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 COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy
Date: 2021-06-02
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, European Semester, France, coronavirus disease, economic recovery, epidemic, fiscal policy, investment policy, macroeconomics, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 2.6.2021  SWD(2021) 405 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 COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy {COM(2021) 500 final} - {SWD(2021) 401 final} - {SWD(2021) 402 final} - {SWD(2021) 403 final} - {SWD(2021) 404 final} - {SWD(2021) 406 final} - {SWD(2021) 407 final} - {SWD(2021) 408 final} - {SWD(2021) 409 final} - {SWD(2021) 410 final} - {SWD(2021) 411 final} - {SWD(2021) 412 final}  
 
 
CONTENTS 

Executive summary 

1.  Assessment of Macroeconomic Imbalances 

2.  Thematic Issue: Public finances 

3.  Thematic Issue: Private indebtedness 

4.  Thematic Issue: Competitiveness 

References 

LIST OF TABLES 

Table 1.1: 

Outward spillover heat map for France 

Table 1.2: 

Assessment of Macroeconomic Imbalances Matrix – France 

Table 1.3: 

Selected economic and financial indicators, France 

Table 3.1: 

Private debt indicators, France 

Table 4.1: 

Selected cost competitiveness indicators, France 

Table 4.2: 

Selected trade performance indicators, France 

LIST OF GRAPHS 

Graph 2.1: 

Thematic Graphs: Public finances 

Graph 3.1: 

Thematic Graphs: Private indebtedness 

Graph 3.2: 

Thematic Graphs: Household Debt 

Graph 3.3: 

Thematic Graphs: Non-financial corporate debt 

Graph 4.1: 

Thematic Graphs: Competitiveness 

LIST OF BOXES 

Box 1.1: 

Spillovers France 

1 

2 

9 

13 

19 

21 

3 

5 

8 

14 

20 

20 

12 

15 

15 

18 

20 

7 

 
 
 
 
 
 
 
 
 
 
EXECUTIVE SUMMARY 

The  2021  Alert  Mechanism  Report  concluded  that  an  in-depth  review  should  be  undertaken  for 
France to examine further the persistence of imbalances or their unwinding. In February 2020, under 
the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic  Imbalances  Procedure,  the 
Commission identified “macroeconomic imbalances” in France. These imbalances related to risks of high 
public  indebtedness  and  weak  competitiveness  dynamics,  in  a  context  of  low  productivity  growth.  The 
analysis shows that these vulnerabilities remain. It should be noted that the context of the assessment of 
vulnerabilities in this year’s in-depth review (IDR) for France is markedly different from last year. Also, 
the  evolution  of  the  COVID-19  pandemic,  the  strength  of  the  recovery,  and  possible  structural 
implications of the crisis are all still surrounded by high uncertainty, requiring caution in the assessment. 
In general, policy action over the past year focused on cushioning the impact of the COVID-19 shock and 
facilitating the  recovery. This has added to indebtedness but should support adjustment  in the  medium-
term. Looking forward, the Recovery and Resilience Plan provides an opportunity to address imbalances, 
investment and reforms needs.  

Main observations and findings of this IDR analysis are: 

  This IDR is informed by the 2021 spring forecast, which expects a recovery in economic activity 
in France with the easing of the COVID-19 crisis. After the steep drop of 8.1% in 2020, real GDP is 
projected to increase by 5.7% this year and 4.2% next year, allowing the economy to recover its pre-
pandemic level in the course of 2022.  

  Despite  positive  recent  developments,  the  COVID-19  shock  has  brought  about  a  temporary 
deterioration in competitiveness. Cost-competitiveness improved in recent years in France thanks to 
a moderate growth in unit labour costs compared to most other euro area and EU countries, and the 
export  market  shares  remained  broadly  stable,  although  competitiveness  losses  accumulated  in 
previous  years  had  not  yet  been  regained.  This  trend  halted  with  the  outbreak  of  the  COVID-19 
pandemic, which led to a sharp increase in unit labour costs, and a drop of exports in crucial sectors 
such  as  aeronautics.  While  reforms  in  recent  years  aimed  to  improve  the  business  environment  and 
competitiveness,  there  is  still  a  significant  margin  for  improvement  in  research  and  innovation.  The 
COVID-19 impact on cost competitiveness is expected to be partially reversed in the coming years. 

  The high level of public debt constitutes a vulnerability for the economy, as it reduces the fiscal 
space available to respond to future shocks and poses high sustainability risks. As a result of the 
fall  in  economic  activity  and  the  measures  put  in  place  to  address  the  COVID-19  pandemic  and 
support the economy, public debt rose sharply in 2020. It is also set to increase further in 2021 due to 
a still high deficit, and set to remain above 116% of GDP over the period 2021-2022. High public debt 
weighs on growth prospects by crowding out productive public expenditure.  

  Private debt has kept rising, while firms have been weakened by the COVID-19 crisis. The debt 
of both households and non-financial corporations was on an upward trend since the early 2000’s. The 
COVID-19  crisis  provoked  a  significant  surge  in  indebtedness  in  2020.  Levels  now  stand  above 
prudential benchmarks for both households and non-financial corporations. While rising indebtedness 
has been flanked by an increase in corporate liquidity buffers and non-performing loans remain low 
compared to the EU average, the phasing out of support measures presents a risk.  

  These vulnerabilities are reinforced by low productivity growth. Several important measures have 
been taken in recent years to improve labour market efficiency and the business environment, which 
will  take  time  to  produce  full  effects.  However,  further  efforts  may  be  necessary  to  support 
productivity dynamics, which will be key for the sustainability of public and private debt. 

1 

 
1.  ASSESSMENT OF MACROECONOMIC IMBALANCES 

Introduction  

In  February  2020,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalances  Procedure,  the  Commission  identified  “macroeconomic  imbalances”  in  France.  These 
imbalances  related  to  high  public  debt  and  weak  competitiveness  dynamics  in  a  context  of  low 
productivity growth, which carry cross-border relevance. The 2021 Alert Mechanism Report published in 
November 2020 concluded that a new in-depth review (IDR) should be undertaken for France with a view 
to assess the persistence or unwinding of imbalances.  

The  context  of  the  assessment  of  vulnerabilities  this  year  is  markedly  different  from  last  year's 
IDRs, which took place before the COVID-19 pandemic. The evolution of the pandemic, the strength 
of the recovery, and possible structural implications of the crisis are still surrounded by high uncertainty 
requiring caution in the assessment. Policy action over the past year focused on cushioning the impact of 
the COVID-19 shock and on facilitating the recovery. While this supports adjustment in the medium-term 
through  stronger  fundamentals,  it  also  has  added  to  indebtedness.  Follow-up  to  country-specific 
recommendations  from  2019  and  2020,  including  those  that  are  MIP-relevant,  is  taking  place  in  the 
context of the assessment of the Recovery and Resilience Plans (RRPs). The analysis of policies in the 
present  report  was  finalised  before  the  formal  submission  of  RRPs  and  does  not  draw  on  information 
included  in  RRPs.  It  is  therefore  without  prejudice  to  the  Commission’s  assessment  of  RRPs,  which  is 
ongoing at the time of publication of this report. 

The assessment follows a similar structure  as the IDRs that were included in Country Reports in 
recent  annual  cycles.  This  chapter  presents  the  main  findings  for  the  assessment  of  imbalances,  also 
summarised in the MIP assessment matrix. The assessment is backed by selected thematic chapters that 
look more at length at competitiveness, public finances and private indebtedness. Spillovers and systemic 
cross-border  implications  of  imbalances  are  also  taken  into  account.  In  addition,  also  assessments  of 
structural issues made in previous IDRs and in the context of fiscal assessments are considered if relevant.  

Macroeconomic context 

Following the historic decrease of 2020 due to the COVID-19 crisis, real GDP growth is forecast to 
rebound, reaching its pre-crisis level by the beginning of 2022. Growth in France rebounded strongly 
in the third quarter of 2020, after the unprecedented contraction in the first half of the year. Overall, GDP 
fell  by  8.1%  in  2020  and  growth  is  forecast  at  5.7%  in  2021  and  4.2%  in  2022.  Potential  growth  is 
forecast to gain momentum after the deceleration in 2020 and reach 1.3% in 2022. The output gap is set to 
improve, becoming slightly positive, at 0.1% in 2022. The current account deficit is forecast to gradually 
narrow, to -1.2% of GDP in 2022, supported by, inter alia, the rebound of net exports. The gross saving 
rate  of  households,  which  rose  sharply  as  a  result  of  the  COVID-19  crisis  and  the  restrictions  on 
consumption, is forecast to reduce gradually to its pre-crisis level, of 14.6%, in 2022. The unemployment 
rate  is forecast to rise to 9.1% in 2021, but to decline  to 8.7% in 2022, remaining higher than in 2019. 
HICP inflation is set to increase to 1.4% in 2021, driven by the increase in the oil price and the gradual 
increase in the price of consumer services. Inflation is expected to slow down in 2022, to 1.1%, mainly 
because of a decrease in energy prices and the stability of excise duties on tobacco, after several years of 
sharp increases.  

Economic  recovery  is  expected  across  all  demand  components.  Private  consumption  is  forecast  to 
rebound sharply in the second half of 2021,  with the lifting of  the  most severe restrictions  weighing in 
particular  on  the  service  sector.  The  recovery  is  set  to  be  supported  by  the  resilience  of  consumers’ 
purchasing power and employment. Investment should also benefit from easing of restrictions as from the 
third quarter of this year, as well as favourable financing conditions and the plan ‘France Relance’ over 
the  forecast  horizon.  Net  exports  are  projected  to  gradually  recover,  but  more  slowly  than  the  other 
components,  as  crucial  export  sectors  (e.g.  tourism  and  aeronautics)  still  suffer  from  longer  lasting 

2 

 
1. Assessment of Macroeconomic Imbalances 

restrictions on international  mobility. Policy  measures to  protect  jobs and to provide liquidity for  firms 
are expected to remain in place until end-2021. A downside risk to growth is a possible surge in corporate 
insolvencies,  as  policy  support  measures  are  wound  down.  This  could  lead  to  an  increase  in 
unemployment and result in reduced productive capacity. Also, the tourism season in summer 2021 could 
be weaker than expected if the vaccination process is delayed or less effective than anticipated. 

