Recommendation for a COUNCIL RECOMMENDATION on France’s 2014 national reform programme and delivering a Council opinion on France’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: France, budget deficit, competitiveness, economic convergence, economic disparity, economic growth, economic stabilisation, financial control, macroeconomics, public debt, social situation, stability programme













EUR-Lex - 52014DC0411 - EN











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52014DC0411

Recommendation for a COUNCIL RECOMMENDATION on France’s 2014 national reform programme and delivering a Council opinion on France’s 2014 stability programme /* COM/2014/0411 final  - 2014/ () */









 
 
Recommendation for a
COUNCIL RECOMMENDATION
on France’s 2014 national reform programme
and delivering a Council opinion on France’s 2014 stability programme

THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,
Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular
Article 5(2) thereof,
Having regard to Regulation (EU) No
1176/2011 of the European Parliament and of the Council of 16 November 2011 on
the prevention and correction of macroeconomic imbalances[2], and in particular
Article 6(1) thereof,
Having regard to the recommendation of the
European Commission[3],
Having regard to the resolutions of the
European Parliament[4],
Having regard to the conclusions of the
European Council,
Having regard to the opinion of the
Employment Committee,
Having regard to the opinion of the
Economic and Financial Committee,
Having regard to the opinion of the Social
Protection Committee,
Having regard to the opinion of the
Economic Policy Committee,
Whereas:
(1)                   
On 26 March 2010, the European Council agreed to
the Commission’s proposal to launch a new strategy for growth and jobs, Europe
2020, based on enhanced coordination of economic policies, which will focus on
the key areas where action is needed to boost Europe’s potential for
sustainable growth and competitiveness.
(2)                   
On 13 July 2010, the Council, on the basis of
the Commission’s proposals, adopted a recommendation on the broad guidelines
for the economic policies of the Member States and the Union (2010 to 2014)
and, on 21 October 2010, adopted a decision on guidelines for the employment
policies of the Member States, which together form the ‘integrated guidelines’.
Member States were invited to take the integrated guidelines into account in
their national economic and employment policies.
(3)                   
On 29 June 2012, the Heads of State or
Government decided on a Compact for Growth and Jobs, providing a coherent
framework for action at national, EU and euro area levels using all possible
levers, instruments and policies. They decided on action to be taken at the
level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.
(4)                   
On 9 July 2013, the Council adopted a
recommendation on France’s national reform programme for 2013 and delivered its
opinion on France’s updated stability programme for 2012-2017. On 15 November 2013 in line with Regulation (EU) No 473/2013[5],
the Commission presented its opinion on France’s draft
budgetary plan for 2014[6].
(5)                   
On 13 November 2013, the Commission adopted the
Annual Growth Survey[7],
marking the start of the 2014 European Semester of economic policy
coordination. On the same day on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the Alert Mechanism Report[8],
in which it identified France as one of the Member States for which an in-depth
review would be carried out. 
(6)                   
On 20 December 2013, the European Council
endorsed the priorities for ensuring financial stability, fiscal consolidation
and action to foster growth. It underscored the need to pursue differentiated,
growth-friendly fiscal consolidation, to restore normal lending conditions to
the economy, to promote growth and competitiveness, to tackle unemployment and
the social consequences of the crisis, and to modernise public administration.
(7)                   
On 5 March 2014, the Commission published the
results of its in-depth review for France[9],
under Article 5 of Regulation (EU) No 1176/2011. The Commission’s analysis
leads it to conclude that France continues to experience macroeconomic
imbalances, which require specific monitoring and decisive policy action. In
particular, the deterioration in the trade balance and
in competitiveness and the implications of the high level of public sector
indebtedness deserve continuous policy attention.
(8)                   
On 7 May 2014, France submitted its 2014
national reform programme and its 2014 stability programme. In order to take
account of their interlinkages, the two programmes have been assessed at the
same time.
