France

Politics:

• Analysis

  France politics: Quick View - Government in a quandary over 75% tax rate

  Event

  The government is digesting the advice of the State Council, France's highest judicial authority in matters of administrative law, on how to revise its plans for a 75% tax on the super-rich.

  Analysis

  The idea of a new top rate of tax on the very rich was one of the flagship policies of the president, François Hollande, during the 2012 election campaign, the presentation of which allowed him to regain the initiative and see off the electoral rise of Jean-Luc Mélenchon on the far left. However, more than a year later, the policy remains beset by difficulties.

  In December 2012 the Constitutional Council ruled that the introduction of a 75% marginal tax rate on personal income above EUR1m per year, planned for 2013, was "unconstitutional" because it contradicted the principle of equal treatment, being designed to apply to individuals, rather than households, as is normally the case. Although the ruling was based on technical factors, the Constitutional Council was also critical of a number of measures in the draft 2013 budget, declaring that marginal income tax rates were too high (reflecting a series of planned taxes on value-added gains and stock options, in addition to the marginal 75% tax rate). It stated that cumulative direct marginal taxation above 68% of income should be considered "confiscatory"-a judgement that limits the government's room for manoeuvre in political terms, if not in legal ones.

  Following the Constitutional Council's advice, which is not binding, the government sought the views of the State Council, which on March 22nd recommended that cumulative marginal income tax rates should not exceed 66.66%. This would leave room for the creation of an additional income tax bracket above the existing top rate of 45% on income above EUR150,000. The 45% tax rate is already topped up with "exceptional contributions" on high incomes established by the previous, centre-right government in 2012, equivalent to 3% (on income over EUR250,000 per year) and 4% (over EUR500,000). Considering in addition social security charges of 8%, the government could in theory create a new levy of up to 9.6% on incomes above EUR1m. However, the State Council also advised that limits to marginal taxation should apply to all incomes (including capital incomes). Given social additional social charges on capital incomes, marginal tax rates can already be as high as 62.2%, leaving a margin of just 4.4%.

  The government does not have to follow the State Council's advice, but it would seriously undermine its political legitimacy if it failed to heed it. The government has little time to decide how to respond, with the measures to be included in the draft 2014 budget. It could apply a new levy to households earning above EUR1m, but this would dramatically increase the number of people affected from around 1,500 to over 10,000. Alternatively, it could raise the thresholds at which a new exceptional levy applies, but this would reduce the number of affected households to just a few hundred, rendering the change meaningless in political and fiscal terms. However, the fact that the government even sought the advice of the State Council-which does not normally rule on tax matters-suggests that it is seeking political cover for a decision to drastically scale back its ambitions.

  March 26, 2013

• Background

  France: Political forces at a glance

  Political outlook: Political forces at a glance

  Present government: France is a democratic republic with an unusual, hybrid system of government. The president, who is directly elected, wields huge power when, as is currently the case, parties loyal to him command a majority in the National Assembly (the lower house and the more important of the two parliamentary chambers). When the presidential and parliamentary majorities conflict, the president is forced into "cohabitation" with a government not of his choosing, boosting the influence of the prime minister in domestic affairs. In 2002 the presidential and parliamentary terms were aligned to reduce this likelihood and the 2012 elections confirmed this "coat-tails effect". Thus, the new president, François Hollande, who was inaugurated on May 15th, was rewarded with a parliamentary majority at the general election in June. The centre-left government is led by the prime minister, Jean-Marc Ayrault, a long-standing ally of Mr Hollande, and is drawn mostly from Parti socialiste (PS).

  General election, June 2012
  Party	% of votea	National Assembly seats
  Parti socialiste (PS)	29.4	280
  Miscellaneous left-wing	3.4	22
  Europe écologie les verts (EELV)	5.5	17
  Parti radical de gauche (PRG)	1.7	12
  Presidential majority (left)	39.9	331
  Union pour un mouvement populaire (UMP)	27.1	194
  Miscellaneous right	3.5	15
  Nouveau centre	2.2	12
  Parti radical	1.2	6
  Alliance centriste	0.6	2
  Total parliamentary right	34.7	229
  Front de gauche (FG)	6.9	10
  Front national (FN)	13.6	2
  Regionalists and separatists	0.6	2
  Le centre pour la France	1.8	2
  Other far-right	0.2	1
  Other far-left	1.0	0
  Other ecologists	1.0	0
  Others	0.5	0
  Total	100.0	577
  a Share of votes cast in the first round on June 10th. The second round was on June 17th.
  Sources: Ministry of the Interior; Le Monde.

