November 5, 2012 4:59 pm

IMF warning adds to French economy fears

France risks falling behind crisis-hit Italy and Spain if it does not reform its economy, the International Monetary Fund has warned, adding to pressure on President François Hollande to stem the country’s industrial decline.

In its annual report on the French economy, the IMF on Monday called for “a comprehensive programme of structural reforms”.

Predicting economic growth of just 0.4 per cent next year – half the level projected by Paris – the IMF said the outlook was further clouded by France’s “significant loss of competitiveness”.

“[It] could become more serious if the French economy does not adapt at the same pace as its principal commercial partners, notably Italy and Spain, which, after Germany, are engaged in profound reforms of their labour and service markets,” the IMF said.

The warning coincided with the release of a much-anticipated report by Louis Gallois, former chief executive of aerospace group EADS, who made what he called a “severe diagnosis of the decline of French industry”.

His report, commissioned by Mr Hollande, said the Socialist government should cut €30bn or 1.5 per cent of gross domestic product in social welfare costs on labour within two years to “stop the decoupling” of the French economy from its competitors.

Mr Gallois put the proposal at the centre of his recommendations despite strong signals from ministers that they were reluctant to take such drastic action. “It is what I call a competitiveness shock – a shock of confidence . . . [to] stop the slide and support investment”, he said.

Mr Hollande, attending an Asian-European summit in Laos, said “strong decisions will be taken”. His government is due to give its full response to the Gallois report on Tuesday.

Many of the 22 recommendations set out by Mr Gallois chimed with the government’s own emphasis on long-term measures to deepen investment, innovation and research; strengthen links between France’s successful multinational companies and domestic suppliers; and support the development of small and medium-sized businesses.

Mr Gallois was also pushing on an open door in supporting worker representation on the boards of companies with more than 5,000 employees.

But his core proposal to reduce France’s high labour costs by cutting €20bn in social welfare charges borne by employers and €10bn in those paid by employees, has unsettled the government.

Ministers have voiced their reluctance to increase other taxes instead, as proposed by Mr Gallois, for fear of hitting consumption and pushing the economy into recession.

The government has also been reluctant to commit to deeper cuts in France’s huge public spending bill to pay for a reduction in labour costs. The IMF said “the quality of budget adjustment would be improved” by deeper spending cuts, adding that big tax increases for 2012 and 2013 “further reduced incentives to work and invest and put France in a position of competitive disadvantage vis-à-vis its peers”.

The head of the IMF, Christine Lagarde, was finance minister of France under Mr Hollande’s centre-right predecessor, although IMF reports of its members’ economies are written by fund staff.

Mr Gallois was also set to be rebuffed over his call for further research into the exploitation of France’s big deposits of shale gas – seen by many in business as an opportunity for the country to emulate the recent boost the energy resource has given the US economy. Mr Hollande has refused to allow development of shale gas using the extraction technology of “fracking”.

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