(9)                   
The objective of the budgetary strategy outlined
in the 2014 stability programme is to correct the excessive deficit by 2015 and
reach the medium-term objective in 2017. The programme confirms the previous medium-term
objective of a balanced budget in structural terms, which is more stringent
than what the Stability and Growth Pact requires. The programme plans to bring
the deficit to 3% of GDP in 2015, above the target set in the Council
recommendation of 21 June 2013. Thereafter, the planned (recalculated) annual
progress towards the medium-term objective is lower than the minimum
requirement of 0.5% of GDP. Overall, the budgetary strategy outlined in the
programme is only partly in line with the requirements of the Stability and
Growth Pact. The programme projects that the government debt will peak at 95.6%
of GDP in 2014 and 2015 and then drop to 91.9% in 2017. The macroeconomic
scenario underpinning the budgetary projections in the programme is plausible
for 2014 and slightly optimistic for 2015, with GDP projected to grow by 1.0%
and 1.7% this year and next, against 1.0% and 1.5% according to the Commission
2014 Spring Forecast. In April 2014, the independent High Council for Public
Finances (“Haut Conseil des finances
publiques”) issued an opinion
on the macroeconomic scenario of the programme. On 5 March 2014, France was
recommended by the Commission to make further efforts to ensure the full
compliance with the Council recommendation under the EDP. The stability
programme outlines a number of additional measures for 2014, among which the
cancellation of ministerial appropriations to be adopted as part of a
supplementary budget and the first effects of the EUR 50 billion savings plan
announced by the government. On this basis, and also taking into account the
fact that the fiscal effort achieved in 2013 was higher than expected at the
time of the Commission recommendation, the programme can be considered to
broadly respond to the Commission recommendation. The level of detail of the
fiscal consolidation measures is insufficient to credibly ensure the correction
of the excessive deficit situation by 2015, as supported by the Commission
forecast of a deficit at 3.4% of GDP next year and an underlying structural
adjustment falling well short of the level recommended by the Council.
Moreover, risks to the government’s targets are tilted to the downside. In
particular, part of the additional measures for 2014 announced in the programme
remains to be adopted and the planned amount of savings for 2015 is very
ambitious. Based on the Commission Forecast, the fiscal effort over 2013-2014
falls short by 0.2 pp of GDP in terms of (corrected) change in the structural
balance and by 0.1 pp of GDP in terms of the amount of measures estimated as
necessary at the time of the Council recommendation. Based on its assessment of
the programme and the Commission forecast, pursuant to Council Regulation (EC)
No 1466/97, the Council is of the opinion that the measures underpinning the
budgetary strategy need to be specified further and that further efforts are
needed to comply with the Council recommendation and to ensure an appropriate
path towards the medium-term objective thereafter. In particular, additional
efforts should be spelled out in the forthcoming amending budget law for 2014. 
(10)               
Given the high and still increasing government
debt and the fact that the deadline for correcting the excessive deficit was extended
to 2015, it is all the more important that the 2014 budget is strictly
implemented and substantial consolidation efforts are firmly pursued in 2015.
In particular, public spending should grow at a much slower pace than in
previous years, as planned by the French government. Hence, there is a need to further specify the strategy on
reducing expenditure by intensifying the on-going spending review and by redefining,
where relevant, the scope of government action. Sizeable
short-term savings cannot be achieved without reducing significantly the
increase in social security spending, which accounts for nearly half of public
sector expenditure. This implies curbing healthcare and pension costs, for
example through setting more ambitious annual healthcare expenditure targets
and temporarily freezing pensions, as well as other social benefits, as
currently envisaged by the government. In addition, the planned new decentralisation law should
streamline the various administrative layers in France to eliminate
administrative overlap and achieve further synergies,
efficiency gains and savings by merging or suppressing administrative layers.
