Sunday

20th Aug 2017

IMF warns France on falling behind Italy and Spain

  • Francois Hollande was elected on an anti-austerity ticket, but has to deliver on spending cuts (Photo: Francois Hollande)

The International Monetary Fund (IMF) has warned France it needs to cut labour costs and taxes or else risk falling behind Italy and Spain, which are undergoing deep reforms.

"The growth outlook for France remains fragile reflecting weak conditions in Europe generally, but the ability of the French economy to rebound is also undermined by a competitiveness problem," the IMF wrote in its annual country review published on Monday (5 November).

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The recent tax hikes on high earners - a campaign promise of Socialist President Francois Hollande - is not going to help France regain competitiveness compared to other EU countries, the Washington-based body warns.

"Combative" rather than "co-operative" relations between trade unions and employers, high social security contributions and a system where hiring and firing is very difficult all add up to a costly labour market in need of reform.

"The loss of competitiveness predates the crisis, but risks becoming even more severe if the French economy does not adapt along with its major trading partners in Europe, notably Italy and Spain which, following Germany, are now engaged in deep reforms of their labor markets and services sectors," the IMF says.

With meagre growth (0.1% this year and 0.4% in 2013), budget cuts have to be carried out carefully, so as not to hamper incentives for innovation and jobs. The same advice is valid for the whole EU, with the IMF suggesting that EU institutions and governments "review jointly the speed of fiscal consolidation at the European level, with a view to providing more support to the recovery."

The IMF recommendations were echoed by another report out on Monday, drafted by former arms firm EADS chief Louis Gallois, which advocated shock therapy to stop the country's industrial decline.

French payroll taxes should be cut by €30 billion over the next two years, Gallois said in his report - commissioned by Hollande - on what the country needs to do to catch up with Europe's powerhouse, Germany.

He also suggested a VAT increase, more cuts to public spending and less red tape when it comes to start-up businesses.

Hollande is expected to react to the report on Tuesday.

His social affairs minister Benoit Hamon on Monday said that the Gallois paper is a "contribution," but ultimately it is the "government that governs."

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France's Socialist government on Friday unveiled €30bn worth of spending cuts and tax hikes, including a 75 percent tax rate on millionaires.

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Moody's on Monday became the second ratings agency to strip France of its top rating, citing continued economic woes and lack of competitiveness.

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Confident that France will "fulfil its obligations" and with Greece off the hook for now, Germany's finance minister Wolfgang Schauble has cast a glimmer of hope for 2013.

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