IMF Urges France to Bolster Reforms and Cut Labour Costs

The International Monetary Fund urged France to become more competitive by "powering up" its reforms programme and bringing down labour costs, in order to close the ever-growing gap between itself and its European counterparts.

Stripping out burdensome regulations from the labour market to planning law will help speed up France's economic recovery, said the IMF, though the recession-hit country will see a gradual turnaround in the second half of 2013.

"The structural challenge faced by France is captured by three related indicators: a declining rate of productivity growth, low profit margins, and a deteriorating export performance," said the IMF in the concluding report of its annual review of the country.

"Developments in these three indicators are closely related: in the face of declining productivity growth, real wage growth has been sustained at the expense of profit margins, which in turn has undermined the capacity of enterprises to innovate and remain competitive in international markets.

"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 fundamental constraint on the ability of enterprises to grow lies in weak profit margins, and rigidities in product and labour markets and not, based on the evidence we have seen, on a shortage of financing."

IMF forecasters predict the French economy to contract by 0.2% in 2013, a cut from their previous estimate of a 0.1% decline.

In 2014, the IMF predicts 0.8% growth, a slash of 0.1%.

France slipped into a double-dip recession - its second such contraction in four years - after GDP declined by 0.2% in the three months to March 31 following the same drop in the fourth quarter.

As with other European states, France is undergoing a strict austerity programme, with spending cuts to government budgets, in order to bolster public finances.

IMF economists said that while the level of France's fiscal consolidation is appropriate, there may be room for it to ease up slightly.

"The stability of public finances requires that the consolidation effort be continued over the medium term," said the report.

"Following three years of substantial fiscal adjustment, there is scope to moderate the pace of consolidation going forward, provided the effort is concentrated on the expenditure and backed by continued structural reforms."

French president Francois Hollande recently warned that unless there is a concerted EU-wide effort to tackle youth unemployment, which has soared since the outbreak of the eurozone crisis amid austerity and financial crisis, the entire European project is at risk of collapsing.

There are 5.7m 16 to 24-year-olds out-of-work in Europe - a rate of 23.5%.

"Remember the post-war generation. My generation. Europe showed us and gave us the support we needed. The hope we cherished," said Hollande.

"The hopes that we could get a job after finishing school and succeed in life. Can we be responsible for depriving today's young generation of this kind of hope?

"Imagine all of the hatred, the anger, it's not anger that we're talking about in fact, it goes more than that. We're talking about a complete breakdown of identifying with Europe.

"What's really at stake here is not just 'let's punish those in power', no. Citizens are turning their backs on Europe and the construction of the European project."

EU leaders are proposing the Youth Guarantee, which would see every under-25 in the EU receive a 'quality offer' of a job, more education, an apprenticeship, or a traineeship within four months of leaving formal education or becoming unemployed.

It could cost as much as €24bn to implement, but its proponents say this is far smaller than the cost of doing nothing, which would lead to lost productivity and increased social security costs.