In this respect, not only the structural reforms
outlined in the stability programme will take effect only in the medium term, although the planned timetable has been brought forward since the
stability programme, but they are also subject to
significant implementation risks. The control of local government expenditure
should also be strengthened, including by capping the annual increase in local
government tax revenue while rigorously implementing the planned reduction in
grants from the central government. Beyond the need for savings in the short
run, the long-term sustainability of public finances is also an issue of
concern. While public expenditure on health has been
kept under control over the last few years, further efforts are needed to
improve the cost-effectiveness of the health system. In particular, there is a need to implement further cost-containment policies as
the health system is projected to face a significant rise in expenditure over
the medium and long term. Areas where efficiency should be enhanced include
pharmaceutical and administrative spending as well as hospital care. Lastly, a
pension reform was adopted in December 2013 with a view to ensuring the
long-term sustainability of the system. However the
pension reform will not suffice to eliminate the
system’s deficit, in particular the deficit arising from schemes for state
government officials and employees working in a number of state-controlled
companies. All in all, according to projections from the French authorities, the
new pension measures will only halve the system’s total deficit to some 0.5% of
GDP by 2020. Moreover, the size of adjustment is subject to significant risks
as the macroeconomic scenario underpinning these projections could prove overly
optimistic. The newly created pensions monitoring committee (“Comité de suivi des retraites”) should ensure that the system’s deficit
is gradually eliminated.
(11)               
France is among the Member States where the cost
of labour is the highest. In particular, the high tax burden on labour reduces
firms’ profitability. In order to support cost
competitiveness, the French government has taken a number of initiatives to
reduce the tax burden on labour. A tax rebate for competitiveness and
employment (CICE), equivalent to a decrease in the cost of labour for wages
below 2.5 times the minimum wage, was adopted in December 2012. A further EUR
10 billion cut in the cost of labour was announced as part of a “responsibility and solidarity pact” in
January 2014. The two measures will account for EUR 30
billion or 1.5% of GDP, which is commensurate with the overall increase in
corporate taxation recorded in 2010-2013 and would only
bridge half of the gap between France and the euro area average in terms of
employer social security contributions. Moreover, exporting firms, which tend
to pay high wages, will benefit less from the CICE than non-exporting firms, thus reducing the impact of the measure on
competitiveness. The responsibility and solidarity pact includes a reduction in
the cost of labour for low wages and one targeting wages between 1.6 and 3.5
times the minimum wage. The latter measure, expected to enter into force from
2016, would have a more direct impact on exporting firms. Wage-setting in
France tends to result in distortions of the wage structure and limit the
ability of firms to adjust wages in economic downturns. The High Council for
the Financing of Social Protection (“Haut Conseil du financement de la
protection sociale”) has assessed the impact of various scenarios for social
security exemptions on employment, but limited emphasis has been put on the
impact on wage developments and competitiveness. However, although extensive
exemptions were granted, for workers paid the minimum wage, the cost of labour
at the minimum wage remains high. These exemptions contributed to containing
labour costs in 2013, which is a positive development, but the level of the
minimum wage in France is such that it provides one of the highest purchasing
power levels in the EU. The minimum wage should therefore continue to evolve in
a manner that is supportive of competitiveness and job creation. France has
only few exemptions from the statutory minimum wage and additional efforts
could be made to reduce the cost of labour for vulnerable groups.
(12)               
France’s global ranking in a number of
international business environment surveys has deteriorated. While efforts have
been made as part of a “simplification
shock” launched in July 2013 to ease relation between firms and the
administration, there is a need for further improving the business environment.
In addition, a number of measures considered under the simplification plan
still need to be defined and implemented. In particular, specific attention
should be paid to regulations from the labour code or to accounting rules linked
to specific size thresholds that hamper the growth of French firms. These may
play a role in SMEs’ difficulties in reaching the size that would allow them to
export and to innovate. Policy initiatives to boost R&D spending and
innovation by private companies, in particular the tax credit on research and
the competitiveness poles, have yielded mixed results so far. The decreasing
weight of the industrial sector in the French private sector translates into
stagnating R&D spending by private companies despite significant efforts at
the firm level. As a consequence, a large proportion of R&D spending
remains financed by public money either directly through public research or
indirectly through subsidies. The effectiveness of the existing tools should be
further improved in order to trigger higher R&D expenditures by private
firms and innovation in the private sector. In particular, resources allocated
to the competitiveness poles could better foster scale effects and improve the
diffusion of innovation. In addition, the effectiveness of the policy could be
strengthened by enabling these poles to become real networks of firms with
positive spillovers. Lastly, the cost of the tax credit on research is expected
to reach EUR 5.8 billion in 2014 (close to 0.3% of GDP). In spite of
the cost of this measure, no ex post assessment of its effectiveness on R&D
is available.