Imbalances and their gravity 

General  government  debt  remains  high  and  is  projected  to  increase  further  in  2021.  At  97.6%  of 
GDP in 2019, before the outbreak of the COVID-19 pandemic, public debt in France was already very 
high, due to protracted elevated structural deficits and a lack of sufficient fiscal consolidation in previous 
years. The pandemic has brought about a brisk increase in public debt, by almost 20 points, to 115.7% of 
GDP in 2020. According to the Commission 2021 spring forecast, France’s public debt is set to increase 
further in 2021, before reducing by around one percentage point of GDP in 2022, on the back of still high 
public  deficits.  The  latest  debt  sustainability  analysis  confirms  that  the  country  faces  high  risk  in  the 
medium-term. (1) 

The existing upward trend in private debt accentuated in 2020. Private debt is above 175% of GDP, 
with  both  households  and  non-financial  corporations  exceeding  prudential  thresholds.  In  particular,  an 
increase in non-financial corporations debt in 2021 as a result of the COVID-19 crisis might result in an 
increase  in  the  number  of  bankruptcies  and  thus  in  an  uptick  in  non-performing  loans  (NPLs).  In  turn, 
while  the  banking  sector’s  solvency  has  remained  so  far  relatively  solid,  partly  thanks  to  support 
measures,  profitability  has  dropped  and  signs  of  credit  tightening  through  2020  and  early  2021  due  to 
deteriorating  risk  perceptions  have  been  observed.  In  this  context,  an  increase  in  non-performing  loans 
following corporate bankruptcies could add additional pressure to the financial system.  

Competitiveness remains an issue in France. The large losses of export market shares in the 2000s had 
not  been  regained  before  the  outbreak  of  the  crisis  and  both  cost  and  non-cost  competitiveness  have 
constituted a concern. Complex administrative procedures and regulatory restrictions imposed on service 
providers  continue  to  weigh  on  the  business  environment.  Competitiveness  deteriorated  significantly  in 
2020.  However,  several  reforms  are  either  underway  or  have  been  introduced  to  improve  cost-
competitiveness.  Further  progress  in  cost-competitiveness  is  nonetheless  hampered  by  the  slow 
productivity  growth  trend,  which  poses  a  risk  to  France’s  long-term  prosperity  and  prevents  a  faster 
deleveraging. 

The large size of the French economy can be a source of cross border spillovers to other Member 
States.  France  is  an  important  trade  and  financial  partner  for  many  EU  countries  and  in  particular  to 
neighbouring  countries  (see  Table1.1).  Box  1.1  provides a  quantitative  estimate  of  how  the  COVID-19 
pandemic has affected the French cross-border demand. It shows a very heterogeneous impact across the 
Member States, with Belgium, Portugal, Luxembourg and Spain being the most adversely affected. 

Table 1.1: 

Outward spillover heat map for France 

Cross-border figures for France, expressed as a % of the GDP of the partner country. The darkest shade of red corresponds to 
percentile 95 and the darkest shade of green to percentile 5. The percentiles were calculated for each variable based on 
the full available sample of bilateral exposures among EU countries. The blank spaces represent missing data. Data refer to: 
Imports - 2018, Imports (in value added) - 2015, Financial liabilities - 2018, Financial assets - 2018, Liabilities (to banks) - 2020-Q3, 
Bank Claims - 2020-Q3. 
Source: IMF, OECD, TiVa, BIS and Commission services 

(1)   See Article 126(3) report (June 2021) and also European Commission (2021) for detailed methodological aspects.  

3 

ATBEBGHRCYCZDEDKEEELESFIFRHUIEITLTLULVMTNLPLPTROSESISKImports2.115.320.70.24.53.91.71.61.44.91.13.83.83.4322.11.52.18.22.962.31.84.56Imports (in value added)1.44.61.60.90.72.42.11.11.10.82.70.92.13.11.81.85.60.91.5222.62.51.41.92.6Financial liabilities962.22.21.814.12.119.712.92.32.211.211266150.61403.22.639.249.21.590.85.67.92.1Financial assets1174.44.61.717.4710.811.81.39.824.313.7 4.255.931.11.8986.32.417.766.47.920.84.19.17.14.8Liabilities (to banks)3.24.44.50.87.551.63.712.13.20.7Bank claims3.454.71.41.25.920.55.43.30.1110.35.92.114.819.60.5249.60.16.812.48.110.16.261.52.4EU partner 
    
 
                                                           
1. Assessment of Macroeconomic Imbalances 

Evolution, prospects and policy responses 

Public deficits will remain high in the coming years. Efforts to consolidate government finances ahead 
of the crisis only modestly reduced the public expenditure ratio. The COVID-19 crisis has brought about 
a  notable  deterioration  in  French  public  finances.  In  2020,  the  expenditure  ratio  increased  by  around  7 
points,  to  62.7%  of  GDP,  remaining  the  highest  in  the  EU.  Curbing  public  spending  and  increasing  its 
efficiency once the recovery is underway is essential to put public debt on a steady downward path. The 
Public Action 2022 (2) programme has however been put on hold and there are as yet no plans to contain 
the  dynamics  of  public  spending,  including  spending  reviews,  when  economic  circumstances  allow. 
Moreover,  the  reform  to  unify  the  numerous  pension  schemes  in  France  was  put  on  hold  after  the 
outbreak of the COVID-19 pandemic and no forward-looking calendar has so far been  announced. The 
complexity of the current French pension system undermines its transparency, puts in question its fairness 
and hampers labour mobility. 

Private debt is set to keep rising in 2021. The public guarantee scheme set up by the state has played an 
important role in supporting lending during the crisis, especially to SMEs. However, the recent increase 
in corporate debt raises a risk of future bankruptcies and may lead to an uptick in non-performing loans, 
which added to the already low profitability and some credit tightening through 2020 and early 2021 due 
to increased risk perception, may represent a challenge to the financial system.  

The deterioration in cost competitiveness in 2020 is expected to be temporary. Cost competitiveness 
remained broadly unchanged in 2019. Unit labour costs decreased in 2019, but mainly driven by one-off 
effects  from  the  transformation  of  the  tax  credit  for  employment  and  competitiveness  (CICE)  into  a 
permanent reduction in social contributions. Total export market shares remained flat, while the current 
account  deficit  remained  broadly  stable.  In  2020  crucial  sectors  were  severely  hit  (aircraft  industry, 
beverages) as a result of the COVID-19 crisis and the unit labour costs increased sharply. However, these 
shocks are set to be temporary. Unit labour costs are expected to decline by 1.4% in 2021 and most of the 
COVID-19-associated  export  market  share  losses  are  expected  to  be  regained  by  2022.  In  addition, 
reforms have been introduced to improve productivity and cost competitiveness, which are set to produce 
positive effects in the years to come. Further reforms and investments are expected in the coming years 
(around EUR 45 billion expenditures embedded in the RRP or the reform of the unemployment benefit 
system), of which the implementation will be key to address the issue. 

Overall assessment 

The  COVID-19  crisis  has  added  to  already-existing  weaknesses  of  the  French  economy.  France  is 
characterised  by  high  and  rising  public  and  private  indebtedness  and  still  weak  competitiveness,  in  a 
context of low productivity growth. A negative shock hit crucial export sectors and increased unit labour 
costs via a fall in productivity. Public debt is set to increase further in 2021, before reducing by around 
one point of GDP in 2022. Fiscal sustainability risks have been aggravated following the outbreak of the 
COVID-19 pandemic and short and medium-term public debt sustainability risks are high. Private debt is 
also  high  and  on  the  rise,  with  household  and  non-financial  corporation  debt  in  excess  of  prudential 
thresholds. New risks include a potential increase of NPLs in the short-term as bankruptcy rates increase. 
The risks stemming from high public debt are therefore compounded by high and growing private debt, 
which  increase  France’s  vulnerability  and  may  limit  the  economy’s  ability  to  counter  negative 
macroeconomic shocks, while low productivity growth aggravates the structural problems of the French 
economy.  Improving  the  productivity  dynamic  will  also  be  key  to  help  reduce  both  public  and  private 
debt burdens. 

Some  elements  contribute  to  dampening  the  risks  associated  with  weak  competitiveness  and  high 
indebtedness.  The  negative  shock  to  competitiveness  brought  about  by  the  outbreak  of  the  COVID-19 
pandemic  is  expected  to  be  temporary.  Important  reforms  were  introduced  in  recent  years  and  are 
expected  to  produce  positive  effects  in  the  medium  term.  The  implementation  of  these  reforms  and 
investments  projects  to  come  (including  from  the  RRP)  will  be  key  to  address  the  persisting  structural 

(2)  Public Action 2022 programme (Action Publique 2022), aimed at a general and coordinated overhaul of all public policies. In 
particular, the  programme  set  three  main  objectives:  the  improvement  of  the quality  of  public  services,  the  modernisation  of 
public administration and the support to the reduction of the expenditure-to-GDP ratio by 3 percentage points by 2022. In this 
respect,  the  programme  formally  embedded  and  replaced  the  annual  spending  reviews  introduced  in  2014  and  officially 
terminated at the end of 2017. 

4 

                                                           
competitiveness  challenges  and  slow  productivity  growth.  In  turn,  the  persistence  of  the  high  level  of 
private  indebtedness,  mainly  driven  by  the  declining  path  of  interest  rates,  in  the  corporate  sector  is 
mostly observed within large international firms. Besides, there is a parallel increase in liquidity buffers 
of NFC, whereas the households’ saving ratio rose significantly in 2020.  

