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# 52013DC0360

**Recommendation for a COUNCIL RECOMMENDATION on France’s 2013 national reform programme and delivering a Council opinion on France’s stability programme for 2012-2017 /\* COM/2013/0360 final \*/**

  

Recommendation for a

COUNCIL RECOMMENDATION

on France’s 2013 national reform programme
and delivering a Council opinion on France’s stability programme for 2012-2017

THE COUNCIL OF THE EUROPEAN UNION,

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

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 5(2)
thereof,

Having regard to Regulation (EU) No
1176/2011 of the European Parliament and of the Council of 16 November 2011 on
the prevention and correction of macroeconomic imbalances[2], and in particular Article 6(1)
thereof,

Having regard to the recommendation of the
European Commission[3],

Having regard to the resolutions of the
European Parliament[4],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

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

(2)       On 13 July 2010, on the
basis of the Commission's proposals, the Council adopted on 13 July 2010 a
recommendation on the broad guidelines for the economic policies of the Member
States and the Union (2010 to 2014) and, on 21 October 2010, adopted a decision
on guidelines for the employment policies of the Member States[5], which together form the
‘integrated guidelines’. Member States were invited to take the integrated
guidelines into account in their national economic and employment policies.

(3)       On 29 June 2012, the Heads
of State or Government decided on a Compact for Growth and Jobs, providing a
coherent framework for action at national, EU and euro area levels using all
possible levers, instruments and policies. They decided on action to be taken
at the level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4)       On 6 July 2012, the
Council adopted a recommendation on France’s national reform programme for 2012
and delivered its opinion on France’s updated stability programme for 2011-2016.

(5)       On 28 November 2012, the
Commission adopted the Annual Growth Survey[6],
marking the start of the 2013 European Semester for economic policy
coordination. Also on 28 November 2012, the Commission, on the basis of
Regulation (EU) No 1176/2011, adopted the Alert Mechanism Report[7], in which it identified France as one of the Member States for which an in-depth review would be carried out.

(6)       On 14 March 2013, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to
pursue differentiated, growth-friendly fiscal consolidation, to restore normal
lending conditions to the economy, to promote growth and competitiveness, to
tackle unemployment and the social consequences of the crisis, and to modernise
public administration.

(7)       On 10 April 2013, the
Commission published the results of its in-depth review[8] for France, under Article 5 of
Regulation (EU) No 1176/2011. The Commission’s analysis leads it to conclude
that France is experiencing macroeconomic imbalances, which require monitoring
and decisive policy action. In particular, developments related to a
deterioration in the trade balance and competitiveness, driven both by cost and
non-cost factors, also in the context of a deteriorating external position and
high public debt deserves continued attention so as to reduce the risk of
adverse effects on the functioning of the French economy and of the Economic
and Monetary Union, notably given the size of the French economy.

(8)       On 30 April 2013, France submitted its 2013 stability programme covering the period 2012-2017 and its 2013
national reform programme. In order to take account of their inter-linkages,
the two programmes have been assessed at the same time.