(13)               
Although barriers on legal forms, shareholding
requirements or tariffs have been removed for certain professions (e.g. veterinarians),
a majority still face significant barriers to entry or conduct today (e.g. taxis,
the health sector, notaries and legal professions more generally). The
principle of numerus clausus for the access to many professions (doctors,
pharmacists, etc.) is still hampering access to services, and could be reviewed
without putting quality and safety at risk. To date, no thorough assessment of
the need for, and proportionality of, restrictions affecting regulated
professions has taken place. In the retail sector, burdensome authorisation
requirements for the opening of trade outlets, notably resulting from urban
planning regulations, and the ban on sales at a loss still remain and have an adverse
impact on competition and on consumers. To date, no concrete measures have been
adopted in France to remove entry barriers in the retail sector. Regarding electricity and gas distribution,
regulated prices are being phased out for non-household customers. However, prices continue to be
regulated for households and for electricity, they are set below cost levels and the access by alternative suppliers is
limited. Regarding energy
interconnections, on-going projects, in particular with Spain, should be
completed to reinforce the electricity and gas interconnections with the
neighboring countries. In the railway sector, market entry barriers are still
preventing an efficient market functioning. France has not opened up its
domestic rail passenger market to competition, except for international
services, where there are few new entrants. It has launched a reform of its
railway system with a view to making it more financially sustainable. A draft
law was presented in October 2013 and is currently being discussed by
Parliament. The measures presented include the set-up of a fully-fledged
infrastructure manager within a vertically integrated structure including the
incumbent operator. This new structure may hamper access to the network by
alternative operators.
(14)               
France has a high and rising overall tax burden.
In 2013, the tax-to-GDP ratio stood at 45.9%, one of the highest in the EU and
up by 3.3 pps since fiscal consolidation started in 2010. Against this
background, a special committee (“Assises de la fiscalité”) has provided input to a reform of the tax
system. Little progress has been made so far in lowering the statutory rates of
personal and corporate income tax and increasing VAT efficiency. Instead, a
temporary surcharge on large companies has been extended until 2015 and this
will result in the all-in statutory corporate income tax rate peaking at 38.1%
(the statutory rate is already one of the highest in the EU at 33.3%). The
French government has announced a gradual reduction in the statutory rate to
28% by 2020 but there is no information on the exact timing of the measure.
Limited progress has also been made over the last year in reducing and
streamlining income tax expenditures. In spite of some progress in the area of
environmental taxation (e.g. with the gradual introduction of a carbon tax or “contribution
climat énergie”), the share of environmental taxation in GDP continues to
remain low. In particular, excise duties in France are not indexed with
inflation and some important environmentally-harmful subsidies such as the
preferential rate of excise duty for diesel remain. Lastly, no
additional measures were taken in 2013 to address the debt bias in corporate
taxation with a view to preventing a further increase in private indebtedness. 
(15)               
Although a number of policy measures were taken
in France, the situation on the labour market continued to deteriorate in 2013
and significant challenges remain. Unemployment continued to increase to 10.3% in 2013 (against 7.5% in
2008). France’s labour market remains segmented with very low levels of
transitions from temporary to permanent contracts (the likelihood of moving
from a temporary to a permanent job was only 10.6% in 2010, as against 25.9% on
average in the EU). The inter-professional agreement on securing employment was
translated into a law adopted in July 2013. Although this reform is a positive
step, its impact remains uneven at this stage. In
particular, very few companies have made use of the
arrangements for company-level agreements created by the law to increase the
flexibility of work conditions in the event of temporary economic difficulties.
