Monday

29th Aug 2016

France to reform or fall behind rest of Europe, IMF says

  • Paris: France has 'deep issues' due to loss of competitiveness (Photo: Anirudh Koul)

France will fall behind its European neighbours unless it introduces reforms lowering its labour costs and boosting its competitiveness, the International Monetary Fund has warned.

"Restoring external competitiveness remains a critical priority and should be complemented by developing domestic sources of growth," the IMF said in its annual report on France published on 3 June.

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The French economy is expected to shrink by 0.2 percent this year, slightly more than the IMF forecast last year (0.1%). The Washington-based lending institution also warned France that its economic recovery may be slower than estimated, as "risks of a more prolonged stagnation in Europe remain elevated."

To emerge from the slump and keep up with other eurozone countries currently undergoing deep reforms, France should focus on increasing its competitiveness by lowering its labour costs and boosting its exports.

"A powering up of the reforms launched by the government in the last six months is needed to close this gap (to other reforming countries)," the IMF said.

The French government was also criticised for raising the tax levels on high-earners.

"As the income base on which the social insurance and redistribution system is financed loses buoyancy, the increased tax burden has undermined incentives to create value," the IMF said.

Unemployment - currently at 11 percent - is also expected to rise this year, despite promises made by French President Francois Hollande to reduce it by December.

On the "positive side", the IMF lists France's demographics, high household saving rates, strong scientific research and high-quality public infrastructure.

Last week, the European Commission gave France two more years to bring its budget deficit from 3.7 percent of gross domestic product at the end of 2012 to 3 percent, the EU threshold.

France's plans to reduce the deficit to 3.5 percent in 2014 and under three percent in 2015 are "appropriate" and in line with the EU demands, the IMF said.

But Hollande last week said it was not up to the EU commission to tell France how to reform.

"We have respected our European commitment on deficit reduction. But regarding structural reforms, especially pensions reform, it's for us and only us to say what is the right way to attain this objective," he said.

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