By SARAH DiLORENZO
PARIS (AP) — France needs to step up reforms of its economy and labor market to avoid falling further behind its European neighbors, the International Monetary Fund warned Tuesday as it lowered growth projections for the country.
In its regular assessment of France's economy, the IMF said that it expects the economy to shrink 0.2 percent this year, down from a previously expected fall of 0.1 percent. It expects it to grow 0.8 percent in 2014, just off the previous prediction of 0.9 percent growth.
France's economy fell back into recession in the first quarter of the year, and unemployment is at 11 percent. Edward Gardner, the chief of the IMF's mission to France, said he did not expect unemployment to fall before the end of the year, as promised by the government.
While the IMF report said that France has made some good reforms, it warned that much more needs to be done. Productivity and profit margins have been slipping for a long time in France, but the report noted the gap between France's competitiveness and that of its neighbors is growing. Countries like Spain and Italy have made significant reforms in recent months, especially to their labor markets, and they will soon begin to bear fruit. That will increase the pressure on France to reform.
"We see deep structural issues affecting growth potential in France due to loss of competitiveness as witnessed in losing market shares faster than some of its European partners and rigidities in labor and product markets," Gardner said after the report was released.
He praised two recent reforms: a tax credit that reduces payroll taxes for companies on the lowest salaries and a labor law that will reduce the cost of firing and simplify legal challenges to layoffs.
But he added: "We also consider them to be really initial steps of a process that needs to be deepened and broadened."
France's rigid employment contracts, which make firing expensive and difficult, need to be loosened and more needs to be done to avoid the long legal challenges that often result from firings, Gardner said.
Finance Minister Pierre Moscovici, who met with IMF representatives on Tuesday to discuss the report, said afterward that France had heard the message that more reforms need to be made, including to retirement benefits and the complex regulations weighing on companies.
"The government is carrying out, at the right rhythm, these different reforms," a statement from his office said.
But business leaders have warned that France has built up laws and tax policies that penalize companies for so many years that the government will face an uphill battle to turn around the impression of France as a difficult place to do business.
"It's a question of perception. You have to be positive, welcome investors, make their lives easier, have predictable taxation," Jean-Dominique Senard, the chief executive of Michelin, one of France's oldest and best known companies, warned recently.
"For a long time there has been a sense of battle, of fighting that dominates labor negotiations," he told a group of financial journalists. "And little by little, this has translated into laws that perpetuate the problem."
The IMF report also addressed concerns that France's tax burden is exceptionally heavy and its tax code one of the most volatile in the world.
The report said that while France needs to continue to reduce its deficit, it should focus on cutting spending. So far, the government has mostly relied on tax increases to close the budget hole.
Gardner said that the government can afford to move more slowly with further deficit cuts while the economy struggles, but that it cannot raise taxes anymore. Last week France was given two extra years by the European Union's executive arm, the Commission, to trim its budget deficit — which was 4.8 percent of gross domestic product at the end of 2012 — to 3 percent.
"There is no more scope for increasing the tax burden in France," he said, noting that high taxes are undermining growth and creating uncertainty for consumers and companies that is deterring them from spending and investing.
Associated Press writer Lori Hinnant contributed to this report.
Copyright 2013 The Associated Press.