1. Assessment of Macroeconomic Imbalances 

5 

Table 1.2: 

Assessment of Macroeconomic Imbalances Matrix – France 

1. Assessment of Macroeconomic Imbalances 

Table (continued) 

(Continued on the next page) 

6 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) Competitiveness Competitiveness in France has shown a mixed-picture for a number of years, with low productivity growth weighing on competitiveness.  Export market shares have stabilised over the recent past after years of losses, as France has benefited from its geographical positioning.  Unit labour costs have grown more moderately than in other euro area and EU countries as wage developments have been contained. However, the sluggish productivity growth makes it difficult to keep on improving the price-competitiveness. In terms of non-price competitiveness, while French exports of goods are overall of medium-high quality, France has continued to maintain the highest quality in the sectors in which France is mainly specialised, such as aeronautics, cosmetics and beverages. The relevance of exports to GDP increased less than in the rest of the euro area.  The COVID-19 shock has brought about a deterioration in competitiveness, with a sharp increase in unit labour costs, and a large drop of exports in crucial sectors.  The current account balance and the net international investment position (NIIP) have been slightly negative for several years, with a deficit of -0.7% of GDP and at -22.9% of GDP respectively, in 2019. The fundamentals of the French economy would however suggest somewhat higher readings on both dimensions. The total export market shares remained flat in 2019, after several years of stabilisation, but are estimated that may have endured an important negative shock in 2020. However, the decrease would be mainly due to unfavourable specialisation and geographical orientation in respect of the COVID-19 crisis. In the central scenario, a large part of the losses are forecast to be regained by 2022. However, negative risks are clearly identified, like a more durable impact on some key sectors for French exports. Following a similar dynamic, the current account deficit deteriorated significantly in 2020, and is forecast to rebound in the following years.  Nominal unit labour costs have exceptionally decreased in 2019 due to the one-off impact of the transformation of the CICE into a permanent reduction in social contributions. In turn, the crisis contributed to a sharp increase of the unit labour costs in 2020. However, this increase is set to be temporary and those losses are forecast to be reversed in the coming years.  In the medium term, labour productivity is expected to remain subdued, which prevents significant progress of cost competitiveness.   Non-cost competitiveness is expected to improve over the medium-term, when the effects of the recently announced and undertaken policy actions will fully materialise. However, several sectors where France exports high-quality products are facing downward risks (long-term impact of the COVID-19 crisis and environmental policies on the aircraft industry, or the impact of the introduction of custom duties on food and beverage). The plan ‘France Relance’ aims at fostering France’s competitiveness by encouraging the digitalization of the economy, the entry of the youth into the labour market or by diminishing taxes on production by € 10 billion. It also entails a specific support plan to aeronautic sector. Besides, an important range of measures had been taken before the pandemic to address the issue of low competitiveness, like the additional reduction of employers' social contributions for employees below 1.6 times the minimum wage. Importantly, several measures were introduced to address the issue of sluggish productivity. The PACTE Law adopted in May 2019, aims at fostering firms’ growth by reforming firm size thresholds, improving the restructuring procedure and encouraging incentive compensation. Besides, action have been taken to the labour market more efficient by improving social dialogue and strengthening collective bargaining within firms.  The unemployment benefit reform, adopted since November 2019 but not implemented yet, aims at reducing excessive reliance on temporary jobs in some sectors, and changed the eligibility criteria and compensation rules to make them more conducive to employment.   Public debt General government debt rose sharply, to 115.7% of GDP in 2020 as a result of the COVID-19 crisis. Such a high debt level constitutes a vulnerability for the economy as it reduces the fiscal space available to respond to future shocks and weighs on growth prospects, by crowding out productive public expenditure and requiring a high tax burden.  On the positive side, government debt management is of good quality and the government has benefited from the very low and even negative sovereign yields environment to lengthen the average maturity of sovereign debt, thereby mitigating refinancing risks. The investor base is diverse, both by type and geographically, with the government The headline deficit rose briskly to 9.2% of GDP in 2020, partly due to the deficit-increasing temporary measures, adopted to fight the pandemic and its socio-economic impacts, which amounted to 3.5% of GDP. The Commission 2021 spring forecast projects the headline deficit to be at 8.5% of GDP in 2021 and to reduce further, to 4.7% in 2022.  France’s public debt is expected to rise further in 2021 due to the high French primary deficit after the COVID-19 outbreak, before declining slightly in 2022. Public debt is expected to remain at very high levels over the medium term. Short-term sustainability risks are assessed as high. In turn, at current trends for age-related expenditures, the simulated debt trajectory by year 2030 The budgetary strategy of France was considered as risky before the COVID-19 outbreak, with no structural adjustment efforts since 2015. Public finances deteriorated briskly in 2020, thereby aggravating the sustainability challenges in the short and medium term.  The quantification of savings and efficiency gains in the context of the ‘Public action 2022’ programme is not available and thereby their macroeconomic impact cannot be assessed. After the outbreak of the pandemic, ‘Public action 2022’ has been put on hold. The pension reform, aimed at unifying the currently existing 42 different regimes, was put on hold too and no forward-looking calendar has so far  
          
 
 
 
1. Assessment of Macroeconomic Imbalances 

Source: European Commission Services 

7 

sector crucially accounting for France's negative total NIIP.  Risks stemming from the high public debt are compounded by the also high and increasing private debt (153% of GDP in 2019 and rising further, over 175% in 2020). These risks have aggravated significantly after the COVID-19 outbreak. Both fundamentals-based benchmarks and prudential concerns point to significant deleveraging needs for households and especially for non-financial corporations.   points also to high medium-term sustainability risks.  Private debt is high and has keep rising. The COVID-19 crisis provoked a significant surge in indebtedness in 2020. Both households and corporate indebtedness are above prudential thresholds and levels suggested by their fundamentals. However, liquidity buffers have increased in parallel. The deployment of a sizeable envelope of State loan guarantees has prevented so far a spike in corporate bankruptcies. However, the possibility that these guarantees could be called on implies an upward risk for public debt. Although the financial sector does not face immediate risks, partly thanks to support measures, pressures from the combination of high public and private debt, in particular of non-financial corporations, may increase in the future under adverse economic conditions. Moreover, the potential increase in bankruptcies and non-performing loans when support measures are phased out add up to the risks on the financial system.  been announced. This reform would contribute to enhancing the transparency and fairness of the pension system, as well as labour mobility. The latter may have also a positive impact on productivity. However, the reform should safeguard the sustainability of the pension system.  Once the recovery is underway, a significant fiscal effort would be needed to put French public debt on a sustained downward trajectory so as to ensure its sustainability.  Main takeaways  France is characterised by very high and rising indebtedness and weak competitiveness, in a context of low productivity growth. Associated vulnerabilities have cross-border relevance.   Competitiveness developments face downsides risks in the short-term due to the COVID-crisis: crucial high-quality sectors have been severely hit, and the scars of the crisis may dampen the productivity in the future, weighing on the labour costs. However, and despite a lot of uncertainty, the shock on competitiveness is set to be mainly temporary. Public and private debt ratios have increased visibly with the COVID-19 crisis. Low productivity growth hampers public and public deleveraging and a faster recovery of competitiveness losses accumulated in previous years.   At the same time, several reforms adopted in recent years are set to improve the responsiveness and performance of the labour market. Besides, the French Recovery and Resilience Plan addresses the national weaknesses. His efficient implementation will be key to foster France’s competitiveness, while ensuring a green and digital transition and addressing the social challenges. By bolstering competitiveness, an efficient implementation of the plan would also help public and private deleveraging. The deployment of a sizeable envelope of State loan guarantees are set to prevent a spike in corporate bankruptcies, but the possibility that these guarantees could be called on implies an upward risk for public debt. Moreover, insofar as these guaranteed loans prevent the restructuring of otherwise less viable firms may weigh on productivity growth.            
 
 
1. Assessment of Macroeconomic Imbalances 

Box 1.1: Spillovers France 

The  pandemic  recessions  in  EU  Member  States  also  reflected  faltering  cross-border  demand  from 
trade  partners.  The drop in French aggregate demand due to the pandemic  and the containment  measures 
played a significant role in the output declines of its closest partners. In the recovery, cross-border spillovers 
may undo their negative impact of 2020, yet the uncertain timing and extent of the recovery make a forward-
looking assessment difficult. As a first step, this box thus aims to take stock of the heterogeneous spillovers 
of French demand to other Member States’ value added in 2020. It quantifies cross-border effects applying 
latest  production  data  to  input-output  estimates. (1)  This  allows  for  synthesizing  supply  chain  effects,  e.g. 
detailing how French consumption from domestic providers affected those providers’ foreign suppliers, and 
their  suppliers  in  turn.  While  these  results  allow  for  country-specific  sectorial  detail,  note  that  they  reflect 
partial  equilibrium  effects  in  the  goods  and  services  market  only  –  they  do  not  include  any  second-round 
effects on foreign wage income, interest rates, prices etc., which may be stronger.  

Graph  1a  shows  the  overall  cross-border  impact  of  the  heterogeneous  final  demand  changes  during 
2020, and highlights the French contribution therein. Overall, 1.2 pp of the 2020 EU output decline can 
be attributed to cross-border demand effects,  with French demand accounting for over 0.2 pp thereof. Yet 
small open service-intensive economies were hit harder than the average. The importance of French demand 
varies significantly across partners. For instance, third of the VA impact in Spain due to intra-EU demand 
changes is driven by a reduction in French demand, whereas this share is almost negligible in countries like 
Cyprus or Romania. 

Graph 1b highlights the heterogeneous effects of the pandemic by zooming in on the French contribution by 
sector (the dark-blue bar in Graph 1a). (2) The indirect spillovers, which captures supply chain interlinkages, 
seems to be most relevant across the trading partners. (3) Such indirect cross-border spillovers account for 
0.1  pp  of  total  impact  of  French  demand  on  the  RoEU  output  loss,  on  a  par  with  industrial,  service  and 
tourist demand together. Changes in the final demand for industry products had a strong impact on Belgium, 
Portugal and some Central European economies in particular. The decline in French tourists accounted for a 
visible share of French demand spillovers to Portugal, Luxembourg, Spain or Malta. Demand changes  for 
non-tourist  services  were  more  diverse,  and  even  seem  to  have  had  a  positive  impact  on  Romania  and 
Poland. Overall, 2020 French demand changes thus had a significant impact on the RoEU, with predominant 
role of indirect spillovers via French supply chains.   

