France needs major reforms to bolster its competitiveness, says IMF in its annual report on French economy; country's labor laws, payroll taxes seen as key challenges

Cindy Allen

PARIS , November 5, 2012 (Thomson Reuters) – France urgently needs to undertake major reforms to boost competitiveness and improve its flagging economic prospects, the IMF said on Monday, as a separate industry review prescribed slashing labor costs.

In its annual report on the French economy, the International Monetary Fund said President Francois Hollande had bolstered his credibility with financial markets with his pledge to cut the public deficit to 3 percent of economic output next year from 4.5 percent in 2012.

However, austerity budgets in France and across Europe are weighing on the bloc's growth outlook, making it even more vital to take steps to bolster economic stability and create jobs.

"(France's) growth outlook is being overshadowed by a significant loss of competitiveness," the IMF said in its report, which landed as industrialist Louis Gallois recommended shock therapy to stem the country's industrial decline.

"This loss predates the current crisis, but there is a risk it will get worse if France does not adapt at the same pace as its trading partners in Europe, notably Italy and Spain," the IMF said.

Echoing Gallois, the Washington-based organization said France should seek to ease its rigid labor regulations, which make it hard for companies to hire and fire workers as business cycles fluctuate, and lighten payroll taxes which are a disincentive to investment.

The IMF repeated a recent plea for France and its European partners to show more flexibility on the pace of deficit cuts and review the timing of deficit targets if economic activity remains weak.

The IMF last month cut its growth forecasts for Europe's second-largest economy to 0.1 percent this year and 0.4 percent in 2013, from 0.3 and 0.8 percent respectively.

Hollande's 2013 budget relies on growth rates of 0.3 percent and 0.8 percent for 2012 and 2013, figures many economists say are overly optimistic.

Backing a call in the Gallois report to balance lower labor charges with spending cuts and higher consumption taxes, the IMF said France should go beyond the spending freeze set out in the budget so that it could ease the burden of high payroll taxes.

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