IMF tells France to slow the pace of deficit reduction

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France should reduce spending rather than increase taxes next year to protect a tentative return to growth, the IMF said on Monday (5 August), while warning that unemployment would keep rising this year and next in the eurozone's second-biggest economy.

In a regular review of the €2-trillion economy, the International Monetary Fund maintained its forecast for a 0.2% contraction of output this year despite signs that France is gradually returning to growth in the second half.

It forecast 0.8% growth for 2014.

"The pace of adjustment should be eased in 2014 relative to current plans in order to support the recovery. Adjustment should also be rebalanced toward expenditure containment," the Fund said in its report.

While the government wants two-thirds of the efforts to cut the deficit next year to come from spending cuts and one-third from additional revenues, the IMF recommends keeping only the spending cuts part of the plan.

President François Hollande is banking on a turnaround in unemployment by year-end thanks to state-subsidised jobs and training places. He hopes that would ease the strain on jobless claims totals that hit an all-time record of 3.28 million in June.

He has upped the stakes by making it the top political priority of his Socialist government. "I will be judged on it," he told the nation in a interview last month.

"Taken together, these measures will have a major impact over the period up to the end of the year. It will make itself felt on the unemployment trend," said a government source.

Although Hollande insists the French economy is already pointing up after two successive quarters of slight shrinkage, he accepts that it will still not generate enough growth to create jobs until the second half of next year.

When French children return to school in September, they will be welcomed by an army of 30,000 new classroom minders and playground assistants in many cases taken straight from the dole queues. Such public sector posts are a category of jobs whose average duration will be doubled to 12 months.

Add to these the so-called "jobs of the future" which the government will fund to help unqualified youths aged between 16 and 25 take up jobs in the health, charitable and other non-commercial sectors.

After a slow start, the government estimates 2,500 such contracts are now being signed a week and expects to get close to a year-end target of 100,000.

But the IMF is less optimistic and sees unemployment rising to 11.2% this year from 10.2% in 2012.

Unemployment would peak at 11.6% in 2014 before slightly decreasing to 11.4% in 2015, the IMF said.

"There are signs the French economy is recovering but a stronger and sustained boost to investment and job creation is needed to reduce unemployment," the Fund added.

The IMF also called France to do more to rein in local authorities' spending and carry out a deeper reform of social spending.

While the government plans for France to return to a structural budget surplus in 2016, the IMF considers it will take the country one more year to return to balance.   

The International Monetary Fund urged France in 2011 to take additional deficit-cutting measures to safeguard its AAA credit rating and to undertake structural reforms to improve flagging competitiveness.

Moody's stripped France of its prized AAA badge in November 2012, cutting the sovereign credit rating on Europe's No. 2 economy by one notch to Aa1 from Aaa, citing an uncertain fiscal outlook and deteriorating economy.

The downgrade, which follows a cut by Standard & Poor's in January, was widely expected but was still a blow to Socialist President François Hollande as he strives to convince the world he can fix France's public finances and stalled economy.

Since then France has been trying to revert the loss of competitiveness by timidly adopting structural reforms.

International organisations:

International Monetary Fund: Confidence, Competitiveness Key to Boost Recovery in France (5 August 2013)

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