 
promoting and providing consultancy services to exporters and supporting companies signing 
important contracts. In particular, a public export guarantee scheme is operated by Coface3 to cover 
potential risks associated with the financing of export contracts. Further actions are also considered as 
part of the creation of the "Banque publique d'investissement". While these policies facilitate existing 
current exports, they are not meant to help new companies reach the critical size to engage in export. 
To do so, the government has launched in November 2012 its Pacte pour la competitivité, la 
croissance et l'emploi which aims at fostering competitiveness of firms in general to help them engage 
in export activities (see Section 3.1).  

2.3. 

Private sector indebtedness 

The level of unconsolidated private debt which was just below the threshold of 160% of GDP in 2010 
has continued to rise to 160.4% of GDP in 2011. The continuous increase over the last few years 
warrants a more detailed analysis of potential financial vulnerabilities of the private sector.  

Graph 14: Decomposition of non-consolidated debt 

P
D
G

f
o
%

300

250

200

150

100

50

0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Financial corporations
Household
Private sector EA17
Private sector

Government
Non financial corporations
MIP Threshold

Data source: Commission services (Eurostat) 

3 Coface is a private company providing credit insurance and trade risk expertise to exporters. Originally a public 
company,  it  was  privatised  in  1994  and now  distributes  its  products  through  its  direct  presence  in 66 
countries 

16 

 
 
 
 
 
                                                            
2.3.1.  Households 

The indebtedness of French households has risen in the last few years, although it remains below 
the average in the euro area. With household debt representing 57% of GDP in 2011, France 
remains clearly below the euro area level (64.2% of GDP in 2011). The actual level of indebtedness of 
households, which represented 82.9% of their gross disposable income in France in 2011 compared to 
97.3% in the euro area, is not particularly worrying. On the other hand, the dynamics cause some 
concern. While household's indebtedness in other euro area economies has been on a downward trend 
since 2009, it continued to increase regularly in France. The main driving force behind it is the 
continuous growth in real estate credit, sustained in particular by dynamic housing prices and low 
interest rates. Recent developments on the real estate market show that volumes have gone down in 
2012 while prices have fallen somewhat. As a consequence, new real estate credit in 2012 fell by 32% 
compared to 2011. Due to the high duration of these instruments, the overall real estate credit volume 
has nevertheless continued to grow, although at a reduced pace, in 2012. As no significant recovery is 
expected in the short term on the real estate market, the low level of new credit could translate into a 
gradual decrease in real estate credit volumes.  

The rising unemployment level weighs on the financial situation and prospects of households. 
The unemployment rate stood at 10.3% in the third quarter 2012. While this is still slightly below the 
EU average (10.5%), this level is getting close to the historical maximum observed in 1997 (11.2%). 
In the medium run, these downward pressures on gross disposable income are not expected to abate. 
Despite measures such as the creation of the emploi d'avenir and the contrats de génération taken to 
limit the rise in unemployment, in particular among youth, the Commission expects that 
unemployment will remain high in 2013 and 2014. As a consequence, households' gross disposable 
income is expected to contract slightly in 2012 and 2013 respectively. Thus, despite the expected 
stabilisation in the nominal credit volume, household indebtedness is not expected to go down in the 
medium term.  

2.3.2.  Non-financial private companies 

The non-consolidated debt of non-financial companies increased in 2011 to reach 103.8% of 
GDP, slightly above the euro area average (99.0%). A comparison of the consolidated debt, netting 
out inter-company loans, in France and in the euro area yields similar results: consolidated debt by 
non-financial corporations reached 82.7% of GDP in 2011, its highest level in the last 10 years 
(compared to 81.4% in the euro area). Despite the somewhat higher level of debt, the leverage of 
companies, measured in particular through the ratio between debt and equity, remains below the euro 
area average. In 2011, net financial assets of non-financial companies represented 105.9% of GDP in 
France and 90.4% of GDP in the euro area. Overall, the leverage of companies, which spiked in 2008 
as a result of sharp decrease in equity, has somehow deflated since then despite the continuously 
growing debt.  

17 

 
 
Graph 15: Leverage, Non-Financial Companies 

Graph 16: Profit margin of non-financial 
companies 

s
t
e
s
s
a

l

a
t
o
t

d
n
a
P
D
G

,
y
t
i
u
q
e
o
t

t
b
e
d

f
o
s
o
i
t
a
R

)

%

(

120

100

80

60

40

20

0

5
9

6
9

7
9

8
9

9
9

0
0

1
0

2
0

3
0

4
0

5
0

6
0

7
0

8
0

9
0

0
1

1
1

*
2
1

Debt / GDP
Debt / assets

Debt / equity
Debt / assets, consolidated

60

50

40

30

20

10

0

d
e
d
d
a

e
u
a
v

l

f
o
%

95

97

99

05

01

07
03
Gross entrepreneurial income
Gross operating surplus
Retained earnings (right axis)
Retained earnings, EA17 (right axis)

09

25

20

15

10

5

0

d
e
d
d
a

e
u
a
v

l

f
o
%

11

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 
The gross operating margin and retained earnings of companies have been on a downward trend 
over the last 10 years. Accordingly, although the actual financial structure of non-financial 
corporations does not point to specific weaknesses, the erosion of their profit margins in a context of 
relatively high indebtedness represents a cause for concern (see Graph 16). As a consequence of the 
crisis, profitability suffered particularly in 2008 and 2009. However, in 2010 and 2011, the margin 
recovered less in France than in other euro area economies. Overall the low and deteriorating 
profitability of French non-financial companies, reflected by the poor performance in terms of gross 
operating income and return on capital compared to the other euro area members, together with the 
increasing level of debt, point toward potential vulnerabilities.  

2.4. 

Public sector indebtedness 

High public sector indebtedness is a major challenge that France still needs to address. At 90.3% 
of GDP in 2012, the debt ratio is forecast to be slightly higher than the EU average of 87.2% and 
clearly above the reference value of 60% specified in the scoreboard and referred to in Article 126(2) 
TFEU. The threshold was first exceeded in 2003 and the debt has been almost continuously on an 
upward trend since then (see Graph 17).4 

The government has engaged in a strong fiscal consolidation since 2011, which helped lower the 
deficit to an estimated 4.6% of GDP last year from above 7% in 2009-2010. This is expected to further 
decrease in 2013, which is the excessive deficit procedure deadline for France, but to remain above the 
3% of GDP reference value. Nevertheless, the debt ratio continued to rise over 2011-2012 and is 
set to exceed 93% of GDP by the end of this year. The government plans to put the ratio on a 
downward path from 2014 and bring it close to 80% of GDP by the end of its five-year term (2017). 
However, risks to the debt path are clearly on the upside, mainly related to the lack of specification of 
the underlying budgetary measures. In the past, debt targets contained in the successive stability 
programmes have regularly been revised upwards and often missed. In that respect, the recent 
transposition of the Treaty on Stability, Coordination and Governance (TSCG) into national law, 
which now provides for a correction mechanism in the event of slippages, is supposed to secure the 
planned fiscal adjustment and thus ensure a gradual reversal in debt dynamics. 

4 See the 2012 In-Depth Review for a description of past trends.  

18 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Graph 17: General government deficit and debt as 
% of GDP 

Graph 18: Public Debt as % of GDP - Medium- and 
long-term debt projections 

% of GDP

(% of GDP)

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

2000

2002

2004

2006

2008

2010

2012

GG deficit (lhs)

GG debt(rhs)

95

90

85

80

75

70

65

60

55

50

110

100

90

80

70

60

50

40

7
0
0
2

1
2
0
2

7
1
0
2

5
1
0
2

3
1
0
2

1
1
0
2

9
9
0
1
0
0
2
2
No-policy change scenario
-1p.p. on interest rate from 2015
+1p.p. on interest rate from 2015
Consolidation (0.5% per year on SB) to achieve MTO

9
2
0
2

3
2
0
2

5
2
0
2

7
2
0
2

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

Note: Shocks to interest rates are applied on short and long-term 
interest rates, on both maturing and new debt 

According to the Commission 2012 Fiscal Sustainability Report, France does not appear to face 
a risk of fiscal stress in the short term. Nonetheless, there are some indications that the fiscal side of 
the economy continues to pose potential challenges in the medium term. Under a no-policy change 
assumption, public debt would not be reduced below 90% of GDP by 2030. Moreover, different 
sensitivity tests show that adverse economic events (such as a 1 pp. permanent increase in interest 
rates) may have a significant negative impact on debt dynamics in the long run (see Graph 18). 

