Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of France and delivering a Council opinion on the 2016 stability programme of France
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: France, budget deficit, economic policy, economic reform, employment policy, school-working life relations, service, stability programme, tax system, unemployment insurance

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 330 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of France  and delivering a Council opinion on the 2016 stability programme of France    
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of France 

and delivering a Council opinion on the 2016 stability programme of France  

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 
policies1, 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 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

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  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified France as one of the Member States for which an in-depth review would be 
carried out. On the same day, the Commission also adopted a recommendation for a 

1 
2 
3 
4 
5 
6 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM (2016) 330 final.  
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

EN 

2 

   EN 

 
 
 
 
 
                                                 
(2) 

(3) 

(4) 

(5) 

Council  recommendation  on  the  economic  policy  of  the  euro  area7.  This 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  between  the  economies  in  the  economic  and 
monetary  union,  France  should  ensure  the  full  and  timely  implementation  of  the 
recommendation. 
The 2016 country report for France8 was published on 26 February 2016. It assessed 
France’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 14 July 2015 and France's progress towards its national Europe 2020 
targets. It also included the in-depth review under Article 5 of Regulation (EU) No 
1176/2011. On 8 March 2016, the Commission presented the results of the in-depth 
review.9 The Commission’s analysis leads it to conclude that France is experiencing 
excessive macroeconomic imbalances. In  particular,  with growth  and inflation both 
low,  France  has  a  high  and  increasing  public  debt  coupled  with  a  deteriorated 
competitiveness.  The  risk  of  adverse  effects  on  the  French  economy  and,  given  its 
size,  of  negative  spillovers  to  the  economic  and  monetary  union,  is  particularly 
important. 

On  29  April  2016,  France  submitted  its  2016  national  reform  programme  and  its 
2016  stability  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application of the measures linking the effectiveness of the European Structural and 
Investment Funds to sound economic governance10.  

in 

France is currently in the corrective arm of the Stability and Growth Pact. In its 2016 
stability programme, the government plans to correct the excessive deficit by 2017, 
in line with the Council recommendation of 10 March 2015. The headline deficit is 
planned  to  decline  further  to  1.2%  of  GDP  in  2019.  The  medium-term  budgetary 
objective – a structural deficit of 0.4% of GDP – is planned to be achieved by 2018. 
According to the stability programme, the government debt-to-GDP ratio is expected 
to peak at 96.5 % of GDP in 2017 before declining to 93.3 % of GDP in 2019. The 
is  broadly 
macroeconomic  scenario  underpinning 
plausible. However, the measures needed to support the planned deficit targets from 
2017 onwards have not been sufficiently specified.  Based on the Commission 2016 
spring  forecast,  the  headline  deficit  is  projected  to  reach  3.4%  of  GDP  in  2016,  in 
line  with  the  deficit  recommended  by  the  Council.  For  2017,  under  unchanged 
policies,  the  headline  deficit  is  projected  to  reach  3.2%  of  GDP,  putting  at  risk 
compliance  with  the  deadline  to  correct  the  excessive  deficit.  The  recommended 
fiscal  effort  is  not  projected  to  be  delivered  in  2016  and  2017  as  the  consolidation 

the  budgetary  projections 

7 
8 
9 
10 

COM(2015) 692 final. 
SWD(2016) 79 final. 
COM(2016) 95 final. 
COM(2014) 494 final.  

EN 

3 

   EN 

 
                                                 
(6) 

(7) 

(8) 

(9) 

strategy  pursued  by  France  relies  primarily  on  improving  cyclical  conditions  and  a 
continuation of the low interest rate environment, which are outside the control of the 
authorities,  thereby  entailing  compliance  risks.  Based  on  its  assessment  of  the 
stability  programme  and  taking  into  account  the  Commission  2016  spring  forecast, 
the Council is of the opinion that there is a risk that France will not comply with the 
provisions  of  the  Stability  and  Growth  Pact.  Therefore,  further  measures  will  be 
needed to ensure a durable correction of the excessive deficit by 2017. 