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  Next elections: The next presidential election will be held in April-May 2017, followed by a general election in June 2017.

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  August 23, 2012

• Structure

  France: Political structure

  Official name

  French Republic

  Legal system

  Codified Roman law system; constitution of 1958

  National legislature

  Bicameral: Senate of 348 members indirectly elected by local councils for a period of six years, with one-half retiring every three years; National Assembly of 577 members directly elected from individual constituencies by a two-ballot system for a period of five years; may be dissolved by the president

  Electoral system

  Universal suffrage; two-round voting system for the National Assembly

  National elections

  Last presidential election in April-May 2012; next presidential election due in 2017. Last legislative election June 2012; next legislative elections due in June 2017

  Head of state

  President, directly elected for a five-year term, currently François Hollande (PS), elected in May 2012

  National government

  There is a clear separation of executive and legislative power; constitutionally, the locus of executive power is the Council of Ministers, which is chaired by the president. The prime minister is appointed by the president, who must consider whether the government can obtain the necessary majority in parliament; according to the constitution, the prime minister hands his resignation to the president, but in practice, prime ministers have been dismissed by the president. Ministers are similarly appointed and dismissed, but on the prime minister's suggestion; they do not have to be members of parliament; an interim centre-left government was appointed in May 2012 and is likely to be confirmed in office following the legislative election in June 2012, though not without changes.

  Main political parties

  Parti socialiste (PS); Europe écologie les verts (EELV); Parti radical de gauche (PRG); Parti communiste français (PCF); Union pour un mouvement populaire (UMP); Nouveau centre (NC); Mouvement démocrate (MoDem); Front national (FN)

  Prime minister: Jean-Marc Ayrault (PS)

  Senior ministers

  Administrative reform, decentralisation & civil service: Marylise Lebranchu (PS)

  Agriculture & food processing: Stéphane Le Foll (PS)

  Culture & communications: Aurélie Filippetti (PS)

  Defence: Jean-Yves Le Drian (PS)

  Ecology, sustainable development, & energy: Delphine Batho (PS)

  Economy, finance & trade: Pierre Moscovici (PS)

  Foreign affairs: Laurent Fabius (PS)

  Higher education & research: Geneviève Fioraso (PS)

  Interior: Manuel Valls (PS)

  Justice: Christiane Taubira (PRG)

  Labour, employment, vocational training & industrial relations: Michel Sapin (PS)

  National education: Vincent Peillon (PS)

  Production recovery: Arnaud Montebourg (PS)

  Regional equality & housing: Cécile Duflot (EELV)

  Social affairs & health: Marisol Touraine (PS)

  Central bank governor

  Christian Noyer

  January 01, 2013

• Outlook

  France: Key developments

  Outlook for 2013-17

  • France's president, François Hollande, has seen a rapid loss of public support since taking office in May 2012. Regaining the initiative will be difficult amid a stagnant economy, rising unemployment and ongoing austerity.
  • The political climate is likely to deteriorate during 2013-14 as the impact of austerity measures is felt. Relations with public-sector trade unions will come under particular strain over job cuts in parts of the public sector.
  • Mr Hollande will seek to balance domestic austerity with calls for more growth-focused policies at the European level, but his ability to challenge Germany's hegemony is limited.
  • The government will largely rely on tax increases to meet its 2013 deficit target, notably affecting more wealthy households and large businesses.
  • The government is unlikely to be able to avoid deeper than planned spending cuts in 2013-14 in order to retain the confidence of financial markets that it is pursuing a credible strategy to put the debt/GDP ratio on a downward path.
  • The effectiveness of the government's plans to improve competitiveness by providing tax relief for businesses during 2014-16 is likely to be undermined by an unwillingness to find further, offsetting savings in public spending.
  • Real GDP is forecast to stagnate for a second successive year in 2013, reflecting the impact of fiscal tightening in France and across Europe. Assuming some progress in stabilising the euro zone, a mild recovery is forecast from 2014.

