US embassy cable - 05PARIS137

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 
------------------------- 
 
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 
--------------- 
 
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