IMF sees France unable to meet a deficit target of 3% of GDP next year, from 4.5% this year


Bloomberg/Washington

The International Monetary Fund called for wage moderation in France, an overhaul of the country’s labour market and more competition in its services sector as Europe’s second-largest economy loses export market share and faces a “fragile” growth outlook.

“Economic growth remains sluggish and the near-term outlook is subject to downside risks,” IMF executive directors said in a statement released on Friday, a day after meeting to discuss France’s economy. “The main challenge going forward would be to further strengthen the recovery, while addressing the competitiveness gap vis-à-vis trading partners and safeguarding financial stability.”

The annual assessment of France’s policies was accompanied by an in-depth study of its financial sector, also released on Friday, that voices concerns about banks’ reliance on wholesale funding. That could put them in a vulnerable position in case of a crisis of liquidity or of confidence in the euro region, according to the report.

French President Francois Hollande is grappling with an economy that is on the verge of recession and has said that 2013 would be a very tough year, with unemployment, already at a 14- year high, still set to rise. He has also cut payroll taxes and is trying to make the labour market more flexible in an attempt to stem the country’s competitiveness loss.

“The key to improved outcomes in terms of growth and employment lies in reforming the labour market so as to increase the capacity of enterprise to invest, adapt and create jobs,” the IMF staff wrote in the report. “Discussions under way between social partners create a unique opportunity to achieve meaningful reforms in this area.”

With a growth forecast of 0.4% next year, half that of the government’s, the Washington-based IMF sees France unable to meet a deficit target of 3% of gross domestic product next year, from 4.5% this year. The IMF expects a shortfall of 3.5% of GDP instead.

“A more measured pace of fiscal consolidation would have been preferable on cyclical grounds, but market and euro area imperatives have reduced fiscal space,” the IMF staff wrote in the report.