France stands to miss a goal of trimming its public deficit to the EU's target ceiling next year as tax hikes made in the name of fiscal rigor undermine growth, the European Commission said on Wednesday.
The EU's executive arm saw growth in the euro zone's second-largest economy at just 0.4 percent next year - half the 0.8 percent assumed in the 2013 budget and held back largely by tax rises that will hurt consumer spending.
Labour Minister Michel Sapin said the government had faith in its targets and the European Union had not factored in the economic boost from company tax rebates and other measures to spur jobs and investment announced this week.
"The government is right to base itself today on the estimates we have set," Sapin told Reuters in an interview.
"The principle of the competitiveness pact is to drive a bit more investment and a bit more employment," he said of the package, which seeks to ease labour costs by granting companies 20 billion euros ($25.5 billion) in annual tax relief.
The Commission said France's budget deficit would fall to 3.5 percent of gross domestic product in 2013 from 4.5 percent this year, still above the 3 percent EU ceiling that President Francois Hollande has pledged to meet, and would only drop below it in 2014.
"After three quarters of stagnating GDP and historically low levels of corporate profitability, prospects for an imminent recovery have waned," the report said. "Specific downward risks relating to the French economy weigh on the potential recovery."
A government spokeswoman said France's 3 percent deficit target for 2013 was "realistic and ambitious".
But the Commission said tax increases programmed in Hollande's 2013 budget were likely to weigh on consumer spending as well as employment, holding up recovery next year, while declining competitiveness could reduce exports.
The EU outlook matches International Monetary Fund estimates for French growth and deficit reduction and is slightly more optimistic on GDP than an October Reuters poll of economists, which predicted 0.3 percent growth next year.
THE FRENCH PROBLEM
Hollande's fiscal credibility is under scrutiny from investors worried that France's record-low bond yields do not reflect the fragility of its economy, prompting him to unveil a 2013 budget in September he described as France's toughest in 30 years.
It relies on a combination of tax rises for companies and the wealthy and caps on public spending to bring the deficit down by 30 billion euros.
EU Economic and Monetary Affairs Commissioner Olli Rehn told journalists in Brussels the forecast was based on a view that domestic demand would be more subdued than anticipated by the Socialist government, which took office in May.
Rehn welcomed the government's new effort to lower labour costs that companies blame for their waning share of global export markets, calling it "positive and important".
The government believes the measures could add up to 400,000 new jobs over five years and add half a percentage point in GDP to an economy that has been stalled for three quarters.
The fact the tax relief will be financed through a mixture of government spending cuts and small increases in sales tax that will kick in from 2014 should protect public finances and domestic consumption, Sapin noted.
"A part of these 0.5 percentage points will be felt in 2013 and allow us to be not too far from our forecasts," he said.
"Our aim is to reverse the rise in unemployment at the end of next year," Sapin said, asked about the EU's forecast that France's unemployment rate, currently 10.2 percent as jobless claims hit a 13-year high, will hit 10.7 percent next year.
He noted the government hopes to give industry another boost with steps next year towards loosening labour laws that make it hard to hire and fire workers to adjust to the economic cycle.
Under pressure from plant closures looming over the auto and steel industry, Hollande intends to pass laws, with or without a union deal, to simplify redundancy procedures while offering guarantees against sweeping layoffs. "We will legislate, whatever happens," Sapin said.
Sapin said companies should also see some relief in the months ahead from changes to the way welfare is financed, and that the government was not ruling out extending the number of years workers must pay pension contributions before they retire.
In Germany, which racked up a trade surplus of 158 billion euros last year as France's trade deficit hit a record 70 billion, a government advisor said France's competitiveness pact did not go far enough, especially given moves like a new 75 percent tax on millionaires.
"The biggest problem in the euro zone is no longer Greece, Spain or Italy, it is France, because it has not undertaken anything in order to truly re-establish its competitiveness, and is even heading in the opposite direction," Lars Feld said.
"France needs labour market reforms," he told Reuters. "Things won't work unless more efforts are made." ($1 = 0.7840 euros)
(Additional reporting by Emmanuel Jarry in Paris and Sarah Marsh in Berlin; Editing by Mark John/Ruth Pitchford)