(9)       Based on the assessment of
the 2013 Stability Programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that despite considerable consolidation efforts
that brought the headline deficit down from 7.5 % of GDP in 2009 to 4.8 % in
2012, France is not expected to correct its excessive deficit by 2013 as
recommended by the Council in late 2009. This is linked notably to a worse
economic environment than expected at the time the recommendation was made
which was only partly compensated by windfall revenues, while the effort was
somewhat backloaded. The macroeconomic scenario underpinning the budgetary
projections in the programme is plausible for 2013 but overly optimistic for
2014. In particular, the authorities anticipate that after a standstill in 2012
(0%) and in 2013 (+0.1%), GDP will grow by 1.2% in 2014 while assuming that
fiscal measures are taken to bring the general government deficit to 2.9% of
GDP. By comparison, the Commission forecasts that GDP will grow by 1.1% in 2014
based on a no-policy-change assumption, a scenario which only takes into
account measures that have been adopted or sufficiently specified and hence
forecasts a deficit of 4.2% of GDP. The main objective of the budgetary
strategy outlined in the programme is to achieve the medium-term objective
(MTO), which is a balanced budget in structural terms, as in last year's
programme. This is more ambitious than required by the Stability and Growth
Pact. The target year for reaching the MTO is 2016, compared with 2015 in the
previous stability programme. The planned headline deficit set by the stability
programme is consistent with a correction of the excessive deficit by 2014, one
year after the revised deadline set by the Council under the excessive deficit
procedure in late 2009. Given the overly optimistic growth forecast in the
programme for 2014, unless additional measures are taken to substantially
reinforce the effort for that year, the Council considers that the fiscal
effort envisaged by the authorities is not compatible with an actual correction
of the excessive deficit by 2014. Planned savings and additional revenue also
lack specifics. In these circumstances, measures need to be specified for both
2014 and 2015 to credibly ensure that the excessive deficit is corrected by
2015 at the latest [as recommended by the Council]. In 2016, the structural
balance, as recalculated by the Commission, is expected to be -0.4 % of GDP
(-0.3 % in 2017) and thus the MTO would not be reached by the end of the
programme horizon. Progress towards the MTO in that year is expected to
represent 0.3% of GDP, which is below the 0.5% of GDP benchmark. The general
government debt has increased substantially since the beginning of the crisis.
Starting from 64.2% in 2007, the ratio of debt to GDP reached 90.2% in 2012 and
is projected to increase further to 96.2% by 2014 according to the Commission
services' 2013 Spring Forecast. The authorities expect the debt ratio to peak
at 94.3% of GDP in 2014 and then to drop to 88.2% in 2017. France will be in a transition period from 2016 regarding compliance with the debt
criterion.

(10)     Given the high and still
increasing debt and the fact that the deadline to correct the excessive deficit
is postponed again, [to 2015], it is all the more important that the 2013
budget is strictly implemented and substantial consolidation efforts are firmly
pursued in subsequent years. In particular, it is crucial that France’s public spending grows significantly less rapidly than potential GDP as
improvements in the structural deficit have so far been mainly revenue based.
In this respect, the on-going public spending review ('Modernisation de l’action
publique'), whose scope includes local government and social security
administrations in addition to central government, should provide indications
to further improve the efficiency of public expenditure. There is also room for
further streamlining of the different administrative layers and competences in
order to achieve further synergies, efficiency gains and savings. The planned
new decentralisation law should address this issue. In view of the expected
increase over the medium-and long-term in public health care expenditure, future
public expenditure on health care requires greater scrutiny and efficiency, in
particular in pharmaceutical spending. The most recent projections by the
Pensions Advisory Council ('Conseil d'orientation des retraites') point to
persistent deficits of the pensions system by 2018, contrary to the 2010 reform
objective of achieving a balanced system by that time. In addition, the partial
rollback of the 2010 reform goes against the Council recommendation. Hence, the
pension system will still face large deficits by 2020 and new policy measures
are urgently needed to remedy this situation while preserving the adequacy of
the system. Such measures could include further increasing both the minimum and
the full-pension retirement ages as well as the contribution period to obtain a
full pension, adapting the indexation rules and reviewing the currently numerous
exemptions to the general scheme for specific categories of workers. Given its
negative impact on the cost of labour, an increase in the level of social
security contributions should be avoided. In light of the public finance
challenge faced by France, it is of critical importance that fiscal measures
are complemented by increased efforts to pursue structural reforms in order to
support and increase the long-term growth potential of the French economy.

(11)     As shown by the 2013
In-Depth Review (IDR), France’s competitiveness remains a significant
challenge, as the strong erosion of its export markets shares in recent years shows.
The French government proposed in November 2012 several policy measures in the
context of the ‘Competitiveness Pact’. The introduction of a corporate income
tax credit (crédit d’impôt pour la compétitivité et l’emploi — CICE), with a
planned full-year impact of EUR 20 billion, is a
significant step which should contribute to lowering labour costs. There is
room for further action as the new tax credit does no more than halve the gap
between the French tax wedge and the OECD average at the level of the median
wage. In addition, the fiscal measures affecting companies adopted since 2010 result
in an overall increase in business taxation, even when corrected for that
measure. The increase in the minimum wage decided in July 2012, while limited, may
have a negative impact on job and competitiveness, as stressed by the 2012
Council recommendation. Between 2002 and 2012, the hourly minimum wage
increased by 38% (16% in real terms). The high level of the minimum
wage, which represents two thirds of the median wage, is partially compensated
for employers by a number of social security contribution exemptions for
employers. The related cost for public finances has increased rapidly over the
last few years, representing more than 1 % of GDP, in part to compensate
for the rapid increase in the minimum wage. In addition, alternative
instruments such as income support schemes (the ’Prime pour l'emploi’ and the ’Revenu
de solidarité active’) are more efficient instruments than the minimum wage to
address in-work poverty.