France's high public debt could adversely affect the country's banking system, which is largely 
exposed to French sovereigns. As of June 2012, the four major French banks had a total of EUR 115 
billion in French government bonds according to figures from the European Banking Authority. The 
spread vis-à-vis the German bund has significantly decreased since its peak in November 2011 and 
French sovereign yields are currently at historical lows. This has prevented so far domestic banks from 
experiencing losses on national government bond holdings and additional funding and liquidity 
constraints. However, the significant drop in equity prices and financial stability concerns that the 
French banking sector experienced in 2011 due to its exposure to peripheral EU countries and in 
particular to sovereigns show how much this might be affected in case of a deterioration in the market 
perception on the sustainability of the country's public debt. Indeed, the re-pricing of peripheral 
government debt had a direct negative impact on the asset side of French banks and therefore on their 
own perceived riskiness (as also reflected in successive rating downgrades), which in turn made their 
refinancing harder. Moreover, such re-pricing eroded the volume of collateral available and thus 
further stressed the refinancing possibilities of French banks. 

The negative impact on firms' financing costs is yet another potential drawback of the high 
government debt. Long-term sovereign bond yields are strongly correlated with corporate and bank 
bond yields, and thus with bank lending rates. This tie will remain strong in particular as long as bank 
resolution in the euro area remains the fiscal responsibility of national governments. As shows in 
Graph 19 the recent fall in sovereign yields has actually translated into lower cost of capital for non-

19 

 
 
 
 
financial corporations (NFC). But, conversely, a (significant) increase in government bond premiums 
can become a major obstacle to granting loans to the real economy. As banks are the main source of 
financing in France, this could seriously jeopardise the flow of credit to enterprises and households. 
Small and medium-sized enterprises, which rely heavily on bank loans, would be particularly affected. 
In addition, a rising level of public debt could also potentially lead to the crowding-out of private 
investment, with public debt further competing with private debt for the allocation of savings. 

More generally, rising public debt may impact on growth prospects and competitiveness 
through the debt service, which drives out more productive government expenditure but also often 
tends to increase taxes. It is worth mentioning that fiscal consolidation in France (as measured by the 
change in the structural deficit) has so far been very much revenue-based while the pre-adjustment tax 
burden was already high. On the other hand, losses of competitiveness render high debt levels even 
more problematic as they weigh on growth prospects, which in turn make it more difficult to put the 
debt ratio on a downward path. These two effects are mutually reinforcing and could turn into a 
vicious circle. In addition, the fiscal space to tackle further shocks or severe private imbalances tends 
to decline with the stock of government debt. 

Graph 19: Interest rates to NFCs compared with 5-year yields on French sovereign bonds 

in %

7

6

5

4

3

2

1

0

All maturities, up to EUR 1 million

All maturities, above EUR 1 million

5-year yield on FR sovereign

Data source: Commission services (Eurostat) 

France's public sector indebtedness represents a major vulnerability not only for the country 
itself but also for the euro area as a whole. Past tensions on peripheral euro area sovereigns have 
provided clear evidence for systemic risks. In particular, highly interconnected financial markets and 
cross-border balance sheet exposures have generally acted as transmission channels. Should the 
second largest euro area and core economy be put under intense market pressure, spill-overs to other 
Member States and to the euro area as a whole would be highly likely and could be amplified by 
confidence effects. 

Increasing public debt and related future developments in sovereign yields warrant close 
monitoring in France. The debt stock will continue to rise in the short term due to the slow economic 
recovery and the gradual reduction in the general government deficit. As a consequence, higher 
interest rates in the short to medium run cannot be excluded, even though a credible medium-term 

20 

 
 
 
consolidation strategy can make an important contribution to averting this. In fact, some rebalancing in 
sovereign yields appears likely given current record lows, which are partly due to the risk aversion that 
has so far supported German bunds and filtered through to other euro area economies including 
France. Moreover, growing concerns from different stakeholders, including investors, international 
organisations, rating agencies and think tanks on the country's capacity to meet the planned budgetary 
targets and carry out much needed structural reforms might exacerbate pressures and reverse market 
sentiment, which then might overreact given the high debt ratio and especially after a protracted period 
of time that has not seen any extreme events affecting France materialising. 

2.5. 

Asset market development  

France stands out in the European Union as one of the few economies where real estate price did not 
contract significantly since 2007 despite a prolonged period of growth (see Graph 20). Housing prices 
more than doubled in the ten years leading to 2007. As a consequence of the financial crisis, asset 
prices plummeted. For example, the CAC 40 lost 50% of its value between Q2 2007 and Q1 2009. 
However, housing prices proved very resilient and, over the same period, they only decreased by 7%. 
In 2010 and 2011, prices actually recovered and reached in Q3 2011 their peak value of 2007, before 
slowly contracting by 2% since then. 

Graph 20: House price cycle 

Change from trough to peak (%)

)

%

(

a
t
a
d
t
s
e
t
a

l

o
t

k
a
e
p
m
o
r
f

e
g
n
a
h
C

10

0

-10

-20

-30

-40

-50

-60

-70

-80

DE

0

BE

50

IT

FI

LU

SE

100

150

FR

200

250

300

350

AT

PT

CZ
EL

SI

MT

SK

PL

HU

ES

NL
UK

DK

BG

EE

IE

RO

LV

Previous trough

Graph 21: Nominal house prices and household 
gross disposable income; 2005=100 

120

110

100

90

80

70

60

0
0
0
2

1
Q

0
0
0
2

4
Q

1
0
0
2

3
Q

2
0
0
2

2
Q

3
0
0
2

1
Q

3
0
0
2

4
Q

4
0
0
2

3
Q

5
0
0
2

2
Q

6
0
0
2

1
Q

6
0
0
2

4
Q

7
0
0
2

3
Q

8
0
0
2

2
Q

9
0
0
2

1
Q

9
0
0
2

4
Q

0
1
0
2

3
Q

1
1
0
2

2
Q

2
1
0
2

1
Q

Housing price indexed on househlds gross disposable
income

Housing price

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

Note: Trough/peak: BE 95Q2/10Q4, DE 10Q4/12Q2, IE 
97Q1/07Q3, EL 00Q1/09Q1, ES 97Q1/07Q3, FR 97Q1/07Q3, IT 
97Q4/09Q1, CY 05Q1/08Q1, LU 95Q1/12Q2, MT 00Q1/08Q3, 
NL 90Q4/08Q3, AT 05Q1/09Q1, PT 96Q4/01Q3, SI 03Q1/08Q1, 
SK 05Q1/08Q2, FI 93Q2/10Q3, BG 02Q2/08Q3, CZ 04Q3/08Q4, 
DK 93Q2/07Q3, EE 03Q3/07Q2, LV 00Q3/07Q3, LT 
00Q1/07Q3, HU 01Q4/04Q4, PL 05Q1/07Q3, RO 05Q1/07Q3, 
SE 96Q1/07Q3, UK 96Q2/07Q3. 
This limited correction of the real estate market, after years of very rapid growth, means that indicators 
based on price deviate significantly from their long-term average, possibly pointing towards an over-
valuation of housing prices. In particular, real estate prices have increased significantly faster than 

21 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
households' revenues. However, a number of factors, underlying this evolution, continue to reduce the 
potential for a strong downward price adjustment. First, the housing market in France confronts a rigid 
supply and growing demand fuelled both by rising population and lower size of households. Supply 
constraints are particularly pressing in specific areas (e.g. Paris and the Provence Alpes Côte d'Azur 
region), fuelling important discrepancies among regions. Moreover, financing conditions for real 
estate have contributed to limiting the correction in housing prices. Interest rates on housing loans 
have dropped from 5.2% in January 2009 to 3.5% two years after. On the other hand, despite these 
incentives, the expected erosion in real disposable income (by 0.3% both in 2012 and 2013 
respectively according to the Commission Services' winter forecast), as well as the end of the first 
owners' credit tax, will likely weigh on prices.  

