“It is essential that the France Relance and France 2030 funds be invested efficiently to boost critical innovation and investment and further support an ambitious structural reform agenda that meaningfully lifts France (AA/Stable)’s growth potential, easing medium-term pressures on its fiscal and credit outlooks,” says Alvise Lennkh, executive director at Scope.

After one of the deepest economic contractions (-8%) among advanced economies in 2020, the French government has announced two large scale stimulus packages to support the economic recovery: The EUR 100bn (4% of GDP) France Relance recovery plan and the EUR 30bn (1% of GDP) France 2030 investment plan.

“We see these investments, in their timing and composition, as a positive for France’s credit outlook as they may contribute around +1% to growth this year and in 2022,” says Lennkh.

France’s economy already returned to its pre-pandemic level in Q3 this year, ahead of Germany (AAA/Stable).

“But as is often the case, the concrete roll-out of these plans will be key in determining their impact on medium-term growth,” he says.

The French Treasury estimates that France Relance will raise the level of GDP by +0.9% in the long run, broadly in line with the EU Commission’s November projections of around +0.6% and +1.0% by 2024.

However, past public investment programmes fell short of delivering on their promised outcomes.

As highlighted in an October 2021 Cour des Comptes report¹, heavy administrative burden led to delays in the disbursement of the funds while the lack of robust, macro-level evaluations of the economic impact of investments prevented optimal reallocations. Scope thus welcomes the increase in transparency and decentralisation of the new plans’ governance frameworks.

In addition, the focus on tackling some of the French economy’s long standing economic bottlenecks is also positive. French industry has long suffered from a competitiveness gap stemming from elevated costs and weak performance in high technology sectors.

France Relance’s investments in the green transition (EUR 30bn), competitiveness and innovation (EUR 34bn), including a decrease in taxes on production and equity injections for SMEs, and social inclusion (EUR 36bn), appropriately target some of these structural issues. In addition, France 2030, designed to complement France Relance, aims to support France’s high-tech industries and reduce the country’s dependence on key imports such as raw materials and micro conductors. These measures together with funds targeted at raising the workforce’s digital skills and the push for innovative sectors, such as green hydrogen, could improve France’s competitiveness.

“While the design of France Relance and France 2030, including improved governance structures, reduces the risk of repeating past mistakes, there remains a risk these plans still fall short of sufficiently raising the country’s growth potential to offset the deterioration in public finances following the Covid-19 shock,” says Lennkh.

Following a period of gradual, albeit sustained fiscal deterioration since the global financial crisis, the Covid-19 shock materially increased the debt-to-GDP ratio to 115.1% in 2020 from around 98% in 2019.

“In view of France’s poor track record of budget consolidation, with the last primary surplus recorded in 2001, raising the country’s growth potential is all the more important to sustaining its elevated public debt levels”, Lennkh adds.

Based on Scope’s estimates, which include a slight upward revision to the country’s growth potential to around 1.5%-1.75%, the debt-to-GDP ratio is likely to hover around 115%-120% over the coming years, as the fiscal deficit is unlikely to decline to levels below 3% of GDP until after 2026.

“France’s public debt trajectory contrasts with that of most euro area peers that will place their debt on a firm downward trajectory over the coming years,” Lennkh adds. “The upcoming elections and the resulting ability of the next government to sustain reform momentum will be critical as meaningful public expenditure reductions are unlikely.”

¹Cour des Comptes (2021), La mise en œuvre du programme d’investissement d’avenir