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June 26, 2017

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Hollande's tender plan needs tough execution

PARIS -- After six months keeping the world guessing about whether he had a vision for fixing France's sickly economy, President Francois Hollande has unveiled a battle plan "a la francaise" to ease companies' labor costs and trim public spending.

But the softly-softly pace of adjustment may be too slow to satisfy financial markets after Moody's on Monday became the second credit ratings agency to strip Paris of its AAA rating, citing both a loss of competitiveness and low growth.

Hollande's "competitiveness pact" aims to create 300,000 jobs and lift output by half a percent over five years by granting 20 billion euros a year in corporate tax relief and pruning public spending by 1 percent.

The measures will be funded by modest sales tax rises from 2014, sparing households immediate pain. Tweaks to labor laws will follow next year to make hiring and firing somewhat more flexible while extending the length of job contracts.

The plan is bold for a left-wing French government, yet it falls short of what business leaders wanted and critics say it may be too timid to pull the economy out of decline in time.

Moreover, a key plank — spending cuts of 12 billion euros a year — will require sharp reductions in welfare payments or local government. This is hard to sell to a parliament full of mayors and civil servants, and an electorate including more than 5 million public sector workers.

"We've taken a big step forward but we've lost time. We should have started two months ago," said a government source. Some in Hollande's team had nudged the president to move sooner but found that "he does not like to be rushed."

"Hollande has not said where the 12 billion euros will come from because he doesn't know. None of us knows. There would be a lot of resistance to public sector cuts," the source said.

Most economists have applauded Hollande's move to embrace reform, despite muttering from Berlin that the measures should be bolder.

But they say success, in the face of stalled growth and rising 10 percent unemployment, depends on Hollande being able to implement all his plans — corporate tax relief, labor reform and spending cuts — to the letter.

That will hinge on acquiescence from a disgruntled public, on the eurozone avoiding further crisis or a deeper lurch into recession, and on investors keeping French borrowing costs low.

"If he can meet all these commitments it would be remarkable and he could really make a difference. If he only partially meets them the results are harder to predict," said Elie Cohen, an economist who advised Hollande during his election campaign.

Cohen sees a risk of France being sucked into the sort of downward spiral that has afflicted Greece, Portugal, Spain and to an extent Italy.

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