The 17.8% decrease in the number of dwellings started in 2012 compared to 2011, together with the 
low volumes of sales recorded by market participants, may be signs that stakeholders anticipate further 
corrections to take place. The strict lending criteria, which rely on revenues rather than on wealth, 
together with the absence of a mortgage market, mean that owners will not be pressed to sell their 
property immediately if prices drop. On the contrary, they would have incentives to postpone any sale. 
As a consequence, a price adjustment would be gradual and would not have a strong impact on the 
purchasing power of households. On the other hand, volume would shrink even further, putting the 
construction sector under additional pressure.  

3. 

IN-DEPTH ANALYSIS OF SELECTED TOPICS  

This section builds on findings of the previous year's IDR to present the main imbalances that have 
contributed to the loss in external competitiveness and it is organized as follows. First, some selected 
elements of cost and non-price competitiveness are presented to set the scene. Second, the weak 
profitability of French firms is analysed in detail. Finally, the last part tries to shed some light on why 
the current labour market framework represents a brake for competitiveness. 

3.1. 

Cost and non-price competitiveness 

This sections draws on the findings of last year IDR to examine the main drivers of the deterioration in 
the export competitiveness. It focuses both on factors which contributed to cost and non-price 
competitiveness. It also summarizes the main reforms that have been taken since the release of the 
previous IDR.  

3.1.1.  Components of cost competitiveness 

3.1.1.1.  Labour costs 

The real compensation of employees has risen quicker than productivity, particularly in 2009, 
leading to a rapid increase in nominal ULC (see Graph 11 and Graph 12). While this situation is 
common to many EU Member states, it is in stark contrast with that of Germany, where real wages 
stagnated or deflated between 2000 and 2007, resulting in a downward pressure on ULC (see Graph 
23). While it affected the revenues of workers, impacting on living standards and contributing to 
sluggish domestic consumption, the decreasing labour costs made it possible for German companies to 
simultaneously improve their margins and reduce their prices in order to gain market shares. Since 
2010, real wages in Germany have rebounded strongly, closing part of the gap with productivity.  

22 

 
 
Graph 22: Euro Area: Real wages and 
productivity; 100=2000 

Graph 23: Germany: Real wages and productivity; 
100=2000 

110

108

106

104

102

100

98

96

94

110

108

106

104

102

100

98

96

94

00 01 02 03 04 05 06 07 08 09 10 11 12

00 01 02 03 04 05 06 07 08 09 10 11 12

Productivity

Real Compensation per Employee

Productivity

Real Compensation per Employee

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

3.1.1.2.  Costs of services 

Business services are an essential input for the industrial sector and represent an important 
share of costs. Market services represent 23% of the cost of production in the industrial sector and 
25% in the manufacturing sector. Rising wages in services would therefore affect all sectors, through 
the interplay of intermediary consumption. Based on the input-output table for France, and assuming 
that prices in all sectors adjust to reflect the increase in production costs linked to higher cost of 
services, a 10% increase in wages in the services sector would lead, ceteris paribus, to increases of 
7.7% and 3.9%  in the cost for services and the manufacturing sector, respectively5. While these 
figures do not reflect the actual adjustment that would take place – they overlook in particular the 
impact on demand of increases in wages, price setting mechanism by companies as well as labour 
market dynamics - they clearly illustrate the strong linkage between the level of wages in services and 
the overall costs in the manufacturing sector. As a consequence, the 20% increase in ULC in the 
service sector in France over the last decade (see Graph 25) had a strong impact on the overall cost 
competitiveness. In comparison to developments in France, unit labour costs in the service sector in 
Germany remained stable since 2000, as a consequence of reforms taken to open the sheltered sectors 
to competition and to reform labour market in order to make it more flexible (Hartz IV measures). 
Hourly cost of labour in services also appears particularly high in France compared to Spain and Italy 
(34 EUR/h against 28 EUR/h, 26 EUR/h and 18 EUR/h in Germany, Italy and Spain respectively). 
Although competition in services has become stronger, in particular as a result of the implementation 
of the Service directive, a number of sheltered sectors remain (including the retail sector, network 
industries such as transport or energy but also regulated trades and professions such as taxis, health 
sector, and some legal professions such as notaries). A strengthening of competition in these sheltered 
market services could contribute to lowering the cost of these services, hence indirectly improving 
cost competitiveness for exporting sectors. 

5 By comparison, based on the same set of hypotheses, a 10% increase in wages the manufacturing sector would 

lead to an overall increase in prices in this sector of 3.8% 

23 

 
 
 
 
                                                            
Graph 24: Hourly cost of labour in France, 
Germany, Italy and Spain 

Graph 25: Unit labour costs by sector in France 
and Germany 

EUR/hour

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

130

125

120

115

110

105

100

95

90

85

80

Germany

France

Spain

Italy

00

01

02

03

04

05

06

07

08

09

10

Industry (except construction)

Services

FR-Manufacturing

DE-Manufacturing

FR-Services

DE-Services

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

3.1.1.3.  Cost reduction through offshoring practices 

The different models adopted by companies to establish their international presence are considered to 
have played a significant role in the relative cost performances of France and its main competitors 
over the last decade (see Fontagné and Gaulier, 2008). More specifically, to reduce their production 
costs, a number of French companies chose to outsource entire parts of their manufacturing process to 
countries where the cost of labour is lower in Central and Eastern Europe or in Maghreb. Conversely, 
German firms took advantage of foreign suppliers by outsourcing only portions of their production 
process, mainly in Central and Eastern Europe. This allowed them to reduce their costs while 
maintaining a share of value added in Germany and safe-guarding domestic skills and know-how. 
Accordingly, Direction générale des douanes et droits indirects (2012) observe that the turnover of 
subsidiaries of French firms abroad are 2.8 times larger than exports, possibly also reflecting the large 
share of services in the economy. This ratio is much lower in Germany and Spain (1.8 and 1.4 
respectively).  

3.1.2.  Non-price competitiveness 

Non-price competitiveness is the main factor explaining the poor performance of exports over 
the last decade. As further analysed in the 2012 IDR, the decreasing non-price competitiveness of the 
economy was the main contributor to the poor export performance since 1999. Such a development 
may be explained by the quality of products, the ability of some firms, and in particular SMEs, to 
engage in exporting activities and to invest, notably in R&D. The reduction of production costs and 
the restoration of profit margins may have a positive incidence in the medium term on investment and 
R&D, and therefore on innovation and non-price competitiveness in general. 

3.1.2.1.  A limited number of exporting firms 

The limited number of exporting firms has contributed to the disappointing export performance in 
France. Comparing the structure of the industrial sector in France and in Germany shows that French 
companies tend to be significantly smaller. Based on data collected by the national statistical offices in 
France and in Germany (in 2006 and 2005 respectively), the proportion of micro industrial businesses 

24 

 
 
 
 
appears higher in France than in Germany (respectively 82% and 77%). Conversely, there is a higher 
proportion of larger (10 employees and over) industrial SMEs in Germany (21%) than in France 
(17%). As engaging in export activities entails significant fixed costs, French industrial firms may find 
themselves relatively handicapped when exporting, compared with their German competitors due to 
their relatively small size. Ceci and Valeirsteinas (2006) established at around 100 employees the 
critical size starting from which a firm can export to distant emerging countries without being 
constrained by size. This implies that French exporters will find it particularly difficult to exports to 
distant regions where the most dynamic markets lay.  

