IMF warns French economy vulnerable to downturn

AP News
Posted: Dec 21, 2012 5:37 PM

PARIS (AP) — The International Monetary Fund warned Friday that the French economy, the eurozone's second-largest, is vulnerable to a downturn because of its shrinking share of the export market and ossified labor market and urged the government to do more, faster to stay competitive and keep its finances under control.

A day after the French parliament passed a new budget that included a 75 percent tax on those earning more than €1 million ($1.32 million), the IMF's executive board praised the country's efforts to fix its economic problems. But the statement suggested that France's projections of its 2013 budget deficit were too rosy and warned that the country's companies remained at a severe disadvantage to those in other European countries, especially for investment and innovation.

The statement blamed the problem in large part on labor costs, which contribute to low profit margins that discourage investment. It projected unemployment would continue to rise slightly to 10.6 percent in 2013, and economic growth would remain below 1 percent.

France has announced it will reduce employers' contributions to social security, and Socialist President Francois Hollande's contentious budget cut €30 billion ($39.63 billion). But the plan also included a bevy of tax increases, including one on profits from investments that led entrepreneurs to accuse the government of punishing risk-takers, as well as the one on millionaires.

The IMF report called on France to rethink its fiscal policy and lift "rigidities that constrain competitiveness and growth."

In a statement, the Finance Ministry welcomed the report and said that it was largely in line with the government's own diagnosis of its economic problems, but he insisted France was doing what was necessary.

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"Pierre Moscovici underscores the government's determination to maintain the rhythm of reform in favor of more balanced and more evenly fairly growth," the statement said.

A government-commissioned report called last month for a "shock" to the economy that would include major labor reform, but the Hollande government almost immediately softened its response. Unions and companies are currently in discussions to overhaul the labor market, but the issues are touchy and it's unclear how far they can go without sparking labor unrest.