OECD slates feeble French budget cuts

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The Independent Online
The French government's economic policies came in for unusually severe criticism yesterday in the annual review of the economy published by the Organisation for Economic Co-Operation and Development (OECD).

The Paris-based body, which groups the leading industrial countries, says the reason the franc comes under pressure in the foreign exchange markets is the unsatisfactory structural reform of the French economy.

In contrast to many French economists, it does not blame the franc fort policy of maintaining a close link with the German mark through high interest rates. A rapid move to a single European currency would bring France significant gains, the report concludes. Monetary union would bind the country to a more credible monetary policy and allow lower interest rates. Last week saw the fifth bout of severe exchange rate turbulence since the dramatic strains on the Exchange Rate Mechanism in September 1992.

The OECD report, whose publication has been postponed since before the May presidential election, says the government will need to make big cuts in public spending if it is to meet the Maastricht target of a budget deficit equivalent to less than 3 per cent of GDP by 1997, the single currency deadline. Written before the budget presented by the Prime Minister, Alain Juppe, last week, the report says French efforts to cut the deficit have been feeble compared with other countries.

The organisation's criticisms of French economic policy are outspoken, although it is well known for its free-market views. Its annual reports are funded by member governments and are generally more sympathetic.

The assessment points out that tax revenues grew by more than expected last year, but that the extra money has been used to raise spending rather than to reduce the government shortfall. To make the kinds of savings that are required, the government will have to attack the government wage bill and social security programmes, it says.

The report points out that France has proportionately more public sector employees than any of the other 24 OECD members. In addition, public sector wages have risen faster than pay in the private sector in recent years. Mr Juppe's pledge last week to restrain civil service pay led to a strike call for 10 October.

French governments havelimited the growth of spending on health and pensions in recent years. But the report concludes: "There is a clear need to pursue reforms of the social security system vigorously."

It says deregulation of the labour market has not moved fast enough. The unemployment rate stands at 11.4 per cent, well above the OECD average of 8 per cent. Last year more than half of all young people were out of work. A high minimum wage accounts for the high rate of youth unemployment, says the organisation. The French minimum is the second highest, relative to average wages, in the OECD, and the highest for young workers.

The good news, yesterday's report concludes, is that the economy will grow at a fast enough pace in the next two years to make painful structural reforms a little easier.

Currencies, page 18