(1)  The  estimates  derive  from  a  two-step  analysis:  1)  Compiling  2020  output  declines  at  the  sector-level  across  the 
globe. For  the  EU  Member  States,  detailed  information  for  2020  is  available  in  Eurostat.  For  non-EU  countries, 
sectoral  output  changes  in  2020  are  approximated  by  IMF  WEO  GDP  changes,  thus  implicitly  abstracting  from 
sectoral heterogeneity; 2) Using output changes in all country-sector pairs to trace back changes in final demand, based 
on global supply chain interlinkages as captured by the OECD ICIO tables. The resulting set of final demand changes 
can then be used to simulate the impact of the COVID-19 crisis on each country-sector's value added. Two important 
assumptions are made to allow for such a translation of output changes into demand changes. First, the technological 
coefficient matrix, which captures the required amount of supplies from any sector to produce a given sector's output, 
is assumed to have remained fixed since the latest ICIO data (2016). Second, the country allocation final demand for a 
specific sector is assumed to have remained proportional to 2016.  

(2)  Distinguishing by the source of demand allows to quantify the impact of demand changes  in a certain country on VA 
production in all its trading partners, by type of good or service. Given the particular nature of the COVID-19 crisis, 
with  a  strong  impact  on  hospitality  sectors,  the  analysis  distinguishes  between  tourism  (NACE  sector  I),  all  other 
services (G-N excl. I) and industry (A-F).  

(3)  For example, a drop in French demand for German cars reduces Slovak production of engines, with a knock-on effect 

on Czech suppliers of engine parts.  

8 

-3-2.5-2-1.5-1-0.50BELPRTLUXESPSVKMLTSVNCZEDEUITAIRLHUNAUTBGRNLDHRVSWELTULVAFINGRCDNKESTPOLCYPROUEUEAGraph 1a: VA impact (%) of cross-border demand change 2019-2020FRARest EU-0.6-0.5-0.4-0.3-0.2-0.100.1BELPRTLUXESPSVKMLTSVNCZEDEUITAIRLHUNAUTBGRNLDHRVSWELVALTUFINGRCDNKESTCYPPOLROUEUEAGraph 1b: VA impact (%) of change in FR demand 2019-2020 by categoryIndustryServicesTourismIndirect   
 
 
1. Assessment of Macroeconomic Imbalances 

Table 1.3: 

Selected economic and financial indicators, France 

(1) NIIP excluding direct investment and portfolio equity shares         
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches.         
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation         
(4) Defined as the income tax on gross wage earnings plus the employee's social security contributions less universal cash 
benefits, expressed as a percentage of gross wage earnings 
Source: Eurostat and ECB as of 2021-05-05, where available; European Commission for forecast figures (Spring forecast 2021) 

9 

2004-072008-122013-182019202020212022Real GDP (y-o-y)2.30.40.91.5-8.15.74.2Potential growth (y-o-y)1.81.20.61.10.81.21.0Private consumption (y-o-y)2.30.61.21.5-7.23.45.6Public consumption (y-o-y)1.71.50.81.7-3.06.0-0.3Gross fixed capital formation (y-o-y)3.9-0.91.84.2-10.211.03.1Exports of goods and services (y-o-y)4.51.23.41.9-16.010.09.6Imports of goods and services (y-o-y) 6.01.23.92.5-11.17.66.6Contribution to GDP growth:Domestic demand (y-o-y)2.50.50.82.2-7.05.93.6Inventories (y-o-y)0.2-0.10.2-0.40.3-0.7-0.2Net exports (y-o-y)-0.40.0-0.1-0.2-1.40.50.7Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.50.30.10.30.30.40.2Capital accumulation (y-o-y)0.80.60.30.60.20.50.5Total factor productivity (y-o-y)0.60.30.20.30.30.30.3Output gap1.9-1.0-0.61.8-7.1-2.70.1Unemployment rate8.79.09.88.48.09.18.7GDP deflator (y-o-y)2.11.10.71.22.20.51.1Harmonised index of consumer prices (HICP, y-o-y)1.91.90.81.30.51.41.1Nominal compensation per employee (y-o-y)2.92.41.1-0.2-2.74.22.8Labour productivity (real, person employed, y-o-y)1.50.20.40.4-7.1..Unit labour costs (ULC, whole economy, y-o-y)1.52.00.8-0.54.8-1.4-0.2Real unit labour costs (y-o-y)-0.50.90.0-1.72.5-1.8-1.2Real effective exchange rate (ULC, y-o-y)0.7-0.30.2-4.3...Real effective exchange rate (HICP, y-o-y)0.0-1.20.3-1.41.60.6-0.8Net savings rate of households (net saving as percentage of net disposable income)9.210.08.69.1...Private credit flow, consolidated (% of GDP)8.65.65.18.0...Private sector debt, consolidated (% of GDP)110.9131.7143.1153.3...of which household debt, consolidated (% of GDP)42.953.057.461.7...of which non-financial corporate debt, consolidated (% of GDP)68.078.885.791.6...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)2.64.23.42.2...Corporations, net lending (+) or net borrowing (-) (% of GDP)0.90.9-0.4-0.6-1.51.51.0Corporations, gross operating surplus (% of GDP)18.017.417.118.516.618.918.6Households, net lending (+) or net borrowing (-) (% of GDP)2.33.72.82.88.05.12.4Deflated house price index (y-o-y)9.7-0.2-0.12.34.7..Residential investment (% of GDP)6.36.46.26.46.1..Current account balance (% of GDP), balance of payments0.2-0.7-0.7-0.7-1.9-1.6-1.1Trade balance (% of GDP), balance of payments0.1-1.3-0.8-1.0-2.2..Terms of trade of goods and services (y-o-y)-0.7-0.40.00.81.1-1.00.1Capital account balance (% of GDP)0.00.00.00.10.1..Net international investment position (% of GDP)-4.8-11.9-17.8-22.9-26.7..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1)-6.7-23.8-31.6-35.6-40.6..IIP liabilities excluding non-defaultable instruments (% of GDP) (1)175.3239.1235.7253.6300.1..Export performance vs. advanced countries (% change over 5 years)-4.3-9.3-5.3-2.2-3.8..Export market share, goods and services (y-o-y)-4.4-4.00.0-1.4-6.71.94.0Net FDI flows (% of GDP)1.71.51.00.21.0..General government balance (% of GDP)-3.0-5.5-3.3-3.1-9.2-8.5-4.7Structural budget balance (% of GDP)..-2.9-3.3-4.6-6.7-4.7General government gross debt (% of GDP)65.683.196.197.6115.7117.4116.4Tax-to-GDP ratio (%) (3)44.644.947.947.147.546.246.1Tax rate for a single person earning the average wage (%) (4)28.227.928.728.027.3..Tax rate for a single person earning 50% of the average wage (%) (4)17.619.218.912.211.1..forecast 
 
 
 
 
      
 
2.  THEMATIC ISSUE: PUBLIC FINANCES 

Deficit developments 

The  general  government  deficit  rose  sharply  in  2020  and  is  projected  to  reduce  again  gradually 
until 2022. After reaching 3.1% of GDP in 2019, the general government deficit rose sharply to 9.2% in 
2020. The sizeable drop in economic activity brought about by the COVID-19 outbreak and the lockdown 
measures adopted to address the health emergency weighed heavily on tax revenues and pushed up social 
transfers  due  to  the  response  of  automatic  stabilisers.  This  cyclical  impact  was  compounded  by 
discretionary measures amounting to 3.5% of GDP, mainly on the expenditure side, adopted to fight the 
COVID-19  pandemic  and  to  support  employment  and  economic  activity. (3)  According  to  the 
Commission 2021 spring forecast, the phasing out of the emergency measures and the projected economic 
recovery  are  expected  to  largely  offset  the  deficit-increasing  effect  of  the  measures  contained  in  the 
French recovery plan.  Accordingly,  the general  government deficit is  set to decline to 8½% of GDP in 
2021.  The  recovery  and  the  unwinding  of  the  emergency  measures  are  expected  to  reduce  the  deficit 
further, to 4.7% of GDP in 2022.  

France  also  adopted  a  sizeable  package  of  measures,  aimed  at  providing  liquidity  support  to 
businesses,  that  is  expected  to  contain  a  spike  in  bankruptcies.  These  measures,  without  any 
immediate budgetary impact, amount to 18.1% of GDP. They include tax and social charges deferrals for 
companies;  an accelerated refund of tax and VAT credits; the  creation of a dedicated reserve for direct 
support  to  strategic  companies  via  equity  investment  (altogether  amounting  to  3.3%  of  GDP)  and  loan 
guarantees of 14.7% of GDP. The take-up rate of State guaranteed loans until February 2021 is estimated 
at 5.6% of GDP.  

After  the  sharp  increase  in  2020,  public  debt  is  projected  to  increase  further  in  2021,  before 
reducing by around one point of GDP in 2022. The high structural deficits, jointly with the lack of any 
material fiscal effort since 2015, kept public debt on a steady upward trend until 2018 (see Graph 2.1(a)). 
The public debt-to-GDP declined only marginally in 2019 to 97.6%. Therefore, public debt sustainability 
risks were assessed as high in the medium term. However, the outbreak of the COVID-19 pandemic, with 
the  resulting  economic  contraction  and  the  substantial  deterioration  of  the  general  government  deficit 
pushed the public debt ratio by almost 20 points, to 115.7% of GDP in 2020. The projected high deficits 
in 2021 and 2022 and fiscal measures aimed at reducing the impact of the COVID-19 pandemic and the 
economic recovery will keep public debt above 116% of GDP (see Graph 2.1(b)).  

