PARIS (Reuters) - France must lower labor costs, open up regulated professions, deepen its labor and business reforms and cease tax hikes to get back to growth and bolster competitiveness, the IMF said on Tuesday.
A day after slashing its growth forecast for Germany, the International Monetary Fund said that France was set to contract slightly more than its current forecast and that unemployment would keep rising in spite of the government's promise to reverse the jobless trend by year-end.
"The number of reforms initiated in the last six months speak well of the government's understanding that France needs to be reformed," the IMF's Mission Chief for France, Edward Gardner, said, adding: "It's a first step in a long process."
The Fund urged France to remove constraints on housing construction and push for more negotiations at enterprise level. It also suggested giving the competition authority more power to review all sectors of the economy and push to remove regulatory obstacles.
With rising youth unemployment a growing concern throughout Europe, the Fund said more instruments should be found to lower the effective cost of hiring young workers.
Gardner said that could include a lower minimum wage or more flexible contracts, an idea that has been fiercely opposed by young people and unions in the past.
Regarding structural reforms, the IMF stressed that France's focus should be on reining in public spending.
"Following three years of substantial fiscal adjustment, there is scope to moderate the pace of consolidation going forward, provided the effort is concentrated on expenditure and backed by continued structural reforms," it said in a regular review of France.
The IMF's report said the French economy would start turning around in the second half of 2013. On Monday, the Fund halved its 2013 forecast for Germany based on uncertainty in other euro zone economies, including neighboring France.
It trimmed its forecast for France to a contraction of 0.2 percent this year from a previous forecast of -0.1 percent and predicted growth of 0.8 percent next year, down from a previous estimate of 0.9 percent.
But Gardner warned that one of the main downside risks for France was the lack of household and business confidence, adding that uncertainty over taxes was weighing on that.
"There is no more scope for increasing the tax burden, not only because it has reached very high levels which are distorting incentives and in the end undermining growth," he said. "But also the perception that taxes are the instrument of adjustment ... is creating a lot of uncertainty ... undermining consumer confidence and enterprise investment capacity."
The Fund said risks to financial stability had abated considerably as banks had repaired their balance sheets, but it noted banks still had some way to go in increasing their liquidity buffers and improving net stable funding ratios.
"This requires a move toward more market-intermediated credit and higher deposit collection," it said.
France entered a shallow recession in the first quarter as weak exports, investment and household spending caused a 0.2 percent contraction.
Editing by Catherine Bremer