(12)     As regards non-price
competitiveness, while the government has recently renewed its export strategy,
supporting the development of export oriented networks and partnerships would
promote the internationalisation of SMEs[9].
More generally, measures could be taken to ensure that the business environment
is conducive to SMEs' growth. Despite considerable efforts deployed by firms in
R&D-intensive sectors and sizeable government support (e.g. the research
tax credit), high- and medium-high-tech sectors represent only a modest and
declining share of the French economy. Hence, there is a need to foster the
creation and growth of SMEs and mid-tier companies (ETI) in these sectors by
improving the framework conditions that encourage innovation and
entrepreneurship. The cluster policy that has been developed to link public
research and private companies might also be further geared towards positive
externalities between private companies located closely to one another. In
addition, PhD studies and research experience should be made sufficiently
attractive to further foster linkages between private companies and research
institutions.

(13)     With regard to services,
only limited progress was seen in the course of 2012. In particular, no
horizontal reform was initiated to remove unjustified restrictions in regulated
sectors and professions. Many professional service providers still face restrictions
as regards their legal form and shareholding structure (e.g. restrictions on
capital ownership for veterinarians and lawyers). Other significant barriers to
entry or practice (such as commercial communications, quotas or territorial
restrictions) remain in a number of sectors (such as taxis, certain health
professions, notaries and other legal professions). The retail sector is still
subject to a number of regulations, such as cumbersome and time-consuming
authorisation procedures for the establishment of retail outlets. In addition,
the existing ban on selling below costs induces a number of distortions while
the objective of supporting producers and small distribution outlets could be
effectively achieved through less distortionary measures. These excessive
restrictions in regulated sectors and professions weigh on competition and tend
to raise their prices. As the in-depth review shows, higher prices in
intermediary services, which account for close to a quarter of production costs
in the manufacturing sector, ultimately impact on the external competitiveness
of French firms. Limited progress was achieved in 2012 on network industries.
The French electricity market remains one of the most concentrated in the EU. Regulated
prices in electricity and gas distort competition and continue to act as a
barrier for new entrants. Regulated tariffs for non-household customers should
be removed according to the timetable agreed with the French authorities. More
interconnection capacity with neighbouring countries and the launch of the
tenders for hydro-concessions would also contribute to fostering competition in
the electricity market. In the railway sector, the rail-freight market is less
dynamic than in other Member States, while rail passenger transport is not open
to competition, except for international services. The forthcoming reform
should ensure that any new ‘unified infrastructure manager’ remains independent
of the incumbent operator to guarantee new entrants fair and non-discriminatory
access.

(14)     The French tax system
remains complex and lacks efficiency due to the wide range of exemptions,
special allowances, but also frequent changes in legislation. Despite efforts
to reduce and streamline tax expenditures, the amount of foregone revenue from
these remains high. The choice of a broad base-low rate approach for corporate and
personal income taxation would be more conducive to growth and social welfare. The
intermediate VAT rate is set to increase from 7 % to 10 % from January 2014. This
is a move in the right direction but additional efforts are necessary. Overall,
the cost of tax and social-security exemptions remains very high up to 10% of
GDP. Despite the demonstrated ineffectiveness of some reduced VAT rates, such
as those for restaurant services, no sufficiently differentiated policy
measures have been taken. The introduction of the CICE tax credit, financed partly
through the above-mentioned increase in the intermediate but also standard VAT
rates, shifts the tax burden away from labour. Further scope for action is
however needed, in particular to rebalance the share of environmental taxes. Last
year, France adopted some measures to address tax incentives to indebtedness in
corporate taxation. However, there is scope for further improvement (interest
deduction is only limited above EUR 3 million and only 15% of the interest
above that limit will be disallowed for tax deductibility in 2013 and 25% in
2014).