3.1.2.2.  A low propensity to export 

Beyond the smaller size of French exporting companies, their lower propensity to export also weighs 
on competitiveness. For a given size, the propensity to export (measured by the share of foreign sales 
in total turnover of exporting firms) of French firms is less than that of German firms. As Graph 26 
and Graph 27 show, only 12% of the turnover of French small industrial firms (1-19 employees in 
industry, construction, trade and business services) is performed abroad, against 47% for their German 
competitors. The lower inclination toward exports, which could be explained by a relatively dynamic 
domestic demand and more microeconomic determinant (export promotion policies, role of chamber 
of commerce, cultural elements, etc.), has also contributed to the relatively lower export performance 
in France.  

Graph 26: Percentage share of export revenues 
of French firms by size* 

Graph 27: Percentage share of export revenues of 
German firms by size 

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

1-19

20-99

100-249

250-499

500+

1-19

20-99

100-249

250-499

500+

0%

1-50%

over 50%

0%

1-50%

over 50%

Data source: Insee, Institut für Mittelstandsforschung (2004 
data) 

Data source: Insee, Institut für Mittelstandsforschung (2004 data) 

*Scope: Industry, Construction, trade, and business services 

3.1.2.3.  Linkage between cost and non-price competitiveness 

Beyond the apparent opposition between the two approaches, cost and non-price 
competitiveness actually complement one another. In the last few years, despite increasing costs, a 
comparison of REER based on export prices shows that firms have reduced their margins to maintain 
export prices, in particular compared to Germany. These efforts to compensate for a reduction in cost 

25 

 
 
 
 
competitiveness were detrimental to long term non-price competitiveness as firms had less financial 
resources to invest in R&D, to develop quality, after sales services and other aspects of their products.  

Conversely, a reduction in production costs, be it through the cost of labour or of other components, 
can allow firms to conduct the necessary adjustments to regain some of the ground lost in the non-
price dimensions of competitiveness. In particular, if firms rather choose to restore their profit margins 
to the detriment of the reduction of their prices, a reduction in the taxes on labour can have a positive 
long-term impact on non-price competitiveness of companies.  

3.1.3.  Recent measures to strengthen competitiveness 

The authorities have taken a series of measures specifically aiming at restoring competitiveness which 
seek both to lower costs of production while supporting innovation. In particular, the "National Pact 
for Growth, competitiveness and employment" represents a significant step to restore export 
competitiveness of firms.  

A number of measures have been developed to foster innovation in the private sector. However, their 
impact will only be felt in the medium run. The tax credit on research expenditure has been broadened 
in 2008. Independent SMEs represented 72% of the tax credit beneficiaries in 2009 and they 
accounted for 18% of claimed R&D expenses but for 22% of the amount distributed. In addition, 71 
clusters, the "pôles de compétitivité", were initiated in 2005 to foster linkages between public and 
private research. A 2012 evaluation of the clusters highlighted their mixed effectiveness, with only one 
third of participating companies have indicated that their membership enabled them to expand sales 
and improve their ability to export. Among the 71 clusters, a reorganisation of the less effective ones, 
and further focalisation or resources, could be relevant to ensure that critical size is reached to generate 
economies of scale and spill-over from research. Finally, a programme of targeted investments to 
promote innovation was launched in 2010: the "investissements d'avenir", which benefits from a EUR 
35 bn funding to support research in strategic areas over 10 years.  

The "National Pact for Growth, competitiveness and employment" which was launched in November 
2012 includes a number of measures to restore both cost and non-price competitiveness (see Box 1). In 
particular, the pact includes a tax credit which shifts tax away from labour, a reform that had been 
called for in the Country Specific Recommendation issued by the Council in July 2012. The 
government estimate that this reform will create 300,000 jobs and increase GDP by 0.5% by 2017. 
While the assessment of this impact may be on the optimistic side, in particular with respect to timing, 
this measure is likely to have a positive impact on export performance. Companies will most likely use 
the tax credit to restore profitability, one of the lowest in the EU, rather than to decrease export prices. 
The competitiveness gains would therefore arise due to non-cost factors: higher profitability would 
allow exporting firms to invest in order to increase productivity and to improve the quality of their 
products. Such an improvement in non-price competitiveness will therefore only gradually translate 
into an improvement in the trade balance. While this would delay the impact on growth and 
employment, it would also lay the foundation for a more sustainable export dynamics.  

26 

 
 
Box 1:  The government's pact for competitiveness  

Responding to the Gallois report, Prime Minister Jean-Marc Ayrault, presented on Tuesday 6 
November a "National Pact for Growth, competitiveness and employment", which would, according to 
him, help to create more than 300,000 jobs by 2017 and would boost the economy by 0.5% over the 
same period. 

a) The main measure, a "tax credit for competitiveness and employment" 

The creation of the EUR 20 bn "tax credit" (1.0% of GDP) on corporate tax indexed on the payroll, 
which will increase over three years: EUR 10 billion in 2013, therefore reimbursed on the corporate 
tax paid in 2014, and an additional EUR 5 bn for each of the two following years, 2014 and 2015, 
therefore reimbursed in 2015 and 2016. In the end the rebate amounts to a 6% cut in labour costs. 

To finance this measure, the main VAT rate will be raised to 20% in 2014 from 19.6% today, and a 
reduced rate that applies to restaurant bills and property repairs will rise to 10 % from 7%, raising a 
total of EUR 6 bn (0.35% of GDP). The government announced plans to cut 0.5% of GDP from public 
spending in 2014-2015 and said it would introduce a new green tax from 2016 yielding 0.15% of GDP 
per year.  

b) The other measures  

The "National Pact for Growth, competitiveness and employment" includes 35 measures, some of 
which are taken from the report. The main measures are:  

- Public guarantees for SMEs: the Public Investment Bank (BPI), whose creation was decided in 2012 
and which results from the merger of three existing entities (OSEO, the CDC Enterprises and the 
Strategic Investment Fund), was included in the new Pact. It would provide more than 500 million 
euros to SMEs in 2013 via a new public guarantee. 

- Four fiscal commitments: the credit research rebate, capital tax rebate for investments in SMEs, the 
"Madelin" status of young innovative companies as well as the "Dutreil" devices will be confirmed 
over the next five years. 

- New commitment of the State to pay faster: The state will undertake to achieve a payment period of 
20 days from its suppliers up to 2017. Public orders will also involve SMEs and innovative 
intermediate-sized corporates ("ETI") up to 2% in 2020. 

- Future investments redirected: Redeployment of nearly EUR 2 billion of funding will be made in 
favour of five priorities (innovation and sectors, enabling technologies, energy transition, health and 
economy of living, training). This will facilitate the implementation of strategy courses, also carried 
by sectoral arrangements within the BPI. 

- The research tax rebate (CIR) will be pre-financed by the BPI. 

 - Employees in Board of Directors: There will be at least two employee representatives in the board of 
directors as deliberating members in large companies. 

27 

 
 
 
 - Support of SMEs on the international: 1,000 SMEs and intermediate-sized corporates will receive a 
"personalized" international help, performed by the BPI. 

 - Export financing doped: A direct public lender will be implemented in the next supplementary 
budget. 

 - 25% increase of international corporate's volunteers (VIE) in three years 

 - A "Brand France" will be launched to promote what is made in France. 

 - High Internet everywhere: The high-speed Internet will be deployed throughout the country.  

 - Dual training: the number of people trained in alternation will double, with no fixed deadline. 

 - Commercial courts will be reformed in order to improve the efficiency of the business justice. 

3.2. 