The  measures  adopted  by  France  in  2020  in  response  to  the  COVID-19  pandemic  were  timely, 
temporary and well targeted. These temporary emergency budgetary measures, amounting to 3.5% of 
GDP, aimed mainly at increasing the capacity of the health system and providing relief to individuals and 
sectors  hardest  hit  by  the  crisis.  The  expenditure  measures  amounted  to  around  3.2%  of  GDP  and 
included the funding of a partial unemployment scheme, additional expenditure to strengthen healthcare 
services  and  subsidies  providing  direct  support  to  small  and  very  small  enterprises  as  well  as  self-
employed. Emergency measures also included exemptions of social security contributions amounting to 
0.3%  of  GDP.  Beyond  the  emergency  measures  in  response  to  the  COVID-19  pandemic,  France  also 
adopted measures under the umbrella of its national recovery plan France Relance worth EUR 1.8 billion 
(0.1% of GDP) in 2020 (out of an overall envelope of EUR 100 billion). These measures mainly included 
hiring bonuses, additional public investment and subsidies to businesses.  

The French recovery Plan France Relance puts forward measures mainly for 2021 and 2022 aimed 
at  supporting  the  envisaged  recovery,  including  by  providing  a  positive  impact  on  aggregate 
demand and employment, improving economic fundamentals and supporting the green and digital 
transition. The plan is endowed  with EUR 100 billion (4.2% of GDP), out of  which EUR 39.8 billion 

(3)  These  discretionary  measures  comprised,  among  others,  additional  healthcare  expenditure,  transfers  to  cover  partial 
unemployment schemes and subsidies under the sectoral compensation fund for SMEs, as well as tax exemptions, mainly on 
social security contributions. 

10 

 
                                                           
2. Thematic Issue: Public finances 

(1.7%  of  GDP)  are  planned  to  be  implemented  in  2021.  The  Plan  contains  additional  measures  to 
reinforce the healthcare system, in particular investments worth 0.2% of GDP over the  horizon covered 
by the Plan, foreseen under the so-called Ségur Agreement concluded in July 2020 with social partners. A 
number  of  measures  in  the  Plan  provide  incentives  for  employment,  including  by  increasing  the 
employment opportunities of unemployed and inactive workers also via professional training. The green 
transition  receives  prominent  attention,  including  in  investments  to  develop  green  technologies  and 
greener energy sources and a more widespread use thereof. The Plan also incorporates measures aimed to 
enhance  potential  growth  and  competitiveness,  including  measures  to  accelerate  digitalisation  of  firms 
and  public  administration,  reduce  the  technological  dependence  on  other  countries  and  to  enhance 
business financing. The measures included in the Plan are mainly temporary and concern expenditure, a 
share  of  which  is  included  in  the  proposed  French  Recovery  and  Resilience  Plan.  However,  the  most 
sizeable  measure  of  ‘France  Relance’  (for  which  no  support  of  the  RRF  was  requested)  to  support 
competitiveness  is  a  EUR  10.5  billion  (0.4%  of  GDP)  permanent  reduction  in  taxes  on  production  in 
2021. This  is  achieved  through  a  50%  reduction  of  the  CVAE  (Contribution  sur  la  Valeur  Ajoutée  des 
Entreprises), which amounts to for EUR 7.25 billion, and a 50% decrease of the housing tax for industrial 
companies  (Cotisation  Foncière  des  Entreprises,  CFE)  (EUR  1.54  billion)  and  the  land  tax  on  built 
properties  (Taxe  Foncière  sur  les  Propriétés  Bâties,  TFPB)  (EUR  1.75  billion).  By  having  a  positive 
impact on productivity growth, the measures in the Plan would also contribute to reducing public debt in 
the medium term. 

Debt sustainability analysis and fiscal risks (4)  

Fiscal sustainability risks have aggravated as a result of the COVID-19 crisis, especially in the short 
term.  Short-term  sustainability  risks  are  assessed  by  the  indicator  S0 (5),  which  now  shows  high  risk, 
rather than the no significant risk flagged in previous reports. This short-term risk increase is due to the 
financial  competitiveness  sub-index  that  has  risen  substantially,  while  remaining  below  the  critical 
threshold. At the same time, the  fiscal sub-index shows a  slight reduction, although it continues to flag 
risks above the threshold. Short-term risks are mitigated by the diversification of the investors’ base and 
the long average maturity of total outstanding debt, that has remained at 8.2 years in 2020, keeping short-
term  rollover  risks  under  control.  The  currently  negative  interest  rates  linked  to  new  issuances  pose  no 
problems  for  the  French  treasury  in  marketing  its  debt.  In  turn,  the  share  of  non-resident  holders  of 
government debt securities, broadly evenly distributed between euro area and non-euro area residents, has 
slightly decreased to around 51% in 2020. Nevertheless, the still high share of public debt held by non-
residents reflects the continued appetite of investors to hold French public debt in their portfolios.  

Medium-term sustainability risks remain high. Under the baseline scenario in the Debt Sustainability 
Monitor, at unchanged policies, the government debt level is expected to remain at very high levels until 
2030, peaking in 2026. This is mainly due to the assumed lack of sufficient fiscal effort to reduce public 
debt,  which  is  only  partially  offset  by  a  favourable  differential  between  the  implicit  interest  rate  on 
government debt and the growth rate of the economy until 2026. Thereafter, this differential is behind the 
projected  decline  in  debt.  In  turn,  the  S1  sustainability  indicator (6)  shows  a  sustainability  gap  of  4.4 
points of GDP, thereby indicating a high medium-term risk. This is mainly attributable to the high debt 
ratio  and  its  distance  from  the  60%  reference  value,  while  the  contribution  of  the  projected  increase  in 
age-related expenditure is limited (see Graph 2.1 (c)). 

France is deemed to be at medium fiscal sustainability risk when assessed over the next 50 years, 
but  potential  corporate  bankruptcies  stand  to  compound  these  risks.  The  long-term  fiscal 
sustainability  indicator  S2 (7)  has  improved  from  previous  reports  and  now  stands  at  -1.1.  It  therefore 

(4)  This section is based on European Commission (2021).   

(5)  S0 is a composite indicator, consisting of two sub-indexes, aimed at evaluating the extent to which there might be a fiscal stress 
risk  in  the  upcoming  year,  stemming  from  the  fiscal  (fiscal  sub-index)  and  macro-financial  and  competitiveness  sides  of  the 
economy (financial competitiveness  sub-index). A set of 25 fiscal and financial-competitiveness variables proven to perform 
well in detecting fiscal stress in the past is used to construct the indicator. Countries are deemed to face potential high short-
term risks of fiscal stress, whenever S0 is above an estimated critical threshold. 

(6)  The  S1  indicator  measures  the  cumulative  gradual  improvement  in  the  structural  primary  balance,  relative  to  the  baseline 

scenario,  required over 5 years as of 2022 to reduce the debt ratio to 60% of GDP by 2034. 

(7)  The  S2  indicator  is  used  to  assess  the  fiscal  sustainability  challenges  in  the  long  term  under  a  baseline  no-policy  change 
scenario by  gauging  the  necessary  improvement  of  the  structural primary  balance  to  stabilise  the  debt-to-GDP  ratio  over  the 
long term.  

11 

                                                           
 
2. Thematic Issue: Public finances 

suggests that no improvement of the structural primary balance would be required to stabilise the debt-to-
GDP  ratio  over  the  long-term.  The  favourable  demographics  in  France  help  to  mitigate  sustainability 
risks. Specifically, age-related expenditure is projected to decrease by 2.8 pps. of GDP over the next 50 
years.  This  is  due  to  the  projected  decline  in  public  pension  expenditure  by  3.2  pps.  of  GDP,  whereas 
healthcare and long-term care spending are projected to rise only moderately, by 0.2 pps. and 0.5 pps. of 
GDP,  respectively.  While  the  S2  indicator  is  low,  the  implied  fiscal  adjustment  may  still  lead  to  debt 
stabilising  at  very  high  levels,  suggesting  the  need  for  some  caution  in  interpreting  this  indictor  for 
already highly-indebted countries. The vulnerabilities linked to the high debt burden, as captured by the 
debt  sustainability  risk  assessment,  suggest  that  French  public  debt  faces  a  medium  sustainability  risk 
over  the  long  term.  More  adverse  scenarios,  such  as  increased  healthcare  and  long-term  care  spending, 
would imply a significant increase in sustainability gaps. Moreover, an increase in the  rate of corporate 
bankruptcies  and  calls  on  state  guaranteed  loans  leading  to  higher  deficits  and  debt  in  the  near  future 
could increase debt sustainability risks in the short and medium term. 

Pensions 

The pension reform, originally announced for 2019 and already discussed in parliament, has been 
put on hold following the outbreak of the COVID-19 pandemic. This reform intended to introduce a 
universal points-based system to replace the current 42 co-existing pension regimes, but was put on hold 
after  the  outbreak  of  the  COVID-19  pandemic.  The  reform  proposed  a  universal  system  whereby 
contributions  would  give  rise  to  equal  rights  regardless  of  profession  or  work  category.  This  reform  is 
generally expected to enhance the fairness, efficiency and transparency of the system, and improve labour 
mobility.  Its  potential  effects  on  public  debt  sustainability  are  however  unclear  at  this  stage,  mainly 
depending on the benefit indexation formulas that could be adopted. 

Public Action 2022 and spending reviews 

After more than two years of implementation, the assessment of Public Action 2022 remains highly 
uncertain.  The  reforms  undertaken  on  human  resources  management,  streamlining  of  internal 
expenditure  controls  and  procedures,  simplifying  regulation,  rationalising  and  relocating  services  at  the 
central  and  local  level,  and  to  accelerating  deploying  IT  solutions  are  expected  to  produce  some 
efficiency gains and to contribute to improving the transparency of, and accessibility to, public services. 
However, the contribution of the programme to fiscal consolidation was never clarified. According to the 
scarce  information  available,  the  actual  expenditure  savings  attained  under  Public  Action  2022  were 
limited. Despite the slowdown in growth rates over the last few years, the persistence of the high level of 
public expenditures in France raises concerns in terms of utility and efficiency, justifying assessing them 
via spending reviews. A lasting control and progressive reduction of public expenditure is key to mitigate 
public debt sustainability risks. 