(15)     The unemployment rate
increased from 9.7 % in 2010 to 10.2 % in 2012. The Commission forecasts
that the unemployment rate will increase to 10.6% in 2013 and 10.9% in 2014 due
to persistently weak economic growth. Against this background, the segmentation
of the French labour market continues to be a source of concern. The likelihood
of moving from a temporary to a permanent job was only 10.6 % in 2010, as
against 25.9 % on average in the EU. As a result, low-skilled workers in
precarious forms of employment tend to bear the brunt of any adjustment process
in the labour market. A law was adopted in May 2013, based on the
inter-professional agreement (ANI) on securing jobs concluded between the
social partners in January 2013. It foresees increased rights for workers,
addressing the legal uncertainty of dismissals and greater flexibility for
employers. The law is a positive step towards a more fluid labour market. The
actual implementation of this reform, as well as its impact, remain uncertain
at this stage because following the adoption of the law transposing the ANI further
branch/enterprises agreements will be needed before the agreement can fully
enter into force.

(16)     A sixth of young people in France leave education and training without a qualification. This is particularly worrying
as the unemployment rate of young people was of 25.4% at the end of 2012 and as
the risk of being unemployed was almost two times higher for the least
qualified young people. Schemes to promote apprenticeships should reach in
particular the least qualified young people. The alignment of national schemes
to the Youth Guarantee Council recommendation should play a structuring role in
responding to these challenges. Despite reforms initiated in 2009, the French
participation rate of adults in lifelong learning (5.7 % in 2012,
low-skilled adults: 2.5 %) is below the EU average. The planned transfer
of competences to the regional Councils might provide an opportunity to address
the weaknesses of the current system. The employment rate for workers aged
55-64 is among the lowest in the EU (45.7 % in the fourth quarter of 2012),
and unemployment is rising among older people. Although a step in the right
direction, it is not clear to what extent the ‘generation contracts’ will contribute
to the employment of older workers and facilitate a return to work by older
jobseekers. French public spending on unemployment benefits rose by 5.3 %
in 2012 and are expected to further increase by 6.1 % in 2013 according to
the stability programme. The cumulated deficit of the unemployment regime,
which would be close to 1 % of GDP by 2013, calls for a reform of the
unemployment benefit system. In particular, some elements, such as the
eligibility conditions, the degressivity of benefits over time or the
replacement rates for workers with the highest wages should be adapted to
ensure that incentives to work are adequate. The new tripartite convention of
the public employment service (Pôle emploi) foresees a differentiated follow-up
of jobseekers. The average size of a job counsellor’s portfolio has however
further increased due to the rising unemployment level and the reorientation of
the Pôle emploi strategy is hampered by the weak economic situation. All in
all, there is a need to take further action in view of the negative economic
prospects and the expected further increase in unemployment in France.

(17)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of France’s economic policy. It has assessed the stability programme and national reform
programme, and presented an in-depth review. It has taken into account not only
their relevance for sustainable fiscal and socio-economic policy in France but
also their compliance with EU rules and guidance, given the need to reinforce
the overall economic governance of the European Union by providing EU-level
input into future national decisions. Its recommendations under the European
Semester are reflected in recommendations (1) to (6) below.

(18)     In the light of this
assessment, the Council has examined France’s stability programme, and its
opinion[10]
is reflected in particular in recommendation (1) below.

(19)     In the light of the
Commission’s in-depth review and this assessment, the Council has examined the
national reform programme and the stability programme. Its recommendations
under Article 6 of Regulation (EU) No 1176/2011 on the prevention and
correction of macroeconomic imbalances are reflected in recommendations (1),
(2), (3), (4), (5) and (6) below.

(20)     In the context of the
European Semester the Commission has also carried out an analysis of the economic
policy of the euro area as a whole. On this basis the Council has issued
specific recommendations addressed to the Member States whose currency is the
euro. France also should ensure the full and timely implementation of these
recommendations.

