By Nicholas Vinocur
PARIS (Reuters) - French unions rejected a proposal for labor reform from employers on Thursday because it failed to improve job security, a sign that a deal seen as crucial to reviving the economy is unlikely by the government's year-end deadline.
The Socialist government has pledged to submit a labor reform to parliament early next year even if unions and employers cannot clinch an agreement, but failure in the talks would damage its credibility and strain relations with unions.
"As things stand at the moment, it will be very, very tricky to reach a deal," said Agnes Le Bot, a negotiator for the CGT union, France's second largest.
The government wants as many as possible of the five unions involved in the talks to sign a deal to lend it political legitimacy and reduce the chances that left-wing groups in parliament will seek to water it down.
Three moderate unions are expected to cooperate but experts say the signature of at least one of the two remaining hardline unions is desirable. Given that the Communist-backed CGT is unlikely to sign any deal, attention is focused on the FO union.
If a majority of unions oppose a deal, the talks will be seen to have failed.
Pressure to rescue a declining industrial sector and revive exports has pushed President Francois Hollande to undertake a series of pro-competition reforms, including a 20-billion-euro tax credit for corporations to ease their costs.
In addition to shoring up the economy, the competitiveness package aims to reassure holders of French debt and its main economic partner in the euro zone, Germany, that France's ultra-low borrowing costs are justified.
Yet observers including credit ratings agency Standard & Poor's and the International Monetary Fund say that France will not regain a competitive edge unless labor rules are relaxed.
Echoing the concerns, an economic adviser to German Chancellor Angela Merkel told Reuters last week that France was now the euro zone's biggest problem.
Employers and analysts agree that highly protective labor laws act as a brake on hiring and investment because companies cannot adjust their wage burden easily during a downturn.
Calling for an "historic deal", the government has urged the parties to conclude their talks by end-2012 with a view to sending a draft law to parliament early next year.
"This time frame is unrealistic," said FO's Stephane Lardy. "They must stop talking about historic deals and let us work."
Parties have fallen behind schedule, with a round of talks on November 22 cancelled and only four sessions left before year-end, meaning the government may have to extend its deadline.
"There's an enormous amount of ground to cover," said Bernard Vivier, head of the IST labor think-tank. "Some points are extremely sensitive for unions and they won't concede anything easily."
Employers want to change the regulations governing layoffs by capping compensation and reducing the maximum period in which workers can contest them to one year from up to five at present.
They also want to make France's standard permanent job contract, the "CDI", more flexible.
Hardline unions CGT and FO say they will resist any dilution of their legal powers to contest layoffs or changes to the CDI. But the moderate CFDT - the largest - said it would consider all options in exchange for greater job security.
(Additional reporting by Jean-Baptiste Vey; Editing by Mark Heinrich)