Analysis: Hollande's softly-softly plan needs tough execution

Tue Nov 20, 2012 7:13am EST
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By Catherine Bremer

PARIS (Reuters) - After six months keeping the world guessing about whether he had a vision for fixing France's sickly economy, President Francois Hollande has unveiled a battle plan "à la française" to ease companies' labor costs and trim public spending.

But the softly-softly pace of adjustment may be too slow to satisfy financial markets after Moody's on Monday became the second credit ratings agency to strip Paris of its AAA rating, citing both a loss of competitiveness and low growth.

Hollande's "competitiveness pact" aims to create 300,000 jobs and lift output by half a percent over five years by granting 20 billion euros a year in corporate tax relief and pruning public spending by 1 percent.

The measures will be funded by modest sales tax rises from 2014, sparing households immediate pain. Tweaks to labor laws will follow next year to make hiring and firing somewhat more flexible while extending the length of job contracts.

The plan is bold for a left-wing French government, yet it falls short of what business leaders wanted and critics say it may be too timid to pull the economy out of decline in time.

Moreover, a key plank - spending cuts of 12 billion euros a year - will require sharp reductions in welfare payments or local government, hard to sell to a parliament full of mayors and civil servants, and an electorate including more than 5 million public sector workers.

"We've taken a big step forward but we've lost time. We should have started two months ago," said a government source. Some in Hollande's team had nudged the president to move sooner but found that "he does not like to be rushed".

"Hollande has not said where the 12 billion euros will come from because he doesn't know. None of us knows. There would be a lot of resistance to public sector cuts," the source said.   Continued...

France's President Francois Hollande speaks at a news conference at the end of the first session of a two-day European Union (EU) leaders summit in Brussels October 19, 2012. REUTERS/Christian Hartmann