The European Commission told France on Wednesday (29 May) to cut labour costs, reform its pension system and open up its protected markets in exchange for a two-year respite to bring its budget deficit under 3% of GDP. French President François Hollande replied swiftly, saying “the Commission cannot dictate what we should do”.
"The extra time should be used wisely to address France's failing competitiveness," European Commission President José Manuel Barroso told a news conference, saying the message to France was "very demanding".
French enterprises “have suffered a worrying loss of competitiveness in the last decade, indeed we can say in last 20 years,” Barroso said, highlighting the need to make up for lost time.
The EU executive wants France to cut its headline deficit to 3.9% of output in 2013, 3.6% in 2014 and 2.8% in 2015.
The eurozone's second-largest economy was also told to simplify its tax system and focus on regaining lost competitiveness to bring the country back to growth, the Commission said in its annual assessment of EU economies.
France has among the highest minimum wage in Europe, at €1,430 per month, and workers can retire at 62, earlier than Germany’s 67.
The French economy, which has been stagnating since its last recession four years ago, contracted again in the past two quarters while the number of jobless has hit an all-time high, making it impossible for France to bring its deficit below 3% of output this year.
"I believe there is a growing consensus now in France about the need for those reforms," Barroso added, as the EU executive urged eurozone countries to reform labour and services markets and slow debt-cutting.
The Commission warned that it expects France's unemployment rate to be 10.6% this year and keep increasing to reach 10.9% in 2014 – contrary to the government's stated promise of halting the rising trend by the end of this year.
Hollande: ‘The Commisison cannot dictate what we should do’
French officials said they broadly agreed with the Commission's analysis of the state of the French economy.
But they also stressed they had already put reforms in motion and would continue at their own pace, which includes seeking deals between unions and employers to reach as broad a consensus as possible and avoid street protests.
Talks among labour unions and employers to reform the pension system, for instance, will kick off in June and will not be passed into law until the second half of the year, meaning the government cannot yet discuss the content with Brussels.
"The European Commission cannot dictate what we should do, it can only say that France must balance its public finances," Hollande told reporters.
The European Commission said possible measures for the pension reform included adapting indexation rules and increasing the statutory retirement age and full-pension contribution period, "while avoiding an increase in employers' social contributions."
"The pension system will still face large deficits by 2020 and new policy measures are urgently needed to remedy this situation."
Paris has said it can get its budget deficit back in line with targets as early as next year but the Commission warned that would require too much belt-tightening and so threaten an economic recovery.
The French government acknowledged earlier this year that it would not bring its deficit below the EU threshold of 3% of GDP this year and slashed its growth forecasts.
In Brussels, EU officials stressed that the Commission’s country-specific recommendations marked the start of a “dialogue” between EU institutions and France, suggesting there will be some degree of bargaining before the final version is endorsed by EU leaders at their June summit.
As one official put it, the recommendations represent “the end of the bureaucratic exercise” and “the beginning of a political process”.
Ireland, which holds the EU’s six-month rotating presidency, said it will now begin the process of getting EU countries to endorse and adopt the Commission recommendations, with a series of ministerial meetings scheduled over the course of next month.
All these will provide opportunities for France and other countries to water down the recommendations or delay the reforms, with some EU officials warning it could put the credibility of the process at stake.
The recommendations “are not legally binding, but there are consequences if a member state failed to act on the recommendations. Governments could face policy warnings or sanctions in some cases,” the Irish Presidency said in a statement.
The process will culminate with a summit of EU leaders on 27-28 June, which is expected to endorse the recommendations.