PARIS France's trade deficit narrowed more than expected in May to 5.3 billion euros due to lower oil prices but manufacturers are still struggling to compete on exports, highlighting a policy challenge for the new Socialist government.
President Francois Hollande, who took power in May, has promised to end France's steady industrial decline - which has culled 750,000 manufacturing jobs in the last decade - but the trade figures showed key sectors such as auto-makers remain under pressure.
The government's problems were also underscored by budget figures for the first five months of 2012 which showed the revenue gap widening to 69.6 billion euros ($86 billion), up 1.2 billion euros year-on-year, as income from corporate taxes slid.
That suggested the previous government of President Nicolas Sarkozy had made scant progress before leaving office toward cutting the deficit to a target of 4.5 percent of gross domestic product (GDP) this year, from 5.2 percent in 2011.
Data from the customs service showed that imports were roughly stable in May at 42.8 billion euros, although a decline in oil prices slashed some 600 million euros from the import bill for hydrocarbons, energy and mining products.
Exports, meanwhile, crept upwards to 37.4 billion euros in May, from 37.0 billion in April, thanks to the completion of large train and naval contracts for the Americas which compensated for a fall in Airbus EAD.PA sales to Asia.
A solid performance from pharmaceuticals and luxury goods also helped to compensate for sustained weakness in manufacturing exports of cars and industrial machines.
"Today's figures confirm the very weakened state of our foreign trade after the last decade," Trade Minister Nicole Bricq said in a statement.
Bricq said the government would insist on toughening EU rules to level the playing field with emerging markets on environmental regulations.
"We cannot accept a decline in our market share of 19.4 percent in real terms over the last five years," she said.
Hollande has said he aims to boost France's industrial competitiveness by increasing investment in research and increasing the flow of credit to small- and medium-sized firms. Economists have said this could take years to have any effect.
PEUGEOT SALES SLUMP
The export weakness was illustrated by PSA Peugeot Citroen (PEUP.PA), Europe's second largest auto maker, which said first-half deliveries tumbled 13 percent as Europe's debt crisis hit demand.
Paris-based Peugeot is preparing cuts expected to include thousands of job losses and closure of its Aulnay plant near Paris. The Socialists are studying a return to state aid for the auto sector and have urged firms not to shut factories.
The data showed that France's exports rose to the troubled southern European economies of Italy and Spain but fell to more robust euro zone partners Germany and Belgium.
Budget figures showed that, while VAT and income tax receipts rose, corporate profit taxes slipped 5 percent to 7.6 billion euros.
The government unveiled 7.2 billion euros of new taxes for 2012 this week, mostly on the rich and on large corporations.
"The second half (of the year) looks challenging," Barclays economists Marion Laboure and Fabrice Montagne wrote, adding the government could hit its target provided economic growth held up and spending was controlled.
This week's measures will also boost revenues by some 6 billion euros next year, but that will cover only a fraction of a 33 billion euro shortfall projected for 2013 if France is to meet its deficit target of 3 percent of GDP.
($1 = 0.8077 euros)
(Reporting By Daniel Flynn; Editing by Ruth Pitchford)