Financial situation of non-financial corporations 

3.2.1.  The profit share of non-financial corporations  

Profit margins of non-financial corporations, as measured by gross operating surplus as a share of 
gross value added, have decreased significantly since 2008 after being flat for 10 years (see Graph 28). 
In addition, NFCs' profitability is the lowest in the euro area, far below that of German, Italian or 
Spanish peers (28.6% in 2011 vs. 41.2%, 40.4% and 41.4%, respectively). While comparing levels 
across countries might partly mask country-specific factors, the relatively worse situation of French 
companies is also apparent in the gap between current profits and historical averages. Indeed, the 
profit share of German and Spanish NFCs is currently still above its long-term levels, unlike that of 
French companies. 

Graph 28: Gross operating surplus of NFCs in selected Member States 

)

%

(
d
e
d
d
a
e
u
a
V

l

55

50

45

40

35

30

25

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

FR

DE

IT

ES

Data source: Commission services (Eurostat) 
However, the deteriorating profitability of NFCs in recent years reflects divergent trends across sub-
sectors. Based on national accounts (NACE rev.2 classification) and following the approach presented 
in Coe-Rexecode (2012a), it is possible to break profit margin developments down by broad activities. 
While differences in levels across activities are largely explained by different production structures 

28 

 
 
 
 
 
and market specificities, changes in profitability over time are clearly an indicator of the relative 
strength of companies operating in different sub-sectors. 

The construction sector experienced a continued improvement during the pre-crisis period before 
suffering a downturn in 2009-2010 (see Graph 29). However, it remained the only one large sector in 
the economy posting an increase in the profit share over 2000-2011. Profitability in the services sector 
has also witnessed a drop in recent years but this has remained relatively limited so far. However, the 
biggest fall has been in industry. The gross operating surplus of companies in the manufacturing sector 
shrank by an alarming 34.6% over 2000-2011 (as a share of gross value added) and the crisis seems to 
have aggravated this. 

Graph 29: Gross operating surplus by broad 
activities   

Graph 30: Evolution of REER deflated by ULC and 
by export prices for the euro area top 3 exporters 
compared to IC 35 

45.0%

40.0%

35.0%

30.0%

25.0%

20.0%

120

115

110

105

100

95

90

85

80

Manufacturing industry

Construction

Market services

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
FR-Export prices
DE-Export prices
IT-Export prices

FR-ULC
DE-ULC
IT-ULC

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 
The drivers behind that deterioration can be assessed through the development of cost components. In 
particular, the price of intermediate consumption in industry increased by an overall 22.9% over 2000-
2011 in industry, beyond the 19.9% hike recorded in services. The price of production rose by 13.6% 
and 19.9%, respectively, over the same period. This points clearly to the relative inability of the 
manufacturing sector to pass on higher production costs to the final price. Such outcome is quite 
intuitive given that industry is much more exposed to international competition than the services 
sector. It is also evidenced by REER developments based on export prices showing that companies 
have compensated the deterioration of cost competitiveness by adjusting prices and reducing profit 
margins (see Graph 30). 

3.2.2.  Non-financial corporations indebtedness 

Concerns about the sustainability of debt, both public and private, are at the heart of the on-going 
crisis in the euro area. French NFCs' indebtedness increased almost continuously in the past decade to 
reach a new high of 103.8% of GDP in 2011, with the rise somewhat decelerating since 2008-2009 on 
the back of weak consumer demand and the financial crisis. The gap compared with the euro area 
average somewhat narrowed over that period while debt levels of German and Italian NFCs remained 
significantly lower (see Graph 31). 

29 

 
 
 
 
%

,

P
D
G

.
s
v

t
b
e
D

160

140

120

100

80

60

40

20

0

Graph 31: Debt as a % of GDP 

Graph 32: Debt-to-equity ratio 

%

,
y
t
i
u
q
e
.
s
v

t
b
e
D

120

100

80

60

40

20

0

5
9

6
9

7
9

8
9

9
9

0
0

1
0

2
0

3
0

4
0

5
0

6
0

7
0

8
0

9
0

0
1

1
1

5
9

6
9

7
9

8
9

9
9

0
0

1
0

2
0

3
0

4
0

5
0

6
0

7
0

8
0

9
0

0
1

1
1

FR

DE

IT

ES

EA-17

FR

DE

IT

ES

EA-17

Data source: Commission services (Eurostat) 
While the MIP scoreboard has given prominence to the private sector debt-to-GDP ratio, it is relevant 
to use a wider range of macroeconomic indicators to assess the capacity of NFCs to manage their debt.  

Data source: Commission services (Eurostat) 

The debt-to-equity ratio of resident NFCs remained clearly below the euro area average and below that 
of their German, Italian or Spanish neighbours (55.4% in 2011 vs. 97.2%, 95.1% and 108.6%, 
respectively, see Graph 32). Although the structure of the private sector may play a role in the 
discrepancies observed among countries it also represents a signal that there is no specific risk linked 
to the financial structure of NFC's in France.  

The financial situation of NFCs can also be assessed through the ratio of debt to financial assets. NFCs 
can employ financial assets to produce income or to repay debt in the case of liquid assets. Therefore, 
an analysis of debt relative to financial assets provides a more complete understanding of the NFC 
balance sheet and their capacity to service debt. Under this measure, NFCs had a ratio of 43.9% in 
2011, clearly below the euro area average and the lowest among peers. This implies that the debt 
levels were less than half the sector's financial assets. 

Another approach to assessing NFC debt is to compare the maturity of the types of debt used by the 
sector. If companies rely on short-term loans or securities, this may result in higher liquidity risks and 
greater sensitivity to increases in interest rates. The ratio of long-term to total NFC debt for selected 
Members States is shown in Graph 33. Higher ratios may be an indication of reduced vulnerabilities of 
NFCs to debt repayments. NFCs in France had the second highest ratio over 2000-2011 after Spain at 
around 75% on average. 

Overall, weak and recently deteriorating profit margins have weighed on NFCs' deleveraging capacity, 
as also evidenced by a relatively high level of investment despite weakening self-financing. However, 
the main driver behind the increasing NFC debt-to-GDP ratio appears to be an expansion of their 
balance sheets. Indeed, resident NFCs are relatively less indebted than peers when compared with the 
size of their financial assets.  

30 

 
 
 
 
 
 
 
 
Graph 33: Long-term debt vs. total debt 

Graph 34: France: Corporate gross operating 
surplus and investment – growth rate 

)

%

(

t
b
e
d

l

a
t
o
T

95

85

75

65

55

45

35

25

30.00

25.00

20.00

15.00

10.00

5.00

0.00

-5.00

-10.00

-15.00

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

FR

DE

IT

ES

EA-17

1980

1985

1990

1995

2000

2005

2010

Corporate investment

Corporate gross operating surplus

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

3.2.3.  Low profitability and investment  

The disappointing evolution of firms' profitability is particularly alarming because it may prevent 
companies from raising their investment in equipment, R&D, marketing, brand while penalizing their 
customer service capacity, before, during and after sale. In the end it may weigh on their potential 
development of productivity and competitiveness. While the overall level of R&D expenditures in the 
private sector is lower in France than in other developed countries ((1.4% of GDP against 1.9% in 
Germany, both in 2011), 2.0% in the US and 2.5% in Japan, both in 2009) the sectoral composition of 
the economy explains much of this variation. Le Ru (2012a) and (2012b) show that R&D expenditures 
in France are very much concentrated on a few sectors6, in particular in the high-technology industries. 
In those sectors, the research effort (measured through the ratio of R&D expenditures to sales) is close 
to the one seen in Germany. Overall, although the research efforts by industrial companies has been 
maintained in the last few years, the stagnating R&D intensity at the national level stems from the 
declining share of these sectors in the value added. In particular, medium-high technology industries 
(including car manufacturers) contribute to a much smaller share of value added in France than in 
Germany. Beyond the level of R&D expenditure, the low profit margins in France have contributed to 
the declining weight of industry. Indeed, besides the high-technology sectors, where firms can benefit 
from substantial price premium, the poor economic performance in the French industrial sector weighs 
on firms' investment and on their ability to develop and market innovation. This hampers their non-
price competitiveness and growth prospects. 