The level of public expenditure in France is one of the highest in the EU and it has 
continued  to  increase  since  2010.  France  has  announced  a  plan  to  reduce  public 
spending  by  EUR  50  billion  between  2015  and  2017  at  all  levels  of  general 
government, but this may be insufficient to achieve a significant reduction in public 
expenditure.  Detailing  the  measures  underpinning  the  spending  reductions,  while 
making sure that the savings measures take into account the close-to-zero inflation, 
would help to increase the efficiency of this plan. 

Challenges  remain  to  reduce  further  the  expenditure  ratio  as  planned,  since  the 
process of identifying large areas of potential savings has not been effective and the 
spending  reviews  have  had  modest  outcomes  so  far.  In  the  housing  sector,  France 
spends  almost  twice  as  much  as  its  European  peers  without  noticeable  better 
outcomes in the housing  market. The combined effect of the implementation of the 
planned  reduction  in  grants  to  local  authorities  from  the  central  government  and  a 
stronger control of local government expenditure, in particular by containing the rise 
in administrative costs of local authorities, could preserve their investment capacity. 
The  spending  reviews  could  be  an  appropriate  tool  to  identify  such  savings. 
Moreover, the recent reform of local administration has the potential to increase the 
efficiency of the system over the medium to long term. 

Sizeable  short-term  savings  cannot  be  achieved  without  significantly  curbing  the 
increase in social security spending, which represents more than half of the general 
government expenditure. The pension system could continue to face deficits over the 
short  to  medium  term,  especially  under  adverse  macroeconomic  conditions. 
Moreover, the previous pension reforms are only expected to curtail the current high 
level of public pension expenditure ratio after 2025. France has set ambitious targets 
for 2016 and 2017 to limit the growth of health expenditure. These targets could be 
complemented by further efforts to  identify efficiency gains in  the medium to  long 
term. 

Policy measures to reduce labour costs and improve firms' profit margins have been 
undertaken  through  the  EUR  20  billion  tax  credit  for  competitiveness  and 
employment  and  the  EUR  10  billion  in  additional  cuts  in  employers'  social 
contributions  planned  under  the  responsibility  and  solidarity  pact.  The  design  of 
these measures, which account for 1.5% of GDP and contribute to reducing the gap 
between France and the euro area average in terms of labour cost, may hamper their 
effectiveness. The results of the planned evaluations of these cost reduction measures 
will  help  any  decision  on  the  future  design  of  these  schemes,  to  ensure  that  these 
measures meet their objectives in terms of efficiency. The effect on wage formation 
and employment is of particular interest for these evaluations. 

(10) 

In the current context of high unemployment, there are risks that the cost of labour at 
the  minimum  wage  hampers  employment  of  low  qualified  people.  While  the 
minimum  wage  is  high  compared  with  the  median  wage,  the  cost  of  labour  at  the 
minimum wage has been reduced by social contribution exemptions. Increases in the 

EN 

4 

   EN 

 
(11) 

(12) 

(13) 

minimum  wage  induce  wage  increases  for  all  categories  of  workers  and  create 
upward  wage  compression.  Because  of  the  minimum  wage  indexation  mechanism, 
there  are  feedback  loops  between  increases  in  average  wages  and  changes  in  the 
minimum wage, which delay the necessary wage adjustment  in response to  a weak 
economic situation. 

Recent  reforms  have  created  only  limited  flexibility  for  employers  to  depart  from 
branch-wide  agreements.  This  concerns  all  aspects  of  employment  conditions, 
including  wages,  working time,  employment and  working  conditions and limits the 
possibilities  for  companies  to  adjust  the  workforce  according  to  their  needs.  At 
present, branches may prevent companies from determining, on a case by case basis 
and after negotiations with social partners, the conditions under which working time 
could depart from branch-wide agreements. The take-up of derogations from branch 
agreements  and  general  legal  provisions  on  employment  conditions,  via  firm-level 
agreements, could be facilitated, in consultation with social partners. 

