France set for slow recovery, weak employment - OECD

PARIS, April 11 Mon Apr 11, 2011 8:30am BST

PARIS, April 11 (Reuters) - Unemployment in France will remain high despite a moderate economic recovery over the next two years and the government needs to explain exactly how it plans to meet deficit cutting targets, the OECD said on Monday.

In its annual report on France, the Organisation for Economic Co-operation and Development said growth in gross domestic product was set to increase slightly from 1.5 percent in 2010 to 1.6 percent this year and 2 percent in 2012.

"While a faster recovery abroad could lead to more robust growth in France, bond-market tensions in Europe's periphery might weigh on investment and consumption prospects," the OECD noted in the 164-page report.

As with most EU countries, French banks' exposure to countries at the centre of the debt crisis was a source of uncertainty and required greater vigilance, it said.

Despite the modest recovery, unemployment would decline only slightly from 9.7 percent in 2010 to 9.3 percent by 2012. Underlying inflation would remain well below 2 pct through 2012.

President Nicolas Sarkozy's conservative government was on track to meet a target of cutting its deficit to 6 percent of GDP this year, from around 7.4 percent in 2010, the OECD said.

Finance Minister Christine Lagarde said on Friday France would go further and cut its deficit to 5.7 percent this year.

If the government sticks to its plan to reduce the deficit to 2.0 percent of GDP by 2014, that would stabilise France's debt at around 90 percent of GDP, the OECD said.

"It is important that the government announce specifically how it intends to achieve its medium-term objective, and that it follow through with implementation," the report said.

It called for the government to pare back expenditure, particularly via reform of the pensions system and the healthcare system, which accounts for 17 percent of spending, and by rationalising regional government bureaucracy.

Sarkozy's government should also extend its policy of replacing only one of every two civil servants who are retiring.

RISK OF HOUSING BUBBLE

Despite popularity mired near record lows ahead of elections next year, Sarkozy has said that reducing the budget deficit is a top priority and his government seeks to make France's cherished AAA sovereign rating beyond any doubt.

France's debt ratio to GDP has quadrupled since the 1970s to more than 80 percent. Reducing that to 60 percent by 2030, for example, would imply a consistent primary surplus, something France has not achieved in recent decades, the OECD said.

France has greater scope than most European countries to increase its collection of VAT, which would allow it lower labour taxes which were blocking employment. It should also consider more taxation on housing and environmental taxes.

After the Constitutional Council blocked Sarkozy's attempt to impose a carbon tax, the OECD urged France to pursue the measure at a European-wide level.

The OECD also urged the government to press ahead with constitutional reform to include rules on budgetary balance. It called for an independent fiscal council to assess the projections underlying the budget and monitor implementation.

In the housing sector, the OECD noted that prolonged low interest rates had helped to turn around a drop in prices.

"The market would probably be vulnerable if rates were to go back up ... and there is a risk that a prolonged period of easy finance could result in a price bubble," it said.

The European Central Bank raised interest rates by a quarter-point on Thursday, but rates still remain well below levels prior to the financial crisis.

With 5 percent of the French population lacking adequate housing, the government should improve landlord rights to boost the rental market, improve land use to stimulate construction and reduce the costs associated with buying property. (Reporting by Daniel Flynn; Editing by Jon Loades-Carter)