  Review

  • The future leadership of the main opposition Union pour un mouvement populaire (UMP) remains in doubt after a botched internal election.
  • The government has accepted the closure of two blast furnaces at a steel plant in eastern France, following a humiliating climbdown by ministers.
  • France has been pushing hard for an EU agreement on the creation of a single banking supervisor for the euro zone, which will be up and running in 2014.
  • Partly in response to pressure from business, the government has fast-tracked a package of tax credits designed to raise the competitiveness of French firms.
  • Moody's Investors Service has become the second of the big three credit ratings agencies to strip France of the highest rating for sovereign debt.
  • The business climate indicator edged up slightly in November, but remains consistent with a mild economic contraction in the fourth quarter of 2012.
  • Unemployment hit 9.9% in the third quarter. A slowdown in energy and food prices and a fall for telecoms caused inflation to drop to 1.4% in November.

  January 01, 2013

Economy:

• Background

  France: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	63.3	Population growth	0.5
  GDP (US$ bn; market exchange rate)	2,777b	Real GDP growth	0.4
  GDP (US$ bn; purchasing power parity)	2,288b	Real domestic demand growth	0.7
  GDP per head (US$; market exchange rate)	43,887	Inflation	1.8
  GDP per head (US$; purchasing power parity)	36,164	Current-account balance (% of GDP)	-1.5
  Exchange rate (av) €:US$	0.72b	FDI inflows (% of GDP)	1.9
  a Economist Intelligence Unit estimates. b Actual.

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  Background: The political foundations of contemporary France go back to the 1789 revolution. France was a founder member of the EU and has been in the vanguard of European integration. However, French voters have become more sceptical towards the EU over the past decade or so. The French economy is in competition with that of the UK to be the second largest in western Europe and is around three-quarters the size of the German economy.

  Political structure: The constitution of the Fifth Republic came into force in early 1959. The president is elected by universal suffrage for a five-year term. Parliament comprises two chambers: the Senate (the upper house), members of which are elected by an electoral college and serve for six years (with one-half retiring every three years); and the more important National Assembly (the lower house), to which deputies are elected by universal suffrage and which serves for a five-year term (although it may be dissolved by the president). The current government is a centre-left administration.

  Policy issues: The main policy challenges will be to reduce the structural budget deficit and stem the rise in public debt, while at the same time shoring up employment, improving competitiveness, promoting industrial development (and growth of small and medium-sized firms in particular) and ensuring a greater degree of intra-generational justice. These goals imply a need for wide-ranging reforms to the tax and benefits systems and to public administration, and an overhaul of the legal framework for the labour market. Social resistance to all of these changes will be strong.

  Taxation: The tax burden remains well above the EU average. The standard rate of corporation tax is 33.3%. The effective rate of corporation tax is significantly lower (even below 20%). The standard rate of value-added tax (VAT) is 19.6%, with reduced rates widely applicable. Income tax cuts over the past decade are being partly reversed, particularly for higher earners. The top rate of income tax currently stands at 41%, but the government plans a new 75% rate for the super-rich.

  Foreign trade: France is the fifth-largest exporter of goods and the fifth-largest exporter of services in the world. The value of goods exports in 2011 totalled US$590bn, while the import bill reached US$692bn, resulting in a trade deficit of US$102bn. As has been the case for several years, France posted surpluses on the services and investment income balances in 2010. Nevertheless, the current account recorded a deficit of US$54bn, or 2% of GDP.

  Major exports 2011	% of total	Major imports 2011	% of total
  Machinery and transport equipment	37.0	Machinery and transport equipment	32.3
  Chemicals and related products, n.e.s.	18.2	Mineral fuels, lubricants, and related materials	15.9
  Food, drinks and tobacco	12.1	Chemicals and related products, n.e.s.	13.7
  Mineral fuels, lubricants, and related materials	4.8	Food, drinks and tobacco	7.7
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Germany	16.8	Germany	18.9
  Italy	8.3	Belgium	11.2
  Spain	7.5	Italy	7.7
  Belgium	7.4	Netherlands	7.4

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  January 01, 2013

• Structure

  France: Economic structure

  Data and charts: Annual trends charts

  
  

  

  January 01, 2013

• Outlook

  France: Country outlook

  France: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: François Hollande of the Parti socialiste (PS) was elected as France's new president in May 2012, and was rewarded with a comfortable parliamentary majority for the PS and allied left-leaning deputies at the general election in June. Mr Hollande's popularity has already fallen sharply and the government's image has been tarnished by the muddled handling of a number of issues, characterised by contrasting statements from ministers, policy reversals and undisciplined outbursts from PS backbenchers. The public standing of the prime minister, Jean-Marc Ayrault, has also suffered, although his position should be secure at least for the next year or so. Some of this fractiousness could be explained by the PS's lack of recent experience in office, but it also reflects the difficult economic environment that is shaping the policy agenda, which has forced Mr Hollande and government ministers to admit that the need for budgetary rigour, as well as reforms to welfare systems and labour markets, is much greater than was previously acknowledged.