12 

 
 
 
 
 
Graph 2.1: 

Thematic Graphs: Public finances 

2. Thematic Issue: Public finances 

Source: European Commission Services 

13 

95100105110115120125130% of GDP(c) Public debt projections BaselineHigher interest rate scenario (1 pp)Lower growth scenario (-0.5 pps)Source: European Commission. 2021 spring DSM60708090100110120-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5% GDPpps GDP(a) Fiscal effort and public debt Change in the structural balanceChange in the structural primary balancePublic debt (right axis)Source: Ameco. European Commission 2021 spring forecast5565758595105115125% of GDP(b) Public debt in France and in the euro area FranceEuro areaSource: Ameco. European Commission 2021 spring forecast         
3.  THEMATIC ISSUE: PRIVATE INDEBTEDNESS 

Private  debt  has  steadily  increased  since  2000,  reaching  153%  of  GDP  in  consolidated  terms  in 
2019. This increase has taken place against a backdrop of low and declining interest rates over this period. 
Private  credit  growth  gained  momentum  in  the  aftermath  of  the  financial  crisis  starting  in  2008  and 
expanded  by  above  10%  on  average  between  2017  and  the  outbreak  of  the  COVID-19  pandemic  (see 
Graph  3.1(a)) At the  same time, the  interest burden  for both households and non-financial corporations 
kept declining (Graph 3.1(b)). The COVID-19 crisis has brought about a brisk increase in private debt-to-
GDP ratios, to 175% of GDP, mainly due to the contraction in economic activity (see Table 3.1).  

Households’ indebtedness 

Households’  indebtedness  has  shown  a  steady  upward  trend,  along  with  deteriorating  lending 
standards.  As a  result, household debt reached 62% of GDP and 98.1% of gross disposable income in 
2019. The outbreak of the COVID-19 pandemic accelerated this trend, with debt as a percentage of GDP 
picking up to 69% (see Graph 3.2(a)). Household debt has resulted mainly from dynamic credit flows (see 
Graph  3.2(b)). This dynamism  is explained by loans  for housing investment following  a steady upward 
trend between 2014 and 2020. At the same  time, credit standards have  loosened across  the board,  with 
increasing  maturities,  loan-to-value  and  debt  service-to-income  ratios  (Haut  Conseil  de  Stabilité 
Financière, 2019a and 2019b). The European Systemic Risk Board (ESRB) issued a warning to France on 
23  September  2019,  inviting  the  national  authorities  to  consider  the  need  for  additional  pre-emptive 
actions such as explicit guidelines for credit standards. 

Despite households’ debt having remained broadly stable when compared with financial assets, the 
growing leverage has  started to become a source of some concern,  especially after the COVID-19 
outbreak.  While  the  household  debt-to-GDP  ratio  has  been  in  line  with  fundamentals  over  the  last 
decade, it already started to depart from them in 2018. Moreover, the debt ratio to prudential thresholds 
gap  of  households,  as  estimated  by  the  Commission,  is  widening  (Graph  3.2(c)).  Consumer  spending 
loans increased marginally in 2019, up to 7.1% of GDP, but rose to 8.1% in 2020 as a result of the crisis. 
In turn, the mortgage stock expanded briskly from 42.8% of GDP in 2019 to 48.3% in 2020. Although 
households’ interest payments as a share of their gross disposable income are at historical lows and in line 
with other euro area countries, the share of household income devoted to debt repayment continues to rise 
as  a  result  of  their  higher  leverage.  In  this  context,  the  rise  in  debt  due  to  the  COVID-19  crisis  might 
represent a heavier burden on households in case of negative shocks to employment.   

Despite some signs of overvaluation in the housing market, some factors limit the existing concerns 
about  high  household  leverage.  Notwithstanding  the  relatively  moderate  increase  in  real  estate  prices 
since  2015,  indicators  continue  to  suggest  risks  of  overvaluation  ranging  between  13%  and  19%  (see 
Graph 3.2(d)). Albeit significant, vulnerabilities in the residential real estate sector are mitigated by two 
main  factors.  First,  the  high  proportion  of  fixed-rate  loans,  above  97%  of  outstanding  loans,  limiting 
interest  rate  risks.  Second,  in  the  event  of  housing  price  declines,  the  double-selection  procedure  of 
borrowers (evaluated by lenders as well as mutual guarantee societies) for most housing loans makes the 
value of the collateral less crucial. The French authorities have taken several macroprudential measures to 
address the growing vulnerabilities, including in the residential real estate market, regulating debt-service 
to income ratios and loan maturities. (8)  

(8)  On  12  December  2019,  the  High  Council  for  Financial  Stability  (HCFS)  activated  a  non-binding  borrower-based  measure 
consisting in a debt-service to income ratio limit of 33% combined with a cap of 25 years on the initial maturity of the loan, 
with a margin of tolerance of 15%. On 27 January 2021 the HCSF amended the Recommendation (Haut Conseil de Stabilité 
Financière, 2021), raising the benchmark ceiling for the debt service-to-income ratio from 33% to 35%. In turn, the flexibility 
margin for the share of new loans that can diverge from best practices in terms of maturity and debt service-to-income ratio 
increased from 15% to 20% of the volume of total new loans. As part of the increase in the margin and in order to ensure that it 
benefits mainly households purchasing their main residence, the share reserved for the purchase of the main residence will be 
increased  from  75%  to  80%  of  the  maximum  flexibility  margin  and  a  share  of  30%  of  the  maximum  flexibility  margin  is 
specifically reserved for first-time buyers. 

14 

 
                                                           
Table 3.1: 

Private debt indicators, France 

3. Thematic Issue: Private indebtedness 

(f) European Commission forecast. (1) Benchmarks for flows (% of GDP) are estimated on the basis of non-consolidated flows. 
(2) Gross non-performing bank loans and advances to Households and non profit institutions serving households (% of total 
gross bank loans and advances to Households and non profit institutions serving households). (3) Gross non-performing bank 
loans and advances to Non-financial corporations (% of total gross bank loans and advances to Non-financial corporations). 
(4) Quarterly data is annualized. 
Sources: Sources: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

15 

2003-072008-122013-18201920202021f|20Q220Q320Q4SourceStocksDebt, consolidated (% of GDP)(a,d)109132143153175|167172175Debt, consolidated (% of potential GDP)(a,b,d)111130142156163|162163163Prudential threshold (% of GDP)(1)(c)878799103100100|Fundamental benchmark (% of GDP)(1)(c)107121128128140135|FlowsPrivate credit flows (transactions, % of GDP) (4)(a)7.75.65.28.013.11.0|27.411.510.8Private credit flows (transactions, % of potential GDP) (4)(a,b)7.95.65.28.112.20.9|26.610.910.0Benchmark for flows (% of GDP)(1)(c)|Households (HH)StocksDebt, consolidated (% of GDP)(a,d)4253576269|656769Debt, consolidated (% of potential GDP)(a,b,d)4252576364|636364Prudential threshold (% of GDP)(1)(c)424046494747|Fundamental benchmark (% of GDP)(1)(c)475658576361|Debt (% of gross disposable income)(a,b,d)66829198101|99100102Interest paid (% of gross disposable income) (4)(a,b)2.02.21.21.0|0.90.8Debt (% of gross financial assets)(a,d)22.126.625.525.5|25.625.825.3Share of variable rate loans for house purchase (%)(d)25.410.53.82.42.3|Domestic  loans in forex (% of dom. loans)(d)0.91.51.71.31.2|FlowsCredit flows (transactions, % of GDP) (4)(a)3.92.32.13.73.20.4|2.64.14.1Credit flows (transactions, % of potential GDP) (4)(a,b)4.02.32.03.82.90.4|2.53.93.8Benchmark for flows (% of GDP)(c)3.22.61.11.31.41.5|Savings rate (% gross disposable income)(b)14.115.313.914.621.118.4|Investment rate (% gross disposable income)(b)10.49.79.39.78.89.9|p.m. Bank HH NPLs (% of HH loans)(2)(d)3.9|Non-financial corporations (NFC)StocksDebt, consolidated (% of GDP)(a,d)68798692106|102105106Debt, consolidated (% of potential GDP)(a,b,d)6978859399|9910099Prudential threshold (% of GDP)(1)(c)454653545253|Fundamental benchmark (% of GDP)(1)(c)616570707774|Debt, consolidated (% of value added)(a,b,d)123143155163194|184190194Interest paid (% of gross operating surplus) (4)(a,b)25.525.317.514.0|14.315.1Debt, consolidated (% of gross financial assets)(a,d)60696056|Domestic  loans in forex (% dom. Loans)(d)2.42.81.61.41.2|1.81.41.2FlowsCredit flows (transactions, % of GDP) (4)(a)3.93.43.24.39.90.5|24.87.46.6Credit flows (transactions, % of potential GDP) (4)(a,b)3.93.43.24.49.20.5|24.17.06.1Benchmark for flows (% of GDP)(1)(c)|Investment (% of value added)(b)21.922.324.525.626.025.6|Savings (% of value added)(b)23.022.222.323.021.025.3|p.m. Banks NFC NPLs (% of NFC loans)(3)(d)5.53.9|Total private sector (Households and Non-financial corporations) 
  
 
 
Graph 3.1: 

Thematic Graphs: Private indebtedness 

3. Thematic Issue: Private indebtedness 

Source: Eurostat 

16 

-15-10-5051015202530354010Q411Q412Q413Q414Q415Q416Q417Q418Q419Q420Q4contributions to growth rate (pp of GDP)(a) Decomposition of y-o-y changes in private debt-to-GDP ratiosCredit flowReal growthInflationOther changesD/GDP, changeSource: Eurostat024681012140709111315171921Q4% of value added and GDI(b) Interest burden for households and non-financial corporations Interest payments / gross disposable income, HouseholdsInterest payments / gross disposable income, Households, EA19Interest payments / value added, Non-financial CorporationsInterest payments / value added, Non-Financial Corporations, EA19Source: Eurostat        
 
 
Graph 3.2: 

