"Strong public opposition to reform"
OECD warns France it must reform welfare system
PARIS, June 16 (AFP) - Market-based reforms are needed across the French economy to tackle chronic unemployment, boost growth and curb overspending so that the country can cope with an ageing population, the OECD warned Thursday.
The OECD, saying that France in some ways was highly productive, also stressed that high deficit spending was worsening prospects for looking after old people.
The 30-country Organisation for Economic Cooperation and Development made its assessment in a hard-hitting review published as a new French government focuses on intractable unemployment.
The report was written before the French resoundingly voted "no" in a May 29
referendum on the European Union constitution, sparking a crisis in France and the EU.
It was subsequently revised in line with OECD procedures and was approved on June 2, the day the new centre-right government of Prime Minister Dominique de Villepin was appointed.
The referendum vote was interpreted as being in part an expression of anxiety among French voters about a trend towards "liberal" or free-market reforms, and the pressure of globalisation, and consequent pressures on the French social model.
The key finding in the OECD summary stated: "France has high productivity per hour worked and a sophisticated social welfare system, but it also suffers from low labour-force participation and high structural unemployment.
"This poor labour market performance contributes to a persistent budget deficit which is exacerbating, rather than alleviating, the fiscal pressures arising from ageing."
The OECD said that the French economy suffered from a range of structural problems, notably complex job-protection and welfare laws, and said that opposition from special but often small special interest groups made reform difficult.
The OECD also said that France's budget deficit may remain above 3.0 percent of gross domestic product this year, despite a payment to the state from state electricity giant Electricite de France to cover future pension liabilities.
The deficit has been in breach of the 3.0 percent of GDP limit set by the EU's Stability and Growth Pact for the past three years but the French government is aiming to bring it back below the limit this year.
France's budget problems resulted from failure to cut its deficit sufficiently during the economic expansion of the late 1990s, the Paris-based organisation said. "There has been no progress on budget consolidation since 1997," it said.
The OECD projected the economy would grow 1.4 percent this year and accelerate to 2.0 percent in 2006.
The country has to tighten control of public spending, cut the number of civil servants and simplify its tax system to promote growth, it said.
High unemployment and low labour force participation contribute to its deficit difficulties.
De Villepin has made reduction of unemployment his government's top priority after French voters said that joblessness was a key reason they had rejected the EU constitution, saying the bloc's expansion a year ago to lower-wage countries was costing them jobs.
The OECD noted that unemployment represented 10.2 percent of the workforce and had not been below 8.0 percent for 20 years, mainly as a result of measures intended to protect workers, such as the high minimum cost of labour and strict employment protection laws.
France needed to relax the degree of employment protection afforded by the standard work contract and limit increases in the minimum wage to those necessary to maintain its purchasing power, it said, referring to a highly sensitive subject which the new government has begun to face by easing aspects of the employment rulebook.
The OECD said France should privatise fully many state-controlled companies.
"The state still maintains its position as the dominant shareholder too often. As a consequence, competition is insufficient in many liberalised network industries because of the dominant position of publicly owned companies," it said.
Public finances were being squeezed by the Pay-As-You-Go pension system because French workers could retire at one of the earliest ages in the OECD area - 59 for men -and they tended to live longer than average.
"Strong public opposition to reform" has allowed the cost of the system to remain relatively high. It will increase further after 15 years "unless further measures are taken," it warned.
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