France vows 'tough decisions' to revive economy

President Francois Hollande pledged "tough decisions" after his government was Monday urged to cut labour costs by 30 billion euros ($38 billion) and the IMF warned that poor competitiveness was the French economy's biggest problem. "Tomorrow the government will draw conclusions from the Gallois report and tough decisions will be taken," the Socialist president said, referring to a 22-point report by Louis Gallois, former head of the EADS aerospace group. But he tempered expectations of radical reform by stressing the need for a "holistic policy" in his comments to reporters in the Laotian capital Vientiane, where he is attending an EU-Asia summit. Hollande, faced with dangerously overstretched public finances, anaemic growth and a huge trade deficit, ordered the Gallois report to find ways to restore French industry's competitive edge. France's share in global trade has nearly halved since 1990 and its hourly manufacturing costs are a fifth higher than the eurozone average. Gallois, who presented his report to Prime Minister Jean-Marc Ayrault, proposed loosening labour laws and slashing employer payroll levies by 20 billion euros and those paid by workers by 10 billion over two or three years. This would mean shifting part of the tax burden on to workers by increasing the so-called CSG levy which helps fund the social security system and by increasing the VAT sales tax. "The French must back this collective effort," Gallois told reporters as he left the prime minister's office, appealing to his compatriots' "patriotism." His report is the latest in a long line of such reviews of what is wrong with the French economy, which have tended to be quietly locked away where they cannot upset voters. Critics say this is likely to happen again as Hollande, whose opinion poll ratings have plummeted since he was elected in May, seeks to avoid controversy. His ministers have already rejected a suggestion Gallois made in July that what France needs is a sudden "shock" to boost competitiveness, and instead signalled a "competitiveness pact" made up of measures to be spread out over five years. On Monday, just hours after the report was handed in, the prime minister's office said that one of its proposals -- on the exploitation of shale gas -- would definitely not be taken on board. The leader of the main centre-right opposition party, Jean-Francois Cope, said he fully backed Gallois' proposals and urged Hollande to find the "courage" to implement them immediately instead of over five years. "He is now at the crossroads. This is a real turning point in his mandate," he said. The International Monetary Fund echoed that view on Monday in its annual report on the French economy that said the "competitiveness gap emerges as the main challenge for macroeconomic stability, growth, and job creation". It said France must act or risk falling further behind its European neighbours. "The (French) government has rightfully launched a broad debate on the subject and has engaged social partners in a dialogue on critical reforms. This creates a unique opportunity to achieve meaningful reforms," the IMF said. The pressure on Hollande to act on competitiveness comes as the unemployment rate has risen to 10.0 percent and his government tries to find 37 billion euros to squeeze the deficit down from this year's target of 4.5 percent to 3.0 percent next year. Business leaders have also urged action. The heads of 98 of the biggest French firms have called for a 30-billion-euro cut in welfare charges paid by employers over two years, along with massive cuts in public spending. Gallois' argument that the labour cost issue can be resolved by cutting payroll levies has angered unions. Another of his recommendations calls for worker representation on the boards of companies with more than 5,000 employees.