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France urged to cut public spending

France may suffer less than other developed countries from the credit crunch, but needs to reduce its public deficit, increase employment and enhance competition if it is to fully revive its private sector, according to a report from the Organisation for Economic Co-operation and Development (OECD).

The OECD predicts France’s GDP will shrink by 3.3% this year and by 0.1% in 2009, according to its Economic Outlook database. More optimistically, in its latest World Economic Outlook, the International Monetary Fund predicted France’s economy, the world’s fifth largest, would shrink by 1.9% this year and grow by 0.7% next year.

The OECD praises France’s economic stimulus package, adopted at the start of the year, which amounts to 1.5% of GDP. The measures are “fairly well targeted,” says the report: “aimed primarily at the productive apparatus and designed, on the one hand, to relieve the liquidity constraints that suddenly confronted SMEs [small and medium-sized enterprises] and, on the other, to speed investment in various infrastructure projects.”

France’s banks, meanwhile, are in a better position than in many other countries because of diversified business activities and “more defensive prudential lending standards”.

However, the OECD issues dire warnings on France’s public finances, with public debt at nearly 70% of GDP. It takes the government to task, saying that “government expectations for public deficit have hardly ever been achieved”. In the traditionally socialist country, the OECD says government spending must be controlled and local taxation overhauled.

It notes that after shrinking from 4.1% to 2.4% of GDP between 2003 and 2006, the general government deficit again widened in 2007 because expenditure was not cut to match a drop in revenues resulting from tax reform.

The French authorities now predict a deficit close to 5.6% of GDP in 2009 and 5.2% in 2010. “It is difficult to foresee a market improvement in the deficit before 2011, if by then, unless further tightening measures are taken,” says the OECD.

Meanwhile, to enhance competition both between French businesses and in the international arena, France should remove barriers in the shape of regulations applied to certain professions and rules on terms of sale between suppliers and distributors, the report argues.

It should also moderate the minimum wage to make labour cheaper, make it easier to fire workers while maintaining unemployment insurance, and increase incentives for over-55s and over-60s to work, says the OECD. This would help cut France’s unemployment rate, one of Europe’s highest. The report is critical of the legally mandated 35-hour working week.

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