HEREBY RECOMMENDS that France should take action within the period 2013-2014 to:

1.           Reinforce and pursue the
budgetary strategy in 2013. Enhance the credibility of the adjustment by
specifying by autumn 2013 and implementing the necessary measures for the year
2014 and beyond to ensure a correction of the excessive deficit in a
sustainable manner by 2015 at the latest and the achievement of the structural
adjustment effort specified in the Council recommendations under the EDP. Use
all windfall gains for deficit reduction. A durable correction of the fiscal
imbalances requires a credible implementation of ambitious structural reforms to
increase the adjustment capacity and boost growth and employment. Maintain a
growth-friendly fiscal consolidation course and further increase the efficiency
of public expenditure, in particular by proceeding as planned with a review of
spending categories across all sub-sectors of general government. Take action
through the forthcoming decentralisation law to achieve better synergies and
savings between central, regional and local government levels. After the
correction of the excessive deficit, pursue the structural adjustment effort at
an adequate pace so as to reach the MTO by 2016,. Take measures by the end of
2013 to bring the pension system into balance in a sustainable manner no later
than 2020, for example by adapting indexation rules, further increasing the statutory
retirement age and full-pension contribution period and reviewing special
schemes, while avoiding an increase in employers' social contributions, and increase
the cost-effectiveness of healthcare expenditure, including in the areas of
pharmaceutical spending.

2.           Ensure that the ‘crédit d’impôt compétitivité et
emploi’ effectively reduces labour costs by the planned amount and that no
other measure will offset its effect. Take further action to lower the cost of
labour, in particular through further measures to reduce employers’
social-security contributions. Ensure that developments in the minimum wage are
supportive of competitiveness and job creation, taking into account the
existence of wage support schemes and social contribution exemptions.

3.           Take measures to improve the business environment and
develop the innovation and export capacity of firms, in particular SMEs and
enterprises of intermediate size. In particular, launch the announced
simplification initiative of the regulatory framework, and improve the
framework conditions for innovation, by enhancing technology transfer and the
commercial exploitation of research, including through a reorientation of the
competitiveness poles.

4.           Take action to enhance competition in services; remove
unjustified restrictions in the access to and exercise of professional services,
notably regarding legal form, shareholding structure, quotas and territorial
restrictions; take action to simplify authorisation for the opening of trade
outlets and to remove the ban of sales at a loss; remove regulated gas and electricity
tariffs for non-household customers and strengthen interconnection capacity
with neighbouring countries; in the railway sector, open domestic passenger
transport to competition.

5.           Pursue efforts to simplify the tax system and improve
its efficiency, while ensuring continuity of tax rules over time. Take measures
to remove the debt bias in corporate taxation. Step up efforts to reduce and
streamline personal and corporate income tax expenditures while reducing
statutory rates; bring reduced VAT rates closer to the standard rate and remove
inefficient reduced rates. Take further measures shifting the tax burden from
labour to environmental taxation or consumption.

6.           Implement fully and without delay the January 2013
inter-professional agreement, in consultation with the social partners. Take
further action to combat labour-market segmentation, in particular to address
the situation of interim agency workers. Launch urgently a reform of the
unemployment benefit system in association with the social partners to ensure sustainability
of the system while ensuring that it provides adequate incentives to return to
work. Enhance the employment rate of older workers and stimulate their
participation in the labour market. Take specific action to improve the
employment perspective of older unemployed people in particular through
specific counselling and training. Increase adult participation in lifelong
learning, especially of the least qualified and of the unemployed. Ensure that
public employment services effectively deliver individualised support to the
unemployed and that active labour market policies effectively target the most
disadvantaged. Take further measures to improve the transition from school to
work through, for example, a Youth Guarantee and promotion of apprenticeship.

Done at Brussels,

Done at Brussels,

                                                                       For
the Council

                                                                       The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               OJ L 306, 23.11.2011, p. 25.

[3]               COM(2013) 360 final.

[4]               P7\_TA(2013)0052 and P7\_TA(2013)0053.

[5]               Council Decision 2013/208/EU of 22 April 2013.

[6]               COM(2012) 750 final.

[7]               COM(2012) 751 final.

[8]               SWD(2013) 117 final.

[9]               European Commission (2011), "Small business, big
world - a new partnership to help SMEs seize global opportunities", COM(2011) 702

[10]             Under Article 5(2) of Council Regulation (EC) No
1466/97.

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