Thematic Graphs: Household Debt 

3. Thematic Issue: Private indebtedness 

Source: European Commission Services 

17 

-4-2024680708091011121314151617181920contributions to growth rate (pp of GDP)(b) Drivers of household indebtedness in FranceCredit flowReal growthInflationOther changesD/GDP, changeSource: Eurostat and Ameco-15.0-10.0-5.00.05.010.015.020.0980002040608101214161820percentage points of GDP(c) Gaps to fundamental-based and prudential benchmarks for households’ debtHouseholds debt gap to fundamentals-based benchmark, ppsHouseholds debt gap to prudential benchmark, ppsSource: Eurostat and European Commission02040608010012001020304050607080040608101214161820*% GDI% of GDP and assets(a) Household indebtedness in FranceDebt / GDP, HouseholdsDebt / fin. assets, HouseholdsDebt / gross disposable income, Households (right axis)Source: Eurostat and European Commission-40-30-20-1001020300002040608101214161820% deviation of current price(d) Housing overvaluation gaps in FranceModel-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg.Overall valuation gapSource: Source: ECB Bank Lending Survey.      
3. Thematic Issue: Private indebtedness 

Non-financial corporations’ indebtedness 

Non-financial  corporations  leverage  has  continued  to  rise.  Corporate  indebtedness  has  steadily 
increased since the 2008-2009 crisis, reaching 91.6% of GDP in consolidated terms in 2019. This process 
was  spurred  by  the  fall  in  interest  rates,  which  adjusted  the  trade-off  between  debt  and  equity  and  the 
reduction  of  intermediation  mark-ups  in  the  French  banking  sector.  However,  compared  to  other  EU 
countries,  the  banking  sector  in  France  is  more  exposed  to  the  real  estate  sector,  which  accounts  for 
around  50%  of  total  loans  to  non-financial  corporations.  Despite  the  high  share  of  bank  loans  to 
construction and real estate sectors in France, as a percentage of assets, loans to those sectors are actually 
lower or broadly in line with the main EU countries.  

The non-financial corporate debt-to-GDP ratio remains above the level suggested by the country’s 
fundamental and prudential thresholds. According to Commission estimates, the debt of non-financial 
corporations  in  2019  was  around  22  percentage  points  above  what  fundamentals  would  suggest.  When 
compared with the level beyond which the risk of a banking crisis is comparatively high, this gap widens 
to  above  37  percentage  points  (see  Graph  3.3(a)).  On  the  other  hand,  the  share  of  non-financial 
corporations’ interest payments on their total value added continued to decline in 2019 to 5.0%, due to 
low  and  falling  interest  rates  reaching  their  lowest  level  in  decades.  However,  the  interest  burden  is 
estimated to have increased slightly, to 5.2% in 2020 (recall Graph  3.1(b)). Moreover, the 30% share of 
short-term debt out of total debt is above the short-term level in most euro area countries.  

The  ratios  of  debt-to-equity  and  debt-to-financial  assets,  although  more  contained,  will  also  be 
adversely  affected  by  the  COVID-19  pandemic.  The  increase  in  corporate  indebtedness  over  the  last 
decade  came  hand  in  hand  with  an  equivalent  increase  in  financial  assets  or  cash-flow.  Total  debt 
liabilities compared to total financial assets showed a steady decline between 2011 and 2017 (see Graph 
3.3(b)). Likewise, non-financial corporations’ indebtedness as a share of equity followed a similar profile. 
The COVID-19 pandemic is expected to bring about a significant increase in the debt-to-equity ratio to 
close to 2007 levels, as firms incurred a significant amount of borrowing to address liquidity shortages. 
Debt-to-financial assets are expected to record a more moderate increase, as following the outbreak of the 
COVID-19 crisis firms keep accumulating sizeable liquidity buffers. 

Up  to  2015  the  increase  in  corporate  debt  was  mainly  attributed  to  large  companies,  which 
accumulated higher liquidity buffers. Firms with the highest increases in liquidity buffers (mostly large 
industrial companies and groups: see Banque de France, 2021) were by far the main contributors to the 
growth of the long-term  financial debt in the period 2010-2015 (Insee, 2017). Within this category, the 
distribution of the net debt-to-value-added ratio remained broadly stable. However, the  HCSF  shows in 
his  last  reports  that  net  debt  has  been  increasing  since  2016,  with  a  growing  heterogeneity  in  the 
distribution. In particular, a few big groups  with high leverage  may have contributed importantly to the 
increase of net indebtedness (Haut Conseil de Stabilité Financière, 2017). Although SMEs, typically more 
vulnerable  to  a  credit  crunch,  appeared  until  recently  to  be  in  a  better  financial  situation  than  in  2007, 
mitigating the overall risks associated with high corporate indebtedness (Banque de France, 2020a), both 
the  Banque  de  France  (2020b)  and  the  Haut  Conseil  de  Stabilité  Financière  (2020)  underlined  the 
increasing heterogeneity among indebted companies over the past few years. 

In  response  to  the  COVID-19  outbreak,  the  French  authorities  relaxed  one  of  the  two 
macroprudential measures taken in 2019 to address vulnerabilities stemming from high corporate 
indebtedness.  After  its  decision  to  raise  the  counter-cyclical  capital  buffer  (CCyB)  rate  from  0.25%  to 
0.5%  of  its  equity  approved  in  the  Haut  Conseil  de  Stabilité  Financière  meeting  of  April  2019,  on  13 
January  2020  the  HCSF  decided  to  keep  that  rate  unchanged  to  enter  into  force  as  of  2  April  2020. 
Besides,  the  HCSF  decided  to  lower  the  maximum  exposure  of  systemic  banks  to  ‘high-indebted’ 
enterprises  from  25%  to  5%  of  its  equity.  This  measure  aimed  to  preserve  the  resilience  of  the  credit 
institutions  vis-à-vis  potential  defaults  of  highly  indebted  private  non-financial  corporations  and  to 
improve  market  discipline  by  sending  a  preventive  signal  to  avoid  future  excessive  imbalances.  The 
HCSF notified the Commission on 5 May 2021 of its intention to renew this decision for two years as of 1 
July 2021. However, the outbreak of the COVID-19 pandemic led the HCFS to relax some requirements 
in order to allow banks to maintain their credit supply, especially to small and medium sized enterprises 
that are the most dependent on  bank financing. On 1 April 2020, the HCSF decided to fully release the 
countercyclical capital buffer  (HCSF, 2020). The  release  was implemented immediately, and the buffer 

18 

3. Thematic Issue: Private indebtedness 

rate will remain at 0% until further notice. This decision was confirmed on 1 July 2020. The HCSF also 
recommended banks and insurers to behave responsibly regarding dividend distribution, share buybacks, 
and variable pay.  

Non-financial corporations leverage accelerated after the outbreak of the COVID-19 pandemic. The 
outbreak of the pandemic and the contraction in economic activity, along with very dynamic credit flows 
brought about a brisk increase in corporate  indebtedness in 2020. Debt of  non-financial corporations is 
estimated  to  have  reached  106%  of  GDP  for  the  year  as  a  whole.  In  turn,  the  fall  of  non-financial 
corporations’ value-added amounted to 9.7%, and the gross operating surplus decreased by 20.4% (16.4% 
excluding the temporary effect of the CICE transformation in 2019). In the second quarter, activity levels 
for  industry  decreased  by  around  50%  compared  to  the  levels  expected  in  absence  of  the  crisis,  with 
sectors such as aeronautics, clothing and metallurgy particularly strongly affected. Activity levels in the 
services sector also decreased sharply, with accommodation and catering services, as well as cultural and 
creative sectors seeing decreases in activity levels of more than 90%.  

Part of the increase in the corporate sector leverage was related to state guaranteed loans. The crisis 
has brought about a sizeable and urgent need for liquidity, and the government took a range of measures 
aiming  at  supporting  non-financial  corporations’s  treasury,  including  State  guarantees  and  payment 
deferrals  of  social  security  contributions.  In  particular,  the  sizeable  credit  flows  observed  in  2020  were 
partly  due  to  the  EUR  300  billion  envelope  of  state  guarantees  deployed  by  the  French  government  to 
ensure liquidity provision to firms, especially SMEs, and to prevent bankruptcies. The high take-up rate 
of  state-guaranteed  loans  has  been  accompanied  by  a  parallel  increase  in  firms  liquidity,  such  that  the 
total  consolidated  net  debt  of  non-financial  corporations  calculated  by  the  Banque  de  France  remained 
almost  stable  (+0.8%  from  December  2019  to  December  2020).  At  a  more  micro-level,  35%  of  SMEs 
declared  in  November  that  they  did  not  use  their  state-guaranteed  loans,  and  27%  that  they  used  only 
some  of  the  loans  (cf.  72nd  half-yearly  SME  business  climate  survey,  BPI  France,  January  2021). 
However, it is very likely that this global stabilization of net debt in 2020 conceals a lot of heterogeneity, 
especially because of the different incidence of the economic shock across sectors. 

The  financial  sector  remains  resilient,  but  there  are  indications  of  credit  tightening  and  asset 
quality  may  deteriorate.  The  banking  sector’s  solvency  has  remained  so  far  relatively  solid,  partly 
thanks  to  support  measures,  but  profitability  has  dropped.  Some  increase  in  non-performing  loans  has 
already been observed since the second quarter of 2020, although still relatively modest, compared to the 
diminishing trend of past years (see Graph  3.3(c)). However, most of the consequences of the crisis are 
probably still to come and there have been signs of credit tightening through 2020 and early 2021 due to 
risk  perceptions  (ECB  bank  lending  survey).  In  order  to  ensure  an  adequate  provision  of  liquidity  for 
firms, especially SMEs, the government has extended the timeframe for State guarantees on loans until 30 
June  2021,  granting  firms  with  an  additional  one-year  deferral  to  start  repaying  their  government 
guaranteed loan. Promoting access to equity or equity-like  finance, especially  for SMEs,  will be  key to 
contain  private  indebtedness. The  moratoria  on  forced  insolvency proceedings  and  strong  support 
measures have resulted in a marked decrease of 39% in the number of bankruptcies in 2020 compared to 
2019, according to the Banque de France. However, the National Productivity Board (CNP) considers that 
this recent decrease in bankruptcies will be  more than compensated in 2021, with expected increases in 
strongly affected sectors of more than 25% compared to 2019. Such an increase in bankruptcies, hand in 
hand with non-performing loans, might entail a negative impact on banks’ balance sheets. 