6  Including  in  particular  Electronic  and  computer  manufacturing,  Transport  material  (excluding  automotive), 

pharmaceutical industry and automotive.  

31 

 
 
 
 
 
                                                            
Box 2:  Main drivers of investments  

In the usual theoretical investment models, investment decisions are determined by entrepreneurs' 
expected profitability. Two approaches have been developed to explain how these expectations are 
derived. The first "explicit" approach, initiated by Jorgenson (1963) links investment to expected 
profitability. The second approach aiming at explaining investment decision is more "implicit": it was 
initiated by Tobin (1969) and assesses the expected profits through the stock exchange value of assets.  

Both approaches derive from the production function and use the principle of the accelerator based on 
investors' anticipations of demand and growth, according to which, in a competitive situation, when 
demand is expected to grow, entrepreneurs increase their production either through additional 
investment or by using more intensively existing capital. This principle has long been considered as 
the major investment determinant (Muet, 1979, Artus and Morin, 1991).  

However, as some recent studies have brought up, some developments in investment could not be 
explained by traditional determinants. For instance, the investment crisis recorded in France in the 
1990s could not be explained by traditional determinants of investment. This unveiled the need for a 
closer look at investment determinants and indeed, more recent studies have brought out the existence 
of persistent gaps between actual investment and planned investment (Herbet 2001).  

The main conclusion of these studies is that the low profit margins between 1990 and 1997 as well as 
the financing conditions were the main explanatory factors behind the gap (see Graph 34). Besides, 
corporate investment in equipment was even lower than suggested by the graph, as the share of 
investment in construction has risen over the last decade due to the increase in estate prices. 

The German case in the 2000s illustrates how restoration of profit margins may also have contributed 
to fostering investment and the possible link between profit margins and investment and innovation. 
The reduction of production costs through labour costs, as well as intermediate service costs and 
partial off-shore practices, have significantly and durably restored profit margins from 2000 and may 
have strengthened entrepreneurs expectations due to improved competitiveness, that has translated into 
the recovery in investment (domestic and foreign) from 2005 that has led to their spectacular 
increasing performances in competitiveness.  

32 

 
 
 
Graph 35: France - Corporate gross operating 
surplus and investment 

Graph 36: Germany - Corporate gross operating 
surplus and investment 

VA (%)

GDP (%)

VA (%)

GDP (%)

33

32

31

30

29

28

14

13

12

11

10

9

8

7

6

46

45

44

43

42

41

40

39

38

37

36

12

11

10

9

8

02

03

04

05

06

07

08

09

10

11

02

03

04

05

06

07

08

09

10

11

Gross operating surplus (%VA, left axis)

Investment (%GDP, right axis)

Gross operating surplus

Investment (%GDP, right axis)

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

3.3. 

Labour market rigidities 

Unemployment in France experienced a sharp rise since the beginning of the crisis. The level of 
unemployment rose from 7.8% in 2008 to 10.2% in 2012. In fact, the increase was more restrained in 
France than in most EU Member States. Over the same period, the unemployment rate increased by 
3.8 pp. and by 3.4 pp. in the euro area and in the EU respectively. In that respect, leaving aside the 
case of Germany where the unemployment rate actually decreased since 2008, all euro area Member 
States recorded an increase in the unemployment rate. This higher unemployment in Europe went 
along with higher levels of structural unemployment (using the non-accelerating-wages rate of 
unemployment estimates or NAWRU). Developments in structural unemployment contributed 39% to 
the progression in actual unemployment in the euro area between 2008 and 2012 (36% in France). 
Hence, the NAWRU now reaches 10.2% in the euro area and 9.7% in France (see Graph 37). Such a 
high level of structural unemployment would suggest that significant reforms are needed to improve 
the situation on the labour market. Accordingly, a number of countries, including in particular France, 
Italy and Spain have engaged in reforms to develop a more flexible labour market.  

The existing rigidities on the French labour market represent an obstacle to the recovery of the 
economy. They also contributed to the deterioration of export competitiveness in the last few years. 
First, rigidities in the nominal wage dynamics contributed to the relative disconnection between the 
evolution of labour costs and productivity observed in section 3.1. Second, the high segmentation of 
the labour market hampers the integration of new entrants, and the return of unemployed, into the 
labour market, hence harming average productivity. Finally, the lack of flexibility, both internal and 
external, may have hampered the ability of companies facing temporary difficulties to retain their 
workers, while limiting employment shift from low to high productivity sectors throughout the crisis.  

33 

 
 
 
 
Graph 37: Structural and cyclical unemployment (2012) 

30

25

20

15

10

5

0

-5

S
E

L
E

V
L

T
L

E

I

K
S

T
P

E
E

G
B

U
H

L
P

R
F

7
1
-

A
E

7
2
-
U
E

I

T S

I

K
U

I

Y F
C

K
D

E
S

O
R

E
B

Z
C

T
M

E
D

U
L

L
N

T
A

NAWRU

Cyclical Unemployment

Data source: Commission services (Ameco) 

3.3.1.  Evolution of the labour cost 

The cost of labour in France has increased a lot in the last few years. In particular, opposite to what 
could be seen in other economies, the cost of labour continued to rise during the crisis. The 
development in the cost of labour comes both from a dynamic level of compensation and from a 
relatively high tax wedge on labour. 

Compensation of employees experienced a continuous rise in the last 10 years. This evolution has 
been in particular explained by the important role that the minimum wage plays in the structure of 
wages in France. Indeed, at 60% of the median wage, the minimum wage is a key component of wages 
setting. Its level is adjusted by law at least once a year to keep up with inflation and to reflect half of 
the increase in the purchasing power of the basic monthly salary of a production worker. Although in a 
few EU Member States the nominal level of the minimum wage is higher (notably Belgium, Ireland, 
Luxembourg and the Netherland), France has the highest level when compared to the median wage. 
Moreover, the distance between the minimum wage and the median wage has decreased over the last 
10 years. This development, which has contributed to reduce the inequalities between workers, has on 
the other hand led to a relative rise in the cost of workers at or close to the minimum wage, with a 
negative impact on employment. In order to limit the impact of the high minimum wage, a number of 
exemptions have been put in place to lower the cost of labour at the minimum wage. In particular, 
employers are exempted from social security contributions on workers up to 1.6 times the minimum 
wage. Similarly, the decision to implement a tax credit on labour cost will lower the cost of labour for 
workers with wages up to 2.5 times the SMIC.  

34 

 
 
 
Graph 38: Minimum wage as a share of median 

Graph 39: Tax wedge on labour (for a single person 
at 67% of average wage) - 2011 

70%

60%

50%

40%

30%

20%

10%

0%

60

50

40

30

20

10

0

FR

PT

BE

NL

UK

ES

2001

2011

E
B

R
F

E
D

T

I

T
A

7
1
-

A
E

I

W F
S

K
D

S
E

L
N

T
P

P
J

K
U

S
U

Data source: Commission services (Eurostat)) 

Data source: OECD 
In addition to the high and increasing wages, the tax wedge on labour also contributes to the high cost 
of labour. Tax wedge in France represents 46.5% of the net earnings for a worker at 67% of the 
average wage. This ratio is second only to that of Belgium and much higher than the average for the 
euro area (42.4%). The tax wedge includes contributions that are paid both by the employer and by the 
workers. Only the part paid by the employers directly impacts on the cost of labour. However, the 
share contributed by the employees will also have an impact either on the nominal wage negotiated 
with the employer or on the supply of labour. In both cases, a higher tax wedge is detrimental to 
economic growth, as well as to competitiveness. 

3.3.2. 

