France embraces shock therapy for ailing economy

France unveiled Tuesday tax breaks for businesses worth up to 20 billion euros a year in a bid to address the flagging competitiveness at the heart of the country's economic malaise. "France needs a new model that will put it back at the center of the world economy," Prime Minister Jean-Marc Ayrault said, adding the government had decided to implement virtually all of the measures recommended in a report drawn up at its request by industrialist Louis Gallois. Designed to offset the high payroll taxes that have dulled the competitive edge of French companies both in the world and the eurozone, the tax credits will be financed by a combination of cuts in public spending and increases in sales taxes (VAT). The measures announced Tuesday follow a stark warning from the International Monetary Fund that France must implement a program of radical structural reform or risk falling behind neighbors like Italy and Spain who have been forced into reform as a result of the eurozone debt crisis. Despite a grim depiction of the current situation, the prime minister insisted that the administration was capable of emulating countries like Sweden by reforming its economy without dismantling its social welfare system. "France is not condemned to an inevitable spiral of decline but a national shock is essential if we are to retake control of our destiny," Ayrault said. Gallois, the former head of the aerospace giant EADS, recommended in his report a "shock" to reduce the cost of doing business in France with a 20-billion-euro cut in the contribution by companies to finance the country's generous social security system and health service. He told Agence France Presse he was happy with the response to his report. "The government has faced up to the problem of France's competitiveness," he said. A proposal from Gallois to cut employees' contributions by 10 billion euros was not however adopted by the government and employers' demands for reforms that would make it easier to hire and fire went unheeded. Reducing employee's social contributions would have given a further boost to the competitiveness of French firms by enabling employers to pay lower wages without reducing the take-home pay of workers. France's hourly labor costs in the manufacturing sector are a fifth higher than the eurozone average and the high cost of employment is seen as having helped drive unemployment up to near record levels of just over three million people, equivalent to around 10 percent of the workforce. Ayrault said later the tax credit should create up to 400,000 jobs and 0.5 percentage points to the country's growth rate by 2017. Finance Minister Pierre Moscovici said the reforms would make it easier for France to cut its deficit, which it must do to comply with eurozone rules despite economic growth having stalled. The measures were also given a welcome in Germany, where a government source noted that: "All measures which improve competitiveness are important for securing the future of the euro." The tax breaks will take the form of credits applied to company earnings from next year and will have an impact on public finances from 2014. They will be phased in progressively with the cost of them reaching 20 billion euros per year by 2016. To finance the tax credits, France's standard rate of VAT will rise from 19.6 to 20 percent from January 1, 2014. An intermediate rate of 7.0 percent, which notably applies to meals in restaurants, will rise to 10.0 percent at the same time. The minimum rate, which applies to food bought from shops and domestic energy supplies, will be cut from 5.5 to 5.0 percent in order, Ayrault said, to ensure that the poorest families were not penalized by the rise in taxes. The government also announced plans to cut 10 billion euros from public spending in 2014-15 and said it would introduce new green taxes from 2016 which will boost the public coffers by three billion euros per year. A new 500-million-euro fund is to be established to support small and medium-sized businesses.