In 2015, the unemployment rate increased to 10.4%. Unemployment is higher among 
young  people,  non-EU  nationals  and  less  qualified  workers.  The  structure  of  the 
labour market is increasingly polarised, with highly educated workers hired on open-
ended  contracts  and  a  constant  proportion  of  low-skilled  jobs  becoming  more  and 
more  precarious.  The  proportion  of  fixed-term  contracts  of  less  than  one  month  in 
total  hires  rose  to  close  to  70%  in  2015.  The  legal  framework  governing  labour 
contracts,  in  particular  as  regards  the  legislation  on  dismissal  for  open-ended 
contracts,  may contribute to  the high segmentation  of the labour  market. The long-
running deterioration in the labour market has put a strain on the sustainability of the 
unemployment  benefit  system.  In  February  2016,  the  deficit  was  projected  to  be  at 
EUR 4.5 billion in 2015, EUR 4.2 billion in 2016 and EUR 3.5 billion in 2017. This 
would further increase the system's debt from EUR 25.8 billion in 2015 to EUR 30.0 
billion  in  2016  and  EUR  33.6  billion  in  2017.  The  benefit  calculation  favours  a 
succession  of  short-term  full-time  jobs  over  long-term  part-time  jobs  and  creates 
incentives for employers to offer short-term employment to be complemented by in-
work benefits. Moreover, the design of the unemployment benefit system, notably as 
regards eligibility conditions and degressivity of benefits, may weaken incentives to 
return to work. 

The transition from school to work remains challenging and the least qualified young 
people  are  the  most  affected.  Recourse  to  apprenticeship  is  decreasing  among  low 
qualified  categories  in  a  context  of  differentiated  regional  strategies  and  a  limited 
capacity of the system to adapt to new economic needs. The offer of training for the 
unemployed,  less  qualified  workers  and  SME  employees  remains  insufficient, 
despite the ongoing vocational training reforms, including on governance, incentives 
and counselling and the new targeted unemployed training plan. The unsatisfactory 
cooperation  between  the  various  actors  involved  in  continuous  vocational  training 
prevents an efficient allocation of resources. The upcoming personal activity account 
may help to rebalance access. 

(14) 

The  French  business  environment  continues  to  be  middle  ranking,  in  particular  as 
regards  the  burden  of  government  regulation,  where  France  ranks  poorly  in 
international  comparisons.  The  simplification  programme  is  being  pursued  as 
planned but progress with implementation is uneven, especially as regards measures 
targeting companies, and there remain challenges in a number of areas. 

EN 

5 

   EN 

 
(15) 

(16) 

(17) 

(18) 

(19) 

(20) 

(21) 

The French economy has a disproportionately high proportion of smaller businesses 
compared  to  other  Member  States  and  this  limits  their  productivity  level.  Recent 
initiatives  to  soften  the  impact  of  size-related  requirements  are  not  expected 
significantly  to  affect  firms'  growth,  given  their  limited  scope  or  temporary  nature. 
As a consequence, threshold effects will continue to limit the growth of French firms. 

Competition in services has improved in some sectors, but barriers remain in place in 
others, notably in business services, as a significant proportion of these services were 
unaffected  by  the  recent  reforms,  and  network  industries.  A  number  of  barriers  to 
entry  and  regulations,  as  well  as  tariffs,  constrain  economic  activity  in  regulated 
professions  and  weigh  on  the  productivity  of  other  sectors  that  use  these  services. 
Further problems stem from the restrictive application of authorisation requirements. 

France continues  to  lag behind  EU innovation leaders, in  spite of the generosity of 
public  support  in  this  area.  There  has  been  an  inflation  and  instability  of  public 
schemes  to  support  innovation  over  the  past  15  years,  which  raises  concerns  as 
regards  the  overall  coordination,  consistency  and  efficiency  of  these  schemes.  This 
affects SMEs in particular. 

In  2014,  the  tax-to-GDP  ratio  stood  at  45.9%,  one  of  the  highest  in  the  EU.  The 
overall  tax  burden  continues  to  increase  and  its  composition  is  not  conducive  to 
economic growth as it weighs significantly on production factors but relatively little 
on  consumption.  Taxes  on  corporations  started  decreasing  modestly  in  2014  and 
France  has  begun  to  close  the  gap  with  the  EU  average  in  terms  of  environmental 
taxation,  but  revenues  from  VAT  remain  low  both  as  a  share  of  GDP  and  as  a 
percentage of total taxation due to low rates, the widespread application of reduced 
rates  and  a  high  number  of  exemptions.  Beyond  the  ongoing  phase-out  of  the 
solidarity  surcharge  on companies,  concrete  steps  to  reach the  announced  objective 
of  reducing  the  corporate  income  statutory  rate  to  28  %  in  2020  have  not  yet 
materialised. 

