France Economic and Financial Policy Part I

France Economic and Financial Policy Part I

Even during the nineties, the economic policies of France maintained the priority objective of stabilizing the exchange rate of the franc with the German mark, along the lines defined by the ‘strong franc’ policy initiated at the beginning of the eighties.. The adaptation to the convergence criteria established by the Treaty on European Union has also strengthened the restrictive orientation of monetary and budgetary policies, and the will to place foreign policy in the core of the ‘strong countries’ of the Economic and Monetary Union (EMU) has resulted in the choice of favoring exchange rate stability over the achievement of other objectives such as growth and employment.

According to, this orientation emerged in a clear way on the occasion of the currency crisis that hit the European Monetary System (EMS) in September 1992, during which the Central Bank of France insisted on defending the franc indefinitely from speculative attacks, despite the huge loss of foreign exchange reserves and the sharp rise in interest rates that this entailed. The French monetary authorities, thanks to the support of the Bundesbank, have managed to ensure the stability of the franc, but at the price of a contraction of GDP (- 1, 3 % in 1993) accentuated by the severe economic recession that hit most of the European economies at that time. Furthermore, maintaining parity with the mark has placed French exports at a disadvantage vis-à-vis products from countries, such as Italy and Great Britain, which, having left the EMS, have left their currencies floating. At the weak performance of domestic demand (the growth of which in 1993 was found to virtually nothing) was added so the abrupt slowdown in exports which has slowed the productive activity and pushed the number of unemployed in 1993 to dell ‘rate 11, 7 %.

In the face of the employment emergency, the choice of the government and the monetary authorities was to keep monetary tightening unchanged while implementing a series of measures aimed at stopping the growth in unemployment. Thus, tax concessions were introduced for recruitment, reductions in social security contributions to be paid by companies, measures in favor of apprenticeships and professional retraining, subsidies for the unemployed and other interventions financed by public transfers. The measures in favor of employment were generally ineffective, since part of the growth in the number of unemployed depended on the disinvestment processes initiated by companies and accelerated by restrictive monetary conditions. The latter, on the other hand,

In fact, until 1991 the framework of macroeconomic variables of philosophy was fully consistent with the parameters established by the Treaty on European Union: after 1993, however, the implementation of restrictive policies amplified the decline in GDP and accelerated the deterioration of public finances. Thus, the lower tax revenues due to the recession, the growth in debt service following the increase in interest rates, the tax relief granted to companies and the transfers allocated to the unemployed have pushed the public deficit in relation to GDP to 5, 7 %, well above the threshold of 3% required for entry into EMU. In the second half of 1993, despite the repeated tensions on the foreign exchange market, the economic situation of France showed signs of improvement. The economic downturn, having pushed down the level of imports, has allowed the current account to double in value compared to 1992. In addition, the very weakness of domestic demand has driven down the rate of inflation (2, 2 % on average in 1993) providing the monetary authorities the opportunity to touch down short-term interest rates.

The signals of a real economic recovery, however, occurred only in 1994, during which the GDP showed a positive variation of 2, 8 % due in large measure to the growth of global demand and in particular all ‘ increase in German imports. Domestic private consumption, on the other hand, remained substantially weak, also due to the modest wage trend which favored a new decline in the rate of inflation (2, 2%) and opened new margins for the use of monetary instruments to support productive activity. It was thus possible to stimulate some growth in productive investment, although not strong enough to stop the continuous increase in the unemployment rate that, at the end of 1994, has reached 12, 2 %. On the public accounts front, on the other hand, the persistence of the budget deficit at values ​​close to 6 % caused an accelerated growth of the public debt, which in four years underwent an increase of more than 15 percentage points in relation to GDP, reaching in 1994 to the value of 56, 1 %.

In 1995, the slowdown in economic growth (dropped to 2, 1 %) highlighted the increasing difficulties from the authorities in charge of control of the economy simultaneously achieve two objectives of the fight against unemployment and the public deficit back. The new government led by A. Juppé thus found itself faced with the problem of how to find the resources to finance employment support programs without compromising the objective of restoring the public deficit (4.9 % in 1995) in line with the values ​​required by the Treaty on European Union. In this context of choice, the government’s economic policy action proved to be uncertain and at times contradictory.

France Economic and Financial Policy 1