The French economy has not escaped the severe recession gripping all developed countries. After ending the year 2008 with a sharp decline, output is likely to contract further during the rest of this year, and prospects for 2010 remain highly uncertain, despite the many stimulus plans at home and abroad. The recession should be less deep than elsewhere, due inter alia to powerful automatic stabilisers. However, while the finances of big banks and households do not appear to be in as bad shape as they are in several other countries, the capacity of the French private sector to revive activity in advance of a global recovery is limited. Moreover, given the already high deficit and debt levels, the crisis will leave public finances in a serious condition.

In this context, the principal short term challenge is to pull the economy out of recession, while avoiding as far as possible recourse to budgetary measures that would be difficult to undo later. The recovery plan adopted at the beginning of the year meets many of these conditions, although the impact of certain measures will not be felt until the second half of 2009, at the earliest. If a further series of actions is deemed necessary, however, it will be more difficult to employ the same kind of self reversing provisions targeted at business investment and cash flow.

Once the recovery is well underway, it will be necessary to urgently implement a programme for reducing the public deficit, consistent with obligations under the Stability and Growth Pact. A credible consolidation strategy will be especially important because of ongoing pressures on the Social Security accounts, which, in light of demographic trends, are likely to intensify. Given the already very high level of taxes and compulsory contributions, the effort to clean up public finances will have to rely essentially on government spending cuts. In order to control public spending more effectively, the General Policy Review (RGPP) applied to central government outlays will need to strive for more ambitious results. There are substantial potential savings in fields that the Review has not yet fully explored, i.e. Social Security and local government.

On the structural front, numerous reforms have been undertaken since the last Survey, but a continuing priority must be to increase the employment rate (which is still one of the lowest in the OECD). Such an increase would serve both to boost potential growth (temporarily) and to ease pressures on public finances significantly. To achieve this, further labour market reforms will have to be pursued, in particular by cutting the cost of work for the less skilled and increasing the participation rate for older workers.

A second priority is to render French firms more competitive in order to halt the steady erosion of their market share in world trade. Restoring competitiveness will require, above all, efforts to achieve higher trend productivity growth and to reinforce its major determinants, such as research and innovation, while at the same time lowering the fiscal, social and administrative burdens that hamper business growth.

If productivity is to grow faster, domestic competition will have to be strengthened, especially in the services sector. While the legal and regulatory framework is clearly moving towards greater competition, there are still numerous barriers to entry in many sectors, particularly in regulated professions, due in part to the self regulation mechanisms in place. When it comes to the electricity sector, one of the biggest obstacles to competition in retail markets is the persistence of regulated prices that reflect the low costs of production of French nuclear power plants and which are therefore below the supply costs facing any new distributor.