  ELECTION WATCH: After electing Mr Hollande as president in May 2012, voters delivered an absolute majority for his party, the PS, at the general election in June. Having held its two most important elections in 2012, France now faces a relatively quiet electoral period before the next presidential and legislative votes, due in 2017. In the interim, second-order elections will serve as barometers of public opinion, but these will have little influence on governance at the national level.

  INTERNATIONAL RELATIONS: The debt crisis in the euro area will dominate foreign relations. Franco-German relations have cooled since the election of Mr Hollande, but little can be achieved within the euro zone (or the EU) without agreement between the two countries, and this will encourage ongoing co-ordination and compromise. Notably, Mr Hollande's commitment to respect French deficit reduction targets and undertake measures to promote competitiveness has been welcomed in Germany. In return, France expects Germany to allow the European Central Bank (ECB) to stand behind the sovereign debt of the weakest euro zone states, and thereby provide breathing space for discussions on possible future phases of integration. A number of items are already under consideration, including the scope and timing of the proposed new common EU banking supervisor, new budget rules and the possibility of a distinct euro zone fund to cushion economic shocks (although wide differences remain over the size, purposes and financing of any "fiscal capacity"). Progress on these issues is likely to be slow even under the best circumstances, and Franco-German tensions could rise if France misses budgetary targets by a wide margin. A more integrationist stance by France will come with significant caveats, moreover. Strong reluctance to transfer fiscal sovereignty to the European level persists in the PS (and among the broader public). An unwillingness to test public opinion on European issues means that the French government will seek to avoid significant changes to EU treaties, certainly before the elections to the European Parliament in 2014. Without deeper political union, however, Germany will resist any substantial pooling of resources, which could hinder the development of a lasting solution to the debt crisis.

  POLICY TRENDS: An uncertain external economic environment and the dismal state of the public finances give the government little leeway in economic policy. The agenda will be dominated by three closely related challenges: the need to consolidate the public finances (and thereby keep financing costs manageable); to promote external competitiveness (and reverse a sharp decline in export market share); and to reduce high structural unemployment. Without action on all three fronts, France risks being dragged into a spiral of rising debt-servicing costs, tight fiscal policy, sluggish growth, a deteriorating trade position and high, socially corrosive unemployment. The Economist Intelligence Unit expects only partial progress, notably as a result of a trade-off between budgetary consolidation and badly needed improvements to the business environment.

  ECONOMIC GROWTH: Following two quarters of stagnation, real GDP expanded by 0.2% quarter on quarter during the third quarter of 2012, which should ensure that growth remains just above zero for the year as a whole. However, indicators suggest that the economy will experience a mild contraction around the turn of 2012-13, with little prospect of sustained recovery next year. Exports will be weakened by ongoing contractions in key trading partners--notably Italy and Spain--with demand from Germany also expected to remain subdued. Rising unemployment and fiscal tightening will exert a drag on domestic activity. Growth is forecast to revive gradually from 2014, assuming that confidence improves, but it will be constrained by successive years of fiscal austerity. The potential for an escalation of the euro area banking and sovereign debt crises remains a significant downside risk.

  INFLATION: Consumer price inflation (EU harmonised measure) dipped to 1.6% in November, from 2.1% in October, partly reflecting a favourable base effect for energy prices. Notwithstanding an increase in administered gas prices in January 2013, the Economist Intelligence Unit expects inflationary pressure to remain fairly weak during 2013, as a negative output gap and weak pay pressures constrain underlying inflation (core inflation was 1.5% in October, the latest available figure). Overall, inflation is expected to average 1.6% in 2013 and around 2.1% during 2014-17.

  EXCHANGE RATES: Although not our central forecast, there is a high risk that several countries will be forced to leave the euro over the medium-term. Such fears partly explain the recent volatility of the single currency, which has fluctuated in a range between US$1.20:EUR1 and US$1.35:EUR1 in 2012, standing at US$1.30:EUR1 in early December. Despite the promise of more determined ECB action to stabilise financial markets, the euro will remain volatile in response to shifting risk appetites, protracted economic weakness and lower reserve accumulation by China. We expect it to average US$1.26:EUR1 in 2013 and US$1.25:EUR1 in 2014-17, but there is a significant risk of sharp movements either way.

