IMF warns over-taxed France risks slipping behind Italy and Spain

Throwing the guantlet at the feet of the Socialist president Francois Hollande, the IMF said rising tax rates are undermining France as a place “to work and invest” and leading to a “significant loss of competitiveness”, reports The Telegraph.

“There is a risk it will get worse if France does not adapt at the same pace as its trading partners in Europe, notably Italy and Spain,” it said.

The IMF challenge had an added piquancy coming from a body headed by France’s Christine Lagarde, widely touted as the next Gaulliste leader and a future rival for the French presidency.

The warning came as French industrialist Louis Gallois delivered a long-awaited report to Mr Hollande calling for “shock therapy” to stop the national rot, with drastic cuts in business payroll taxes to claw back loss ground against Germany and other EMU states.

Mr Gallois, ex-head of the EADS aerospace group and a revered figure in France, said all parties need to unite in a patriotic push to save the nation.

His report listed 22 measures. These include a €30bn cut in payroll levies, worth 1.5pc of GDP, to be offset by a higher VAT and other consumption taxes. The aim is to reduce the “tax wedge”, or tax share of labour costs. This has risen to 50pc, among the world’s highest.

Mr Gallois called for a state bank to channel cheap credit to exporters, a subsidy likely to raise the eyebrows of the EU’s competition police.

Much of the report is a slap in the face for Mr Hollande who cut VAT in June to protect buying power and has just raised company taxes yet further in the 2013 budget. He is facing a nationwide revolt by business leaders.

Arnaud Montebourg, the production revival minister, vowed to study the report with “respect”, acknowledging that France faces a national emergency.

French industry has been losing 60,000 jobs a year for a decade, cutting manufacturing to 12pc of GDP – the same as Britain. This has become a neuraligic issue over recent months with a string of high-profile plant closures and a state rescue for Renault, which saw car sales crash 26pc in October.

“The socialist government is not ready to confront the unions or reform the French economy funadamentally,” said professor Eric Dor from IESEG School of Management in Lille.

“We are wasting years. Unlike Germany, we don’t compete well in hi-tech areas and we face competition from Italy and Spain as they cut unit labour costs. The government is in denial about this,” he said.

France’s share of world exports has fallen to 3pc from 6.3pc in 1990, losing ground against Spain, Beglium, and Holland, as well as Germany. The trade balance has switched from surplus of 2.5pc of GDP to a deficit of 2.4pc over the last twelve years.

While Germany squeezed wages in the early EMU years to gain an edge, France let unit labour costs ratchet upwards to €35.30 an hour. This is now 10pc above German levels. The IMF said much of French industry is in “low to medium-tech products” that face rivals in Asia.

Gaulliste deputy Jacques Myard said it is too late for France to claw back the lost ground within EMU. “Only a devaluation of 30pc against Germany can restore the competitiveness of French firms and provide the necessary shock. We have to confront the real issue, which is that the euro is strangling the French economy. We have to leave. All else is just waffle,” he said.

Free market critics say France’s root problem is a Leviathan state – now 56pc of GDP, higher than Denmark – combined with cossetted welfare and early retirement. Just 40pc of those aged 55 to 64 are in work, compared with 57.7pc in Germany.

Mr Gallois was careful not to criticise the sacred modèle français. He also dropped his call for shale gas development after the Greens said it would “absolutely violate” the party’s post-election deal with Mr Hollande.

Dominique Barbet from BNP Paribas said faiure to exploit France abundant shale reserves may prove as costly mistake as nuclear power plants age and French electricity prices climb towards EU levels. “The loss of this comparative advantage threatens the existence of entire energy-intensive manufacturing sectors, such as aluminium, glass, and steel,” he said.

Mr Hollande promised “tough decisions” when he unveils his own reform package on Tuesday.

Mr Dor said the president had better deliver. “If he refuses to act, the markets will act for him. Perhaps that is the sort of shock that it will take