Segmentation of the labour market 

The labour market shows a high degree of differentiation between insiders and outsiders. The relative 
protection that employed workers can rely on translates into important barriers to employment, in 
particular for population with low skills and young workers. The ratio between the unemployment rate 
of people below 25 and people above this age provides an indication of the difficulties met by young 
people on the labour market. In 2012, the unemployment rate of young people in France was 2.9 times 
that of people above 25. This is significantly higher than the average in the European Union (2.5). The 
unemployment ratio, which compares the number of unemployed with the total population between 15 
and 24, stands at 8.4% in 2011, compared to 9.1% in the European Union, hence shedding a more 
nuanced light on the situation of young people. Actually, the relatively low activity rate of young 
people in France – 38.3% compared to 42.7% in the EU – partly explains their high unemployment 
rate as young people on the French labour market tend to be those with the lowest educational 
achievement. While the high participation to tertiary education in France is an explanatory factor for 
the low participation of young people to the labour market, limited prospects on the labour market 
may also provide an incentive for young people, who would otherwise seek employment, to remain in 
education In comparison, the German labour market appears much more favourable for young 
workers. 

35 

 
 
 
 
 
In addition to the difficulties experienced by younger workers, the protection provided to workers with 
permanent contracts creates incentives for employers to appeal to alternative forms of contracts. In 
particular, in 2011 the share of temporary contracts represents 15.2% of workers in France, compared 
to 14.1% in the EU (15.8% in the euro area). Although the share of temporary contracts does not seem 
particularly high compared to peers, France is among the few countries where both youth 
unemployment is high and temporary contracts are widely used. Employment in a temporary contract 
is the main entry point into the labour market for young workers, representing 55.1% of total 
employment for people aged 15 to 24. Moreover, contrary to what happens in other countries, these 
contracts do not represent a stepping stone for more stable forms of employment. Data on the mobility 
of temporary workers (OECD, 2013) shows that after one year, only 14% of French temporary 
workers obtain permanent work (compared to 45% in the UK, 29% in Italy and 23% in Germany) with 
72% still in temporary employment.  

Graph 40: Youth unemployment rate over prime 
age unemployment rate 

Graph 41: Share of temporary contract 

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

30

25

20

15

10

5

0

2003

2007

2012

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 

Note: 2011 figures are used for Italy and the UK in 2012 
The difficulties to enter the labour market and the protection that workers with permanent contracts 
benefit from have an impact on competitiveness. First, difficulties to enter, or re-enter the job market 
can result in loss in human capital. In that respect, the sharp increase in long-term unemployment and 
in youth unemployment may limit the potential for future gains in productivity, a risk that the dearth of 
training for unemployed only makes more acute.  

3.3.3. 

Impact of the crisis on the labour market 

Labour markets in various countries have weathered differently the impact of the contraction in output 
in 2008-2009 and the ensuing low level of GDP growth. Confronted with lower output, employers 
could either reduce employment to maintain productivity (external flexibility) or safeguard 
employment at the cost of lower productivity per employees. In the latter case, depending on existing 
schemes, employers could then limit the impact on margin through a reduction in the number of 
working hours and/or in wages (internal flexibility). Evidence collected on the various economies 

36 

 
 
 
 
shows that Member States adopted very different strategies, with a potentially strong impact on 
competitiveness.  

Graph 42: Employment and Value added – France 

Graph 43: Employment and value added - 
Germany 

110

108

106

104

102

100

98

96

94

92

90

115

113

111

109

107

105

103

101

99

97

95

Employment

Value added

Employment

Value added

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 
In France, the evolution of employment and value added suggests that significant labour hoarding took 
place when output started to decrease in 2008. Although employment shrunk, the correction was 
smaller than value added developments would have suggested. However, employment did not progress 
when value added returned to growth. In Germany, while value added contracted more than in France, 
no commensurate dip in employment was seen. This could be a sign that employers have appealed to 
flexibility instruments (in particular partial unemployment). Conversely, in Spain, adjustment in 
employment seems to have significantly over-shooted compared to what developments in value added 
would have initially suggested. Indeed, workers in low productivity sectors (and in particular in 
construction and associated branches) were predominantly impacted by the crisis, hence pushing up 
productivity per worker.  

37 

 
 
 
 
Graph 44: Employment and Value added – Spain 

Graph 45: Employment and value added - Italy 

110

105

100

95

90

85

80

110

108

106

104

102

100

98

96

94

92

90

Employment

Value added

Employment

Value added

Data source: Commission services (Eurostat) 

Data source: Commission services (Eurostat) 
On the one hand, the limited adjustment witnessed in France has translated into relatively mild impact 
of the crisis on employment. On the other hand, only limited rebalancing of workforce from low to 
high productivity activities can be seen based on data at sectorial level. As a matter of fact, only in 
Spain did one see significant rebalancing at branch level, with employment in the construction sector 
strongly contracting. In other economies, data suggest that only limited change in the industrial 
structure took place throughout the crisis.  

Overall, evidence suggests that French firms have maintained production capacities and human capital 
to the detriment of their productivity in the short term. No rebalancing of workforce from low to high 
productivity activities has occurred either. This may well weigh on productivity developments at 
recovery and profit margins would probably not improve either.   

3.3.4.  Reforms engaged on the labour market 

A number of reforms have been conducted in order to increase the flexibility of the labour market. 
Efforts have been done to develop both internal and external flexibility. In particular, the reform of 
partial unemployment, which entered into force in 2009, and the agreement with social partners 
reached in January 2013 are steps in the right direction.  

The development of partial unemployment in France has been developed to mimic the system in place 
in Germany. The purpose is to allow employers to reduce temporarily the labour force in order to 
weather a temporary decrease in activity. In such a case, and upon agreement with the administration, 
the employers can reduce the number of hours worked by employees. Employees are entitled to 
unemployment benefits on the hours not worked. Moreover, if the reduction in activity lasts more than 
3 months, employees are encouraged to attend additional trainings. Such schemes can usefully 
maintain the workforce, and even improve productivity through training, during periods of inactivity. 
However, due to the complexity of the current system, only few companies, mostly the largest ones, 
use this scheme. Between 2007 and 2009, only 0.85% of the workforce in France benefited from 
partial unemployment, compared to 3% in Germany. The 2009 reform may have improved 
participation in the last few years. In order to further develop this scheme, social partners have agreed 
to work on a simplification of the system.  

38 

 
 
 
 
In January 2013, social partners signed a national agreement to reform the labour market. This 
agreement has the ambition to address the labour market segmentation and the rigidities of dismissal 
procedure while securing workers' transition between different jobs, hence paving the way for more 
flexicurity. The agreement is very broad and includes proposals to improve workers security and to 
reduce labour market segmentation and rigidities. The proposed measures to better secure employment 
for workers include in particular disincentives for temporary contracts of short duration and cuts on 
social security contributions for young adults recruited on permanent contracts and further promotion 
of adult lifelong training.  

Significant efforts have also been made to develop both internal and external flexibility. Measures are 
proposed to (i) enhance exit flexibility by broadening the scope of individual and collective economic 
dismissal; (ii) broaden the scope of firm level adjustment through firm level collective negotiations 
allowing hours worked and wages to derogate from those agreed in sectorial contracts (iii) introduce a 
procedure to further develop pre-trial negotiations, thereby reducing the uncertainty of the labour 
process. These proposals address key weaknesses of the French labour market institutions.  

While the impact of the proposed measures on the cost of labour is not clear yet, they may contribute 
to strengthening productivity as improving security for workers could translate into higher incentives 
to undertake trainings. However, the effectiveness of the reform will depend on how the agreement 
will be transcribed into the law. In particular, without a careful design of the system, a number of risks 
could materialise. First, the reform of the unemployment benefits may have consequences for the 
public finance. Second, while the hike in the social security contributions of fixed-term contracts of 
short duration may help reduce labour market duality, they could also shift job creation in favour of 
interim employment, whose contributions remain unchanged without a specific branch agreement 
deciding otherwise. Also, the increase in the minimum hours of part-time may potentially reduce the 
use of overtime (and their cost); but this effect is partly offset by an increase in the compensation for 
the first 10% of overtime. Finally, regarding the "accords de maintien de l'emploi", which promote the 
adjustment at the firm level without changes in employment, it is unclear from the agreement whether 
these agreements could allow for significant derogations at the firm level from the conditions set by 
contracts of higher levels.  

