French study urges 30 bn euro cut in labour costs

The French government received Monday a 22-point report on why the economy was unable to compete globally with a key recommendation for a 30-billion-euro ($38 billion) "shock" reduction in labour costs. The document, which highlights an urgent dilemma over how to boost competitiveness, was presented by its author Louis Gallois, former head of the French SNCF railways and of the EADS aerospace group which controls Airbus, to Prime Minister Jean-Marc Ayrault. Gallois said the need of the hour was a "sort of social pact between all the partners," adding that a "shock" reduction in labour costs was needed to kickstart the economy. He proposed reducing cutting employer payroll levies by 20 billion euros and those paid by employees by 10 billion euros over two or three years. This would mean shifting part of the tax burden on to workers by increasing the so-called CSG levy which helps fund the social security system, or increasing the VAT sales tax. The review, commissioned by the Socialist President Francois Hollande and the latest in a line of such reports on what is wrong with the French economy, has been described by the right-wing opposition as a last chance to change direction. Hollande, currently attending an EU-Asia summit in Laos, said his government would "draw all conclusions" from the report. It is known that the analysis by Gallois will focus notably on ways to slash high production costs and boost research and innovation. France's hourly manufacturing costs are 20 percent higher than the eurozone average, according to the EU's Eurostat agency. But ministers have already rejected a suggestion Gallois made in July that what the country needs is a big and sudden "shock" to boost efficiency, saying instead that measures will be spread out over five years. The spotlight is on deep structural reforms which run counter to French habits. But similar reports for the government in the past have tended to be short-lived time bombs which are quietly locked away where they cannot upset the voters. This time the government -- facing a dilemma of dangerously overstretched public finances, anaemic growth and a huge trade deficit -- says the analysis will not be buried. The share of French industry in global trade has shrunk from 6.3 percent in 1990 to 3.3 percent in 2011 as production costs have risen relative to those in other countries, in particular to eurozone neighbour Germany. The government has set a target of eliminating during its five-year term the country's 25-billion-euro ($31-billion) trade deficit excluding energy. The competitiveness pact is shaping up to be a key initiative to rejuvenate the economy as the government is being forced to apply 37 billion euros ($47 billion) in austerity next year to meet the country's EU fiscal targets. With the unemployment rate rising back to 10.0 percent, pressure has been building on the government to act. Industry Minister Arnaud Montebourg, who has been outspoken in blaming globalisation for destroying French jobs and recently launched a "buy French" campaign, said on Monday the government would "study, analyse and respect" the recommendations of the report. "We are in a state of economic emergency and have to take decisions," he told RTL radio, stressing the need for a "national consensus to ensure that production is encouraged in our country and that industry survives rather than declines." Gallois has already enraged unions by suggesting taking the labour cost issue by the horns and cutting payroll levies paid by employers. Business leaders have piled pressure on the government, with the heads of 98 of the biggest French groups calling for a 30-billion-euro cut in welfare charges paid by employers over two years, along with massive cuts in public spending.