Reforms could add 3.7% to French growth over 10 years: OECD

Published Fri, Oct 17, 2014 · 02:53 PM

[Paris] The moribund French economy could get a sharp boost each year over a decade if highly controversial reforms to help businesses are enacted, predictions from the OECD showed on Friday.

Such changes could add 0.4 per cent to economic output every year over the next 10 years, it said, with the total benefit amounting to 3.7 per cent of gross domestic product (GDP).

In the next five years, as the measures take effect, the benefit could equate to 0.3 per cent of output each year, the Organisation for Economic Co-operation and Development said.

The calculations by the Paris-based body, a policy forum for 34 advanced democracies including France, point to a significant extra benefit since France's economy is set to grow by only 0.4 per cent this year.

"To put the French on the path to stronger growth, but also more inclusive, requires the reinforcement of structural reforms started in 2012," OECD Secretary General Angel Gurria said in a statement with the report, which was to be given to President Francois Hollande later on Friday.

France's economic growth has sunk into the doldrums this year, held back by near record unemployment and the government's huge pile of debt, which has put it on a collision course with the European Union.

The reforms are strongly opposed on the left of the governing Socialist party. Hollande is counting on the measures to turn the economy around.

Finance Minister Michel Sapin forecast at the beginning of the month that France's output would grow by only 0.4 per cent this year, recovering to 1.0 per cent in 2015, 1.7 per cent in 2016 and 1.9 per cent in 2017.

Paris also predicts its budget deficit - the shortfall between revenue and spending - will hit 4.3 per cent of GDP next year and only fall to the EU's debt ceiling of 3.0 per cent in 2017, instead of next year as previously promised.

That has put it at loggerheads with the European Commission, the EU's executive arm, which many expect could demand that Paris modify its 2015 budget to bring it in line with rules governing the 18-country eurozone.

Analysts say that a compromise is likely to require France to introduce big reforms of its labour laws.

To turn around its economic fortunes, France must swiftly implement Hollande's "Responsibility Pact" which would strip 50 billion euros (US$64 billion) from public spending, and hand out 40 billion euros of corporate tax breaks with the aim of creating 500,000 jobs, the OECD said.

"In the future, these structural reforms will not only be implemented fully but also expanded, particularly to further reduce the dual labour market, rebalance funding of the pension system and rationalise public spending," it added.

That dovetails with the European Central Bank's message that despite the added measures it is taking to stabilise the eurozone economy, it is up to the states to undertake reforms needed to achieve growth.

ECB board member Benoit Coere, a Frenchman, weighed in Friday on the subject of structural reforms.

Incremental reforms in Greece, Portugal and Spain had the net effect of triggering "a protracted disinflationary process that is still ongoing," Coeure said, speaking in the Latvian capital Riga.

By contrast, quick and deep austerity drives in Latvia and Ireland spurred speedy recoveries from deep recessions in both cases, he said.

"Countries that have enacted a more front-loaded reform strategy have, on the whole, seen better outcomes than those that have applied a more staggered approach," he said.

"Today's low inflation expectations in the region as a whole may indeed be telling us that the approach was on average too staggered, and that it is time to accelerate," he added, without specifying the countries he had in mind. AFP

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