The tax system is very complex. A high number of inefficient taxes yielding little or 
no  revenue  remains  and  personal  income  taxation  is  particularly  complex,  which 
comes  at  a  significant  administrative  cost.  In  spite  of  the  introduction  in  the  2014-
2019  public  finance  programming  law  of  the  requirement  regularly  to  assess  and 
monitor  tax  expenditures,  the  projected  reduction  in  tax  expenditures  for  2016  is 
modest after several years of increase. 

Overall,  the  barriers  to  private  investment  are  moderate,  with  the  high  regulatory 
burden  and  high  corporate  tax  rates  being  the  main  obstacles.  The  investment 
environment  would  be  improved  by  enhancing  the  business  environment,  reducing 
taxes on production and simplifying the tax system. All measures taken to improve 
the cost and non-cost competitiveness of French firms have the potential to increase 
investment  levels  and  to  incentivise  firms  to  invest  in  physical  and  human  capital, 
with a view to improving productivity. The long-term growth potential is also limited 
by subdued investment in innovation activities. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  France’s  economic  policy  and  published  it  in  the  2016 
country report. It has also assessed the stability programme and the national reform 
programme and the follow-up given to the recommendations addressed to France in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal  and  socioeconomic  policy  in  France  but  also  their  compliance  with  EU  rules 
and guidance, given the need to reinforce the EU's overall economic governance by 

EN 

6 

   EN 

 
providing  EU-level input  into  future  national  decisions.  Its  recommendations  under 
the European Semester are reflected in recommendations (1) to (5) below. 

(22) 

(23) 

In the light of this assessment, the Council has examined the stability programme and 
its opinion11 is reflected in particular in recommendation (1) below. 

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 (5) below. 

HEREBY RECOMMENDS that France take action within the period 2016-2017 to: 

1. 

2. 

3. 

4. 

5. 

Ensure a durable correction of the excessive deficit by 2017 by taking the required 
structural  measures  and  by  using  all  windfall  gains  for  deficit  and  debt  reduction. 
Specify  the  expenditure  cuts  planned  for  the  coming  years  and  step  up  efforts  to 
increase the amount of savings generated by the spending reviews, including on local 
government  spending,  by  the  end  of  2016.  Reinforce  independent  public  policy 
evaluations  in  order  to  identify  efficiency  gains  across  all  sub-sectors  of  general 
government. 

Ensure  that  the  labour  cost  reductions  are  sustained  and  that  minimum  wage 
developments  are  consistent  with  job  creation  and  competitiveness.  Reform  the 
labour law to provide more incentives for employers to hire on open-ended contracts.  

Improve the links between the education sector and the labour market, in particular 
by  reforming  apprenticeship  and  vocational  training,  with  emphasis  on  the  low-
skilled. By the end of 2016, take action to reform the unemployment benefit system 
in  order  to  bring  the  system  back  to  budgetary  sustainability  and  to  provide  more 
incentives to return to work.  

Remove  barriers  to  activity in  the  services  sector,  in  particular  in  business  services 
and  regulated  professions.  Take  steps  to  simplify  and  improve  the  efficiency  of 
innovation  policy  schemes.  By  the  end  of  2016,  further  reform  the  size-related 
criteria  in  regulations  that  impede  companies'  growth  and  continue  to  simplify 
companies' administrative, fiscal and accounting rules by pursuing the simplification 
programme.  

Take action to reduce the taxes on production and the corporate income statutory rate 
while  broadening  the  tax  base  on  consumption,  in  particular  as  regards  VAT. 
Remove  inefficient  tax  expenditures,  remove  taxes  that  are  yielding  little  or  no 
revenue and adopt the withholding personal income tax reform by the end of 2016. 

Done at Brussels, 

For the Council 
The President 

11 

Under Article 5(2) of Council Regulation (EC) No 1466/97 

EN 

7 

   EN