However, the rate of effective dismissals brought to court has been
significantly reduced. While negotiations took place in 2014 between social
partners to reform the unemployment benefit system, the new agreement is not
expected to substantially reduce the deficit of the system. The cumulated
deficit of the unemployment benefit system, which was close to 1% of GDP in
2013, calls for additional structural measures to ensure its sustainability. In
particular, some elements, such as the eligibility conditions, the degressivity
of benefits over time or the replacement rates for workers with the highest
wages were only marginally modified following the last agreement between social
partners in March 2014 and they should be further adapted to ensure that
incentives to work are adequate. Thanks to successive pension reforms, the
employment rate of workers between 55 and 64 years of age has seen a constant
increase in the past three years. However, the employment rate among older
workers in France (45.6% in 2012) remains well below the average in the EU
(-4.5 pps below) and only 55% of older workers in France retire directly after
employment (2008-2011). As a result, the unemployment rate for this group has
increased strongly over the last few years. Hence, there is a need to
strengthen measures to improve their employability while reviewing incentives for
them to stay in or return to work.  
(16)               
The 2013 Programme for International Student
Assessment survey showed that educational inequality in France is amongst the
highest in OECD countries. A sixth of young people in France leave education
and training without a qualification. This is particularly worrying as the
unemployment rate of young people was of 25.5% at the end of 2013 and as the
risk of being unemployed was almost two times higher for the least qualified
young people. Schemes to promote apprenticeships should reach in particular the
least qualified young people. Some
progress in addressing this issue was made through the launch of the reform of
compulsory education in July 2013 and the adoption of a law on vocational
education and lifelong learning in March 2014. However, it is too early to
assess whether these measures will effectively reduce inequalities in the
education system and a new plan targeting lower-secondary education schools in
disadvantaged areas announced in January 2014, still needs to be implemented. Lastly,
transition from school to work has been facilitated but the number of
apprentices decreased in 2012 and the schemes increasingly benefitted students
in higher education.
(17)               
In the context of the European Semester, the
Commission has carried out a comprehensive analysis of France’s economic
policy. It has assessed the stability programme and the national reform
programme. It has taken into account not only their relevance for sustainable
fiscal and socio-economic policy in France but also their compliance with EU
rules and guidance, given the need to reinforce the overall economic governance
of the European Union by providing EU-level input into future national
decisions. Its recommendations under the European Semester are
reflected in recommendations (1) to (7) below.
(18)               
In the light of this assessment, the Council has
examined France’s stability programme, and its opinion[10] is reflected in
particular in recommendation (1) below.
(19)               
In the light of the Commission’s in-depth review
and this assessment, the Council has examined the national reform programme and
the stability programme. Its recommendations under Article 6 of Regulation (EU)
No 1176/2011 are reflected in recommendations (1) to (6) below.
(20)               
In the context of the European Semester the
Commission has also carried out an analysis of the economic policy of the euro
area as a whole. On the basis of this analysis, the Council has issued specific
recommendations for the Member States whose currency is the euro. France should
also ensure the full and timely implementation of these recommendations.
HEREBY RECOMMENDS that France take
action within the period 2014-2015 to:
1.                      
Reinforce the budgetary strategy, including by
further specifying the underlying measures, for the year 2014 and beyond to
ensure the correction of the excessive deficit in a sustainable manner by 2015 through
achieving the structural adjustment effort specified in the Council
recommendation under the Excessive Deficit Procedure. A durable correction of
the fiscal imbalances requires a credible implementation of ambitious
structural reforms to increase the adjustment capacity and boost growth and
employment. After the correction of the excessive deficit, pursue a structural adjustment
towards the medium-term objective of at least 0.5% of GDP each year, and more
in good economic conditions or if needed to ensure that the debt rule is met in
order to put the high general government debt ratio on a sustained downward
path. Step up efforts to achieve efficiency gains across all sub-sectors of
general government, including by redefining, where relevant, the scope of
government action. In particular, take steps to reduce significantly the
increase in social security spending as from 2015 as planned, by setting more
ambitious annual healthcare spending targets, containing pension costs, and
streamlining family benefits and housing allowances. Set a clear timetable for
the on-going decentralisation process and take first steps by December 2014,
with a view to eliminating administrative duplication, facilitating mergers
between local governments and clarifying the responsibilities of each layer of
local government. Introduce a ceiling on the annual increase in local
government tax revenue while reducing grants from the central government as
planned. Beyond the need for short-term savings, take steps to tackle the
increase in public expenditure on health projected over the medium and long
term, including in the area of pharmaceutical spending, and take additional
measures when and where  needed to bring the pension system into balance by
2020 in a sustainable manner, with a special focus on existing special schemes.

