2004: FRENCH MACROECONOMIC PERFORMANCE

UNCLAS SECTION 01 OF 02 PARIS 000137

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR E, EB, EUR
TREASURY FOR DO/IM SOBEL, RHARLOW, LHULL
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR PBIO
SUBJECT: 2004: FRENCH MACROECONOMIC PERFORMANCE



1. SUMMARY: France enjoyed a moderately good year in 2004
in terms of macroeconomic performance, advances in economic
policy, and economic stability. Job growth remains the
economy's major weakness, but modest GDP growth did help the
government to maintain fiscal restraint and the private
sector to post respectable gains. END SUMMARY

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MACROECONOMIC PERFORMANCE
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2. Although it will be a while before the GOF finalizes all
official statistics, preliminary estimates indicate France
enjoyed a relatively positive year in 2004. Gross domestic
product (GDP) totaled around 1.5 billion euros. The
estimated real (inflation-adjusted) growth rate of 2.1
percent would be the best performance since CY 2000,
although such growth lags behind the U.S. figure of 3.9
percent annual GDP growth. Despite an environment prompting
households to exercise caution, consumption is thought to
have increased around 2.1 percent, slightly faster than
purchasing power (which increased around 1.6 percent
compared with 0.5 percent in 2003),primarily due to
increased expenditures for manufactured goods. Unemployment
remained stable but high at around 9.9 percent. Inflation
edged up to around 2 percent. In 2004, France registered a
small trade deficit (2 billion euros in the first ten
months). Imports rose steadily, but exports increased only
moderately, mainly due to the higher euro.


3. Central government spending was flat. Public sector
debt increased only slightly, but remained high at 64
percent of GDP. The public deficit was 3.6 percent of GDP
(versus an EU target of 3 percent).


4. As for financial markets, at year-end 2004, Euronext
(the conglomerate owning the Paris, Amsterdam and Brussels
stock exchanges) ranked fifth among world markets with a
stock-market capitalization of USD 1.8 trillion, and in
recent weeks has tabled an offer to buy the London stock
exchange. The CAC 40 index posted a 7.9 percent growth rate
for the year, and finally regained and surpassed the market
value it had lost in the 2000-2001 recession. At the end of
December 2004, the total market capitalization of the 1,333
companies listed on Euronext was up 9.1 percent over 2003.

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ECONOMIC POLICY
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5. The key features of France's economic policy in 2004
included the GOF's effort to restrain central government
spending, and the cautious continuation of its "partial
privatization" policy (not necessarily selling outright
state-owned enterprises, but opening up firms to private
investors, even to the extent of ceding majority shares).
The Prime Minister heralded health care reform as a major
achievement in 2004, although under the bill passed, the
French health care system is not supposed to achieve
financial balance until 2007. Late in the year (subsequent
to significant gains by left-leaning parties in local
elections),the GOF trumpeted "social cohesion" as a major
goal. The term social cohesion is the French right-of-
center equivalent to "compassionate conservatism," involving
projects aimed at breaking down ethnic ghettos, integrating
immigrants, overcoming poverty, reintegrating troubled
neighborhoods, and fighting against gender discrimination.
The bill envisions spending 13 billion euros over five
years. Since the "social cohesion" bill passed late in the
year, no major social projects were begun in 2004, and the
GOF made no measurable progress in the bill's chief
performance indicators, namely reducing unemployment and
alleviating the lower-income housing shortage.

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COMMENT
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6. 2004 was a mixed year for the French economy. Modest
growth was an improvement over previous performance, but
employment, the Euro/dollar relationship, domestic demand
and the public deficit remain areas of concern. Economic
reform steps were modest, and France continues to advance
its privatization agenda, if cautiously. Government
officials predict 2005 growth of 2.5 percent, although most
economists foresee growth more on the order of two percent.
The key area to watch is whether, as the 2007 presidential
elections get closer, the GOF is prepared to tackle
remaining economic reforms.
LEACH