OREANDA-NEWS. The French government's latest measures to reduce unemployment complement existing policy initiatives but do not change our overall assessment of the country's structurally inflexible labour market, or its economy, Fitch Ratings says. The fiscal implications of the reform will be limited.

President Francois Hollande on Monday announced plans to address an "economic state of emergency" by creating 500,000 vocational training schemes, paying SMEs EUR2,000 a year for two years if they hire employees at up to 1.3x the minimum wage for at least six months, and boosting apprenticeships and capping unfair dismissal payouts to reduce judicial uncertainty.

The measures provide incentives for job creation but in our opinion fall short of addressing long-standing bottlenecks in the labour market. The measures announced support job growth by increasing training to build up skills, reducing (albeit temporarily) the cost on SMEs of hiring, expanding apprenticeships, and limiting dismissal payouts. But, like previous reforms, they do not in themselves address the structural inflexibility in the labour market.

Instead, they supplement the government's broader reform platform, including previously announced tax cuts and credits worth EUR50bn, the "Macron" Acts, which focus on extending economic opportunity, de-regulation and the digital economy, and changes to the labour code expected this year. The quantitative impact of the reforms announced to date remains uncertain but we do not think they will reverse the fall in growth potential that has occurred since the 2000s.

This week's announcement that the 2015 central government deficit was EUR70.5bn represents a better-than-expected outturn (0.18% of GDP, EUR3.9bn below the government forecast) and resulted from higher revenues (EUR1.8bn) and lower spending. The outturn supports our view that France can meet the European Council's recommendation that it corrects its excessive deficit by 2017 (we forecast a deficit of 2.8% of GDP for that year).

The employment plans announced on Monday will cost just over EUR2bn, 0.1% of GDP, and are to be funded with corresponding savings in 2016 (still unidentified).

Mr Hollande also restated that the EUR20bn annual Tax Credit for Competitiveness and Employment would be permanently incorporated through lower social employer contributions rather than through tax credits. The change is fiscally neutral for both public finances and company after-tax profits.
Downside risks to public finances remain, including higher-than-budgeted local authority and social security spending, and the potential negative impact of lower-than-expected inflation on revenues. In Fitch's opinion, an underlying improvement in the structural deficit over the medium term would reduce the vulnerability of the public finances to financial and economic shocks.

High debt, which limits France's ability to deal with fiscal shocks, is the main weakness of the sovereign's 'AA'/Stable rating, which we affirmed in December. A stronger economic recovery and greater confidence in medium-term growth prospects, especially if supported by structural reforms, would be credit positive.