High indebtedness of non-financial corporations could  weigh on  medium-term growth. In relaxing 
its economic support measures, France will have to strike a balance between the risks related to extending 
these measures for too long, thereby wasting public resources and creating more “zombie firms”, which 
would  prevent  the  re-allocation  of  resources  to  firms  with  higher  productivity  levels,  and  the  risks  of 
ending them too quickly, leading to bankruptcies of productive and otherwise solvent firms and to a rise 
of  the  amount  of  non-performing  loans. Likewise,  excessive  indebtedness  may  limit  firms’  ability  to 
undertake investment projects and ultimately put a lid on productivity growth. 

19 

Graph 3.3: 

Thematic Graphs: Non-financial corporate debt 

3. Thematic Issue: Private indebtedness 

Source: European Commission Services 

20 

0102030405060708090100040608101214161820*Ratios of debt to equity, GDP and total financial assets (%)(b) Alternative leverage indicators of non-financial corporations in consolidated termsDebt / GDPDebt / equityDebt / financial assetsSource: Eurostat2030405060708090100979901030507091113151719% of GDP(a) Fundamental-based and prudential benchmarks and NFC debt NFC debt, consolidated,  % of GDPFundamentals-based benchmark, % of GDPPrudential benchmark, % of GDPSource: Calculations based on Eurostat and ECB00.511.522.533.5417Q118Q119Q120Q1(c) Non-performing loans per sectorHHNFCOthersOverall NPL rate% of total loans and advancesSource: Non-performing loans and advances, ECB consolidated banking data.        
4.  THEMATIC ISSUE: COMPETITIVENESS 

France  faced  an  important  and  continuous  decrease  of  its  export  market  shares  over  the  decade 
until 2012. This trend was common to most developed countries, as they integrated in international value 
chains, but the decrease was sharper for France than for most of its neighbouring countries, particularly 
Germany  (Graph  4.1(a)).  According  to  Camatte  et  Gaulier  (2018)  -  corroborated  by  Blas  et  al.  (2015), 
neither the sectoral, nor the geographical orientations can explain this.  

In the years before the COVID-19 crisis, France’s trade performance showed some improvement. 
Total  nominal  export  market  shares  stabilized  over  the  2013-2019  period,  accompanied  by  an 
improvement  in  cost-competitiveness.  In  particular,  the  growth  in  unit  labour  cost  was  moderate  in  the 
past few years before the COVID-19 crisis (Graph 4.1(b)), when large cuts in social contributions were 
adopted  (CICE  and  Responsibility  Pact).  Unit  labour  costs  increased  by  4.6%  between  2013  and  2018 
(5.6%  in  the  euro  area).  In  2019,  its  growth  remained  significantly  lower  than  in  the  euro  area,  partly 
thanks to further social contribution cuts, targeted on workers close to the minimum wage. 

In  terms  of  non-price  competitiveness,  French  products  are  currently  of  a  medium-high  quality. 
According  to  Burton  and  Kizior  (2021),  France  ranked  11th  among  37  countries  in  2014-2016  (OECD 
and  EU  countries)  in  the  non-price  component  of  exports  (a  proxy  for  ‘quality’).  France  is  also 
characterised  by  an  important  degree  of  specialisation,  with  three  sectors  (aeronautics,  beverage  and 
cosmetics) accounting for around 20% of the total export value, where quality has remained particularly 
high. 

France’s exports were hardly hit by the COVID-19 crisis in 2020. Market shares fell by 7.7% in 2020. 
France’s  exports  suffered  from  particularly  its  sectoral,  and  to  a  lesser  extent  its  geographical 
specialisations. According to the OECD (Economic Outlook, December 2020), world demand for French 
exports decreased slightly more than global world trade (based on the assumption of stable market shares 
in  every  country).  According  to  the  French  customs’  data,  aeronautics  exports  decreased  by  45.5%  in 
2020  and  contributed  -5.9  percentage  points  to  the  growth  of  total  good  exports.  France’s  exports  also 
suffered from the sharp decline in services activities, especially tourism (around -50%). The magnitude of 
the shock is partly explained by the high level of specialisation of French exports.  

As  in  many  other  countries,  also  cost  competitiveness  deteriorated  in  France  in  2020.  Unit  labour 
costs  increased  by  4.8%  in  2020.  The  main  driver  was  deteriorating  labour  productivity  (-7.1%), 
reflecting labour hoarding in light of the COVID-19 crisis. This deterioration was only partially mitigated 
by support measures, in particular partial activity, which caused a drop in compensation per employee by 
4.8% in real terms. 

Some  risks  surround  the  evolution  of  export  shares  in  the  aftermath  of  the  COVID-crisis.  In  the 
central scenario, export market shares lost due to the sectoral and the geographical orientations are set to 
be mostly regained by 2022, but some uncertainty persists about the potential long-lasting effects of the 
crisis  on  the  aeronautics  sector,  both  at  the  national  (destruction  of  human  or  physic  capital)  and 
international (depressed demand) scales. The French authorities adopted specific support measures for the 
sector  –  as  part  of  ‘France  Relance’  –  including  state-guaranteed  loans  and  investment  funds.  The 
geographical orientation (mainly EU markets) represents another risk, with a rebound potentially weaker 
than in the emerging countries, for instance, in case of vaccination campaign less efficient than expected. 

On the positive side, cost-competitiveness is set to improve in the coming years. The sharp rise in unit 
labour  costs  in  2020,  mainly  due  to  the  negative  shock  on  productivity  caused  by  labour  hoarding,  is 
forecast to partially reverse in the coming years. After an increase of 4.8% in 2020, unit labour costs are 
forecast to decline by 1.4% in 2021 and 0.2% in 2022 (Table  4.1). Both labour productivity growth and 
real compensation per employee are expected to gradually rebound in 2021 and 2022. Additional cuts in 
social security contributions, targeting workers close to the minimum wage, and the permanent EUR 10 

21 

 
billion  reduction  in  production  taxes  are  expected  to  significantly  support  the  country’s  cost-
competitiveness. 

Graph 4.1: 

Thematic Graphs: Competitiveness 

4. Thematic Issue: Competitiveness 

Source: European Commission Services 

Table 4.1: 

Selected cost competitiveness indicators, France 

(1) Labour productivity contributes to ULC with a negative sign (not shown in the table): For instance, high productivity growth 
reduces unit labour cost growth. 
(2) Wage benchmarks: DG EMPL provides two benchmarks for the growth rate of nominal compensation per employee. 
Benchmark 1 (Predicted nominal compensation growth) reflects wage growth as predicted by developments in inflation, 
productivity growth, and the unemployment rate. The prediction is estimated through a panel regression. Benchmark 2 
(Compensation growth consistent w. constant ULC-based REER) reflects external competitiveness and is consistent with a 
constant value of the real effective exchange rate (REER), computed on the basis of unit labour costs (ULC).   
Abbreviations: REER_GDP = Real effective exchange rate based on GDP deflator, Performance relative to the rest of 42 
industrial countries; double export weights (2010=100), REER_ULC = Real effective exchange rate based on ULC, Performance 
relative to the rest of 37 industrial countries; double export weights (2010=100), NEER = Nominal effective exchange rate, 
Performance relative to the rest of 42 industrial countries; double export weights (2010=100). 
Source: REER and ULC: AMECO; wage benchmarks: DG EMPL.  

Table 4.2: 

Selected trade performance indicators, France 

Source: GVA, Exports and imports, Terms of trade: AMECO; EMS growth and trade balance: Eurostat. 

22 

-8-6-4-2024681005060708091011121314151617181920*21*22*Rate of change y-o-y (%)(b) Decomposition of rate of change of unit labour costs (ULC) (inflation, real compensation per employee and productivity)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in EU27Source: Ameco606570758085909510010503040506070809101112131415161718192021*22*2003=100(a) Export market share, goods and services, nominalFRDEESITSource: Eurostat03-0708-1213-1718192021'22'Nominal ULC, yoy % change1.62.00.71.0-0.54.8-1.4-0.2Labour productivity, yoy % change11.20.40.70.70.3-7.25.62.9Inflation (GDP deflator growth), yoy % change2.01.10.71.01.22.20.51.1Real compensation per employee, yoy % change0.81.30.70.8-1.4-4.83.71.7Nominal compensation per employee, yoy % change2.92.41.51.7-0.2-2.74.22.8Wage benchmark (nominal compensation growth)23.52.41.63.12.1-4.8 -  - Wage benchmark (constant ULC-based REER)21.32.71.31.13.84.1 -  - REER_GDP, yoy % change0.9-1.5-0.31.1-1.72.5-0.2-0.7REER_ULC, yoy % change1.5-0.30.10.6-4.3-  -  -  NEER, yoy % change1.7-0.50.72.7-0.82.11.40.103-0708-1213-1718192021'22'Export market share (goods and services), yoy % change-3.6-4.00.50.7-1.4-6.71.94.0Export market share (goods and services) - volume,  yoy % change-4.9-1.7-0.40.70.9-7.9-  -  Exports (goods and services), yoy % change4.32.43.15.32.9-17.112.410.6Exports (goods and services) - volume, yoy % change3.41.23.24.41.9-16.010.09.6Trade balance (services), % of GDP1.00.90.6 -  -  -  -  - Trade balance (goods, except energy products), % of GDP1.10.60.4 -  -  -  -  - Trade balance (energy products), % of GDP-2.2-2.8-1.9-1.9 p-1.8 p-1.2 p -  - GVA (Tradables), in % of total GVA38.838.538.538.438.436.7- - GVA (Non-tradables without construction), in % of total GVA55.856.055.956.055.958.0- - GVA (Construction), in % of total GVA5.55.45.55.65.85.3- -         
 
 
        
 
 
 
        
 
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