President Francois Hollande needs to embark on a significant overhaul of French labor laws to prevent the country from falling behind its European peers, the International Monetary Fund said.
“The lack of competitiveness in the French economy is now the major challenge to its macro economic stability,” the Washington-based fund said today in a report. The economic discussion that Hollande has already started “represents a unique opportunity to undertake vigorous reform.”
The annual review of the French economy both sets hurdles for Hollande and gives him political cover as he embarks on an effort to revive French growth amid Europe’s sovereign debt crisis. Hollande’s government received its own set of recommendations from industrialist Louis Gallois earlier today and plans to set out a broad response tomorrow.
The IMF predicts the French economy will expand 0.4 percent next year, half the government’s official forecast. French gross domestic product has failed to rise for three quarters and will probably remain stagnant through the end of this year, according to national statistics office Insee.
“The prospect of a resolution of Europe’s sovereign debt crisis remains uncertain and budget consolidation across the region will continue to depress demand,” the IMF said.
Should European economic weakness persist, the region’s governments should agree to slow their budget-cutting effort to help support growth, in the view of IMF economists.
Labor Market ‘Rigidities’
Even so, the IMF urged Hollande to push ahead with a revamp of French labor rules and to increase competition in the services sector.
“The malfunctioning and the rigidities of the labor market and the service sector are at the core of the competitiveness problem that has gotten worse with time,” the IMF said. “They can only be addressed with a program of very serious structural reforms.”
An increase in income taxes to finance a cut in payroll charges would only have short-term benefits, though an increase in sales tax could work better, the report said. Hollande ruled out an increase in sales tax during his presidential campaign.
To boost job creation, Hollande should consider improving the legal framework that governs job cuts and restrain minimum wage increases, according to the IMF.
“The legal uncertainty” faced by companies “increases the implicit cost of labor and discourages hiring,” the report said. “The level of the minimum wage, its uniformity and its indexation mechanism contribute to the difficulties of poorly qualified workers and youth entering the labor market.”
The IMF praised French banks for improving their solvency ratios and financing structures, while saying they would still be vulnerable if the euro-area debt crisis deepened severely.
“French banks have acted quickly to improve their solvency and their financing structure,” the IMF said. They are in a “better position to face the impact of weak economic growth on their assets, as well as market turbulence, even if their strong exposure to market financing could be a source of vulnerability,” it said.
The IMF recommended that France review the tax treatment of savings in order to ensure “efficient” financial intermediation.