OECD: France must reform labour market and cut spending

Emmanuel Macron has taken the lead in some polls. [Frederic Legrand - COMEO/Shutterstock]

Labour market rigidity and excessive public spending are among the issues holding back France’s economic recovery, according to an OECD report. EURACTIV France reports

Life may be good in France, but in terms of economic reform, there is still a long way to go. This was the OECD’s conclusion in its “Economic Survey of France 2015,” published on 2 April.

The OECD believes the battle for France’s economic recovery has not yet been won, despite the reforms already undertaken by the government, such as the tax credits for competitively and employment and the responsibility and solidarity pact. The report calls for “an ambitious and credible programme of structural reforms”.

>> Read: OECD more optimistic than Brussels about French growth

The French response to this recommendation may be swift. Emmanuel Macron, the Minister for the Economy, has recently announced his intention to present a second economic bill by the summer. The “Macron 2” bill will continue the structural reform programme begun by “Macron 1,” officially named the Growth and Economic Activity Bill, which aims to relax labour laws.

 >> Read: French attempt to ‘liberate’ the economy ends up adding new regulation

According to the organisation, France can expect to see economic growth of 1.1% this year and 1.6% in 2016. This slow economic progress will “dampen the employment outlook,” causing unemployment to “fall only slightly”.

Good social indicators

Despite the poor economic forecast, levels of wellbeing in France remain high, with relatively low inequality. The quality of life indicators where France particularly stands out among the 34 OECD members are work-life balance and environmental quality.

>> Read: Brussels demands more ambitious reforms from France

The report stated that the French economy has “come through the crisis without suffering too heavily,” and that “in contrast to some other countries in the euro area, the supply of credit does not seem to be constraining economic activity, even for small and medium-sized enterprises”.

Rigid labour market

The country’s major weakness, identified by the OECD, is the rigidity of its labour market; the organisation recommends taking measures to make employment contracts more flexible.

The report encourages France to tackle labour market duality, the division of the workforce into short term and permanent staff that results from overly “long and complex laying off procedures”. It recommends that Paris seek to “simplify and shorten layoff procedures,” while continuing to guarantee “good income protection for workers between jobs”.

Budgetary slippage

Paris is still struggling to bring its budget deficit down below the eurozone limit of 3%, and has recently received another two-year extension from the European Commission.

The OECD put the French budgetary slippage of 2014 down to “disappointing tax receipts, reflecting the combined impacts of weak economic growth and low inflation”.

>> Read: Valls opts for growth over deficit reduction

The report urges France to continue cleaning up its budget, but “at an appropriate and recovery-compatible pace”.

This will involve significant cuts to public spending, which is still too high. At 57% of GDP, it is among the highest levels in the OECD, and is holding back the French economy. 

In 2013, European Union finance ministers gave France a two-year extension to bring its deficit below the EU ceiling of 3% of GDP.

Paris was asked to cut labour costs, reform its pension system and open up its protected markets in exchange for the two-year respite.

The reforms were suggested as part of the European Commission's economic policy recommendations, which are sent to member states each year.

>> Read: Barroso urges ‘credible reforms’ in France in return for deficit grace period

However, France declared last year it would not meet the 2015 deadline, and would only hit the target in 2017.

This placed Paris under the threat of fines, of up to €4 billion.

After examining the situation, the Commission proposed giving the country another two-year extension, until 2017, calling on France to bolster efforts to get its budget back in order.

This triggered sharp criticism from EU budget hawks, including Germany's centre-right.

>> Read: German centre-right ‘disappointed’ over extension of French deficit deadline

French President François Hollande said afterwards that his government would find €4 billion in "new savings" in 2014 to meet demands from Brussels.

>> Read: Hollande pledges €4bn in 'new savings' to meet EU deficit target

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