2.                      
Ensure that the labour cost reduction resulting
from the “crédit d’impôt compétitivité
emploi” is sustained. Take action to further lower employer social security
contributions in line with commitments under the responsibility and solidarity
pact, making sure that no other measures offset its effect and that the
targeting currently envisaged is maintained. Further evaluate the economic impact
of social security contribution exemptions, putting the emphasis on employment,
wage developments and competitiveness and take appropriate measures if
necessary. Further reduce the cost of labour in a budget neutral way namely at
the lower end of the wage scale notably through targeted reductions in employer
social security contributions  taking into account the various wage support
schemes. 
3.                      
Simplify companies’
administrative, fiscal and accounting rules and take concrete measures to
implement the government’s ongoing “simplification plan” by December 2014.
Eliminate regulatory impediments to companies’ growth, in particular by
reviewing size-related criteria in regulations to avoid thresholds effects.
Take steps to simplify and improve the efficiency of innovation policy, notably
through an evaluation and if necessary an adaptation of the “crédit d’impôt recherche”.
Ensure that resources are focused on the most effective competitiveness poles
and further promote the economic impact of innovation developed in the poles. 
4.                      
Remove unjustified restrictions on the access to
and exercise of regulated professions and reduce entry costs and promote
competition in services. Take further action to reduce regulatory burden
affecting the functioning of the retail sector, in particular by simplifying
authorisations for the opening of trade outlets and removing the ban on sales
at a loss. While maintaining affordable conditions for vulnerable groups,
ensure that regulated gas and electricity tariffs for household customers are
set at an appropriate level which does not represent an obstacle to
competition. Strengthen electricity and gas interconnection capacity with
Spain; in particular, increase the gas interconnections capacity to fully
integrate the Iberian gas market with the European market. In the railway
sector, ensure the independence of the new unified infrastructure manager from
the incumbent operator and take steps to open domestic passenger transport to
competition before 2019.
5.                      
Reduce the tax burden on labour and step up
efforts to simplify and increase the efficiency of the tax system. To this end,
starting in the 2015 budget, take measures to: remove inefficient personal and
corporate income tax expenditures on the basis of recent assessments and the “Assises de la fiscalité” initiative while
reducing the statutory rates; take additional measures to remove the debt bias
in corporate taxation; broaden the tax base, notably on consumption; phase out
environmentally-harmful subsidies.
6.                      
Take further action to combat labour-market
rigidity, in particular take measures to reform the conditions of the “accords de maintien de l’emploi” to
increase their take up by companies facing difficulties. Take additional
measures to reform the unemployment benefit system in association with social
partners, in order to guarantee its sustainability while ensuring that it
provides adequate incentives to return to work. Step up counselling and
training for older workers and re-assess the relevant specific unemployment
benefit arrangements. 
7.                      
Pursue the modernisation of vocational education
and training, implement the reform of compulsory education and take further
actions to reduce educational inequalities in particular by strengthening
measures on early school leaving. Ensure that active labour market policies
effectively support the most vulnerable groups. Improve the transition from
school to work, notably by stepping up measures to further develop
apprenticeship with a specific emphasis on the low-skilled.  
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               OJ L 306, 23.11.2011, p. 25.
[3]               COM(2014) 411 final.
[4]               P7_TA(2014)0128 and P7_TA(2014)0129.
[5]               OJ L 140, 27.5.2013, p.11.
[6]               C(2013) 8004 final.
[7]               COM(2013) 800 final.
[8]               COM(2013) 790 final.
[9]               SWD(2014) 81 final.
[10]             Under Article 5(2) of Council Regulation (EC) No
1466/97.