39 

 
 
 
Graph 46: Trade union density in selected EU Member States, 2008  

70

60

50

40

30

20

10

0

SE DK FI BE LU IT IE AT SI GB GR PT DE NL CZ SK HU PL ES FR EE

Data source: OECD 

While the process engaged to develop flexicurity is a step in the right direction, significant avenues for 
reform remain. In particular, it should be noted that, despite the success of the latest negotiation, the 
low density of trade unions in France, measured as the ratio of trade union members to the total 
number of wage and salary earners (see Graph 46), could act as a constraint for further reform as a 
number of studies link the quality of social dialogue, the representativeness of workers' union and the 
ability to reform the labour market (e.g. Cette et al, 2012).  

40 

 
 
 
 
4. 

POLICY CHALLENGES 

The analysis in section 2 indicates that France has macroeconomic imbalances in the areas of export 
performance and competitiveness, as last year's IDR concluded. The sources of these imbalances are 
manifold, but issues related to non-price competitiveness are crucial to explain the poor export 
performance. Poor cost competitiveness in turn impedes a better enhancement of innovation. In this 
vein, section 3 sets the scene by discussing key aspects related to non-price competitiveness, and then 
analyses in detail (i) the low profitability of firms in the private sector, which hinders the potential for 
investment and innovation and (ii) labour market rigidities which, by pushing up labour costs, impact 
negatively not only on employment but also on competitiveness. 

It should be recalled that the deteriorating export performance of France, together with rising 
indebtedness, was clearly identified as an emerging imbalance in last year's first IDR and relevant 
policy responses were reflected and integrated in the Council's country-specific recommendations 
issued for France in June 2012. The assessment of progress in the implementation of those 
recommendations will take place in the context of the assessment of the National Reform Programme 
and the Stability Programme under the European Semester. Against this background, this section 
discusses different avenues that could be envisaged to address the challenges identified in this IDR.  

Non-price competitiveness: in last year's IDR the analysis already pointed to the crucial role of non-
price/cost competitiveness issues to explain the external performance. Indeed, most of the 
deterioration in export market shares comes from lower non-price competitiveness. Specific efforts are 
therefore needed to support exporting companies and help them improve the quality of the goods 
produced. In order to regain the lost ground, the authorities have initiated an export promotion strategy 
focusing on selected product categories. So far, measures announced mainly aim to help exporters 
access finance. While this could help companies with a willingness to export to raise their capacity, 
the impact of these measures might be only limited. Additional efforts seem to be needed to ensure 
that companies in general and SMEs in particular gain access to export markets. An initiative such as 
the promotion of linkages between large companies with important export activities and local SMEs 
would be a promising avenue. Efforts to remove barriers to firms' growth and to better structure the 
network of export promotion agencies would also be welcome.  

Beyond support to exporting firms themselves, the country could benefit from horizontal measures 
targeted to help companies increase the quality of their goods. One key aspect of this process is the 
support to innovative activities. It is worth highlighting that current overall R&D spending in France is 
in line with the EU27 average.  

However, a large share of R&D spending is financed by public money. It will be important to review 
the effectiveness of the cluster policy, centred on the pôles de compétitivité. More precisely, a number 
of reports, including some commissioned by the authorities, have underlined the disappointing results 
of a policy that seems to pursue several objectives at the same time (including regional and local 
development), which potentially limits the impact on innovation itself. Resources available for this 
policy could be better targeted to the most innovative clusters, insisting on the need to develop and 
commercialise the outcome of the work conducted. The research tax credit, which has been maintained 
for three years to ensure continuity of the fiscal framework, is a positive measure which can contribute 
to fostering research activity. However, further studies would be needed to assess the extent of 
potential deadweight effect.  

41 

 
 
There is also a need to attract more young talent into science and engineering studies in order to avoid 
skill shortages, which may deter future private R&D investments. Moreover, entrepreneurial attitudes 
and innovation skills need to be fostered across the whole education system. Enhanced coherence 
between education, training and employment policies, in particular at the local level, would help better 
match skills with labour market demand.  

Profitability in the private sector: The analysis in this IDR has pointed to the critical role that 
restoring the profitability of firms, currently among the lowest in the EU, can have in developing non-
price competitiveness. In particular, the need to improve profits and R&D spending by firms 
establishes a strong link between costs of production, notably of labour, and non-price 
competitiveness. Wage developments, including those of the minimum wage, need therefore to be 
looked at closely to ensure that they do not contribute to a further erosion of the external price/cost 
competitiveness position. The overall cost competitiveness of the economy could also be enhanced by 
a further shift in the tax burden from labour to other sources of revenue. Accordingly last year's 
country-specific recommendations (CSR 4) called for a tax shift from labour to less growth-distortive 
tax bases. An effort has been made in this direction through the creation of a tax grant based on total 
payroll (the so-called tax credit for competitiveness and employment). This measure should impact 
positively on the profitability of companies from 2014 on (a scheme is considered to advance 
payments in specific cases). The mechanism selected, which is more complex than a decrease in social 
contributions weighing on labour, means that the measure will not actually reduce the cost of labour 
but will contribute to improve after-tax profitability. In this respect, it may not fully reach its 
objectives in terms of employment but will contribute to improving profits.  

Rigidities in the labour market: The level of unemployment in France has been rising further in the 
last few months. The existing rigidities in the labour market clearly aggravate the competitiveness 
issues of companies. They may contribute in particular to delaying the reallocation between sectors 
and occupations, to reducing wage adjustment, and compressing wage distribution; the high tax wedge 
has a negative effect on labour demand and on the hours worked. At the current juncture, and given 
the expected slow recovery, it is important that policies focus on developing the adjustment capacity 
of the labour market rather than on safeguarding sectors where productivity is ailing. Depending on 
how the final scheme is translated into law, the current agreement between social partners to better 
define the process to be followed in case of economic dismissals and to develop agreements to 
safeguard employment in exchange for a temporary increase in working hours or a decrease in salary 
could have a significant impact on the way the labour market operates.  

Further efforts are still needed however to better develop part-time employment and to ensure that 
reforms are conducted through a social dialogue. The agreement reached by social partners in January 
2013 is a positive sign. The reform addresses key weaknesses of the labour market institutions, and as 
such, it moves in the direction set by the country specific recommendations addressed to France by the 
Council. However, it appears useful if these reforms, although significant, could be further 
complemented to enable firms to redress their competitive edge, in particular over their main southern 
competitors, notably in Spain and Italy, where labour costs have been reduced and significant reforms 
undertaken, including on the labour market, and where export performance has already significantly 
recovered. 

Inter-linkages between the banking sector, the sovereign and the private sector: The currently 
high level of public debt in France has not resulted in significant tensions on sovereign bonds for the 

42 

 
 
moment. Indeed, despite the still rising level of debt, interest rates and spreads vis-à-vis the German 
bond have largely abated since early 2011. In that respect, the commitment taken by the authorities to 
respect the deadline set by the Council in the context of the Excessive Deficit Procedure, together with 
their resolution to bring public debt on a downward trend by 2017 contributed to comforting the trust 
of investors. However, as a number of institutions are currently revising their forecasts for economic 
growth and public finances, French bonds could become a central focus for investors. A hike in 
interest rates, possibly also against the context of a changed situation in global liquidity conditions, 
would not only endanger the sustainability of the public debt, but could also have spill-over effects 
into the real economy due to the expected increase in the financing costs for the private sector.  

Putting the debt firmly onto a downward path would not only reduce the risk associated with sovereign 
debt but also the crowding out of investment by private companies, hence easing financing. In 
addition, it will also provide the authorities with more latitude to implement a fiscal policy aiming at 
improving the competitiveness of the country, as well as to face unexpected developments in other 
economic sectors such as financial markets. 

43 

 
 
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