PARIS (Reuters) - Already living in Germany's shadow, the French economy is increasingly losing ground to southern Europe and Spain in particular, despite efforts by President Francois Hollande to claw back France's competitive edge.
Though Hollande has reforms in the works to trim France's high labour costs and introduce more flexibility into the jobs market, the moves stop far short of what Spain has done.
"A lot of adjustment in Spain is the result of the very severe crisis and the very drastic measures to reduce labour costs and make the labour market more flexible," the IMF's France mission chief, Edward Gardner, said.
"In those terms, France has lost relative to Spain in terms of competitiveness," he said.
Unit labour costs, often used by economists as a gauge of competitiveness, have fallen 5 percent in Spain over the last five years while in France they rose 10 percent, according to the Organisation for Economic Cooperation and Development.
The hourly cost of employing a French worker was 34.2 euros (29 pounds) in 2011 and 20.6 euros in Spain, the most recent figures from the Eurostat EU statistics agency show.
With unemployment at 26 percent, some Spanish executives say workers are now much more open to flexible work time and lower starting wages to avoid further job cuts.
Eager to halt France's competitive decline, Hollande is so far banking on 20 billion euros in tax credits to reduce companies' wage bills and a labour market reform that introduces more flexibility for employers.
But the head of the industrial lobby Groupe des Federations Industrielles, Pierre Gattaz, said more still needed to be done especially on public spending, which is second only to Denmark in the rich world at 56 percent of national output.
"Today's public spending is tomorrow's taxes and social charges, and the source of unemployment the day after that," Gattaz said. "As long as we don't deal in depth with this problem, then we will have a terrible tax burden and weak competitiveness."
After the tax credit for companies and labour market reform, Hollande aims to turn next to reforming the pension system. However, he has steered clear of promising deep spending cuts, which could rattle his power base among public sector workers.
FURTHER TO GO
Spain's falling labour costs have not gone unnoticed by French companies, especially its carmakers struggling with depressed demand and high costs at home.
Renault told unions this month it would cut 7,500 French jobs by 2016 by not replacing departing workers. In contrast, it announced plans in November to create 1,300 jobs in Spain after getting pay and working time concessions from staff there.
"I think Spain is going very quickly in the right direction of re-establishing an industrial competitiveness," Renault Chief Executive Carlos Ghosn told Reuters in an interview.
The company, which is 15 percent-owned by the French state, has told French workers to make concessions too to avoid closing plants in France.
Renault is not alone in beefing up its Spanish operations with Ford also shifting jobs from Belgium to Spain, which is already Europe's second-biggest car producer after Germany.
Spain's growing competitiveness is beginning to raise eyebrows in the French government as French firms increasingly struggle to beat out Spanish rivals in international tenders.
"I can see very clearly that they are making staggering bids," Trade Minister Nicole Bricq said, citing contracts in Latin America and tenders for infrastructure.
Though she did not name projects, Bricq visited Colombia and Ecuador in December to lobby officials to support French firms' bids for metros in Bogota and Quito.
France's share of euro zone exports to the rest of the world have fallen from over 15 percent a decade ago to 12.8 percent currently, according to Reuters calculations. Spain has seen its share rise from just shy of 5 percent to 6 percent with much of the increase coming over the last two years.
Moreover, with the euro surging on currency markets, Spanish exporters are able to thrive with a much higher exchange rate than their French rivals, according to a Deutsche Bank study.
It calculates the pain threshold for French exporters is as low as $1.24, well below the euro's current rate above $1.35.
Spanish firms' resistance buckles only once the exchange rate reaches $1.90 thanks in part to low wages and high productivity from the workers lucky enough to have jobs in a country where one out of four people is out of work.
One saving grace for France is that it remains a top destination for foreign direct investment with inflows surging last year. But that does not reflect on its competitiveness and many of those investors are only in France to snatch a share of the euro zone's second largest domestic market.
Spain is not alone in regaining the competitive edge with signs that Italy, Portugal and even Greece reining in wages and improving their trade balances.
"On a purely cost basis, the efforts being made by the problem countries around the Mediterranean -- Italy, Spain, Greece and Portugal -- does put pressure on French tradeable goods and services producers," OECD senior France economist Peter Jarrett said.
France must either increase productivity, hold down wages or move into more innovative markets for higher-quality products not easily reproduced elsewhere, Jarrett said.
"And if they can't do some combination of those three then activity will migrate from France to those countries," he warned.
Gilbert Cette, an economics professor at Aix-Marseille University who advised Hollande on labour reform, said it would take years to see if those measures bear fruit but said France had the advantage that it had started reforms on its own terms.
"They waited until they had their backs against the wall to reform," Cette said. "France is not in a situation of total crisis and yet it is carrying out reforms."
(Additional reporting by Julian Satterthwaite from Davos and Jane Barrett. Editing by Mike Peacock)