  EXTERNAL SECTOR: France's trade position has deteriorated sharply in the past decade. This partly reflects higher international oil prices, but the deterioration is sectorally and geographically broad-based, suggesting a loss of external competitiveness. The trade deficit is forecast to remain fairly large throughout 2013-17, but the overall current-account deficit should remain manageable as a proportion of GDP owing to large surpluses on the services and income accounts.

  January 01, 2013

• Forecast

  France: Country forecast summary

  Country forecast overview: Highlights

  • France's president, François Hollande, who was inaugurated in May 2012, is in a reasonably good position to push through his agenda, with the Parti socialiste (PS) and allied deputies wining an absolute parliamentary majority at the general election in June.
  • In the short term, the PS parliamentary group is likely to be largely compliant, allowing the new government to implement a sharp fiscal tightening in its 2013 budget. The political climate is likely to deteriorate from 2013 as the impact of austerity measures is felt.
  • The public finances are in a poor state and France remains vulnerable to a loss of financial market confidence. The government will rely on tax increases to meet its 2013 deficit targets, notably affecting the wealthy, high-income earners and large businesses. A serious effort to implement structural reforms, particularly to the public administration and social security, will be needed if medium-term targets are to be met. Social resistance to reforms will be strong.
  • Public debt is on course to reach 90% of GDP by 2013. Two ratings agencies have stripped France of its AAA rating during 2012. Unless the government can place the debt/GDP ratio on a downward path in the coming years, France could face a steady increase in interest costs. Although we expect ambitious budget targets to be missed, the debt ratio should begin to fall from 2014.
  • Other economic policy challenges include tackling high structural unemployment and reversing the slide in external competitiveness. The government plans various schemes to support industrial development and promote innovation, but ambitions to reduce the tax burden for businesses from 2014 may be undermined by the weak state of the public finances. The government's programme is relatively thin on other supply-side measures, such as steps to promote labour market flexibility, although talks between the social partners could yield modest results.
  • Real GDP is forecast to stagnate for a second successive year in 2013. Tax increases will weigh on household spending, and an uncertain economic outlook and tight credit will curb investment spending. Declining competitiveness against Germany and fragile demand in many key European markets suggest that real GDP growth will not exceed 2% in later years, even assuming that global conditions improve during 2014-17. The trade balance will remain in deficit, but will be partly offset by services and income surpluses.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	0.1	0.1	0.9	1.4	1.5	1.5
  Consumer price inflation (av; %)	2.1	1.6	2.0	2.2	2.1	2.0
  Consumer price inflation (av, %; EU harmonised measure)	2.2	1.6	2.0	2.2	2.1	2.0
  Budget balance (% of GDP)	-4.5	-3.4	-2.6	-2.2	-1.7	-1.2
  Current-account balance (% of GDP)	-2.1	-1.7	-1.6	-1.5	-1.5	-1.6
  Short-term interest rate (av; %)	0.6	0.2	0.6	1.1	1.8	1.8
  Exchange rate US$:€ (av)	1.28	1.29	1.27	1.24	1.26	1.26
  Exchange rate ¥:€ (av)	102.62	106.19	109.94	110.13	116.13	115.24

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  January 01, 2013

View detailed map

Country Briefing

Land area

Metropolitan France, 543,965 sq km; including 51.4% used for agriculture and 27% woods or forests; excludes overseas territories and departments

Population

63.4m (population for metropolitan France at start of 2012)

Main towns

Population of urban areas in '000 (2007)

Paris (capital): 11,837

Lyon: 1,757

Marseille/Aix-en-Provence: 1,618

Lille: 1,164

Toulouse: 1,118

Bordeaux: 1,009

Nice: 1,000

Nantes: 768

Strasbourg: 642

Toulon: 601

Rennes: 578

Climate

Temperate, oceanic in the west, continental in the east, Mediterranean in the south

Weather

Average weather conditions at Météo France weather stations (based on 1999-2008 data): maximum average temperature, 19.8°C at Perpignan, minimum, 6.4°C at Dijon-Longvic; maximum average rainfall, 984 mm at Bordeaux-Merignac, minimum, 547 mm at Perpignan

Languages

French and-regionally-Provençal, Alsatian, Basque, Breton, Catalan, Occitan

Measures

Metric system

Currency

Euro (EUR) = 100 cents

Time

1 hour ahead of GMT

Public holidays

January 1st, 2nd; April 9th; May 1st, 8th, 17th, 28th; July 14th; August 15th; November 1st, 11th, 12th; December 25th

January 01, 2013