EU Commission says France must urgently speed up reforms

By Ingrid Melander

PARIS (Reuters) - The European Commission said France's new government must urgently speed up its reform plan, aimed at helping the economy by cutting business taxes at the same time as trimming public spending to bring the deficit to within EU limits.

The call showed that the EU was keeping up the pressure on President Francois Hollande after a government crisis this week provoked by three ministers who challenged his increasingly pro-business line and rejected budgetary rigor.

Paris has admitted it will not meet its public deficit target this year and is unlikely to do so in 2015 but Hollande is hoping for leeway from EU officials in Brussels amid a debate in Europe about how to kickstart growth and reduce debts.

Hollande has ousted the three ministers and named a former investment banker, Emmanuel Macron, as his economy minister.

"It is urgent for France but not just France, for the other countries which are in a similar situation to speed up the work they are doing, the structural reforms," said a spokesman for EU Economic Commissioner Jyrki Katainen.

"What will of course be fundamental will be the respect for fiscal efforts measured in structural terms," the spokesman added of the Commission's role monitoring national government moves to bring deficits into line with EU-endorsed limits.

The spokesman declined to comment on the new government line-up but said it was important that France had confirmed its intention to press ahead with reforms and added that the Commission was willing to help France in its efforts.

Earlier, Macron vowed to ‎rebuild trust in the euro zone's second largest economy and put an end to mixed messages and infighting on its economic policy.

""We have to win back the confidence our partners and investors abroad must have in our country and to win back the trust of the French themselves. Without that, we can do nothing," the 36-year-old former top economic advisor to Hollande said at a handover ceremony with his predecessor, Arnaud Montebourg.

Economists have welcomed Macron's nomination, seen as a sign ‎Hollande will press ahead with a pro-business policy to cut corporate taxes by 40 billion euros to lift the economy out of stagnation while trimming the deficit.

Paris has hinted it will not bring its deficit under the EU cap of 3 percent of GDP next year but is hoping to convince its EU partners to give it some breathing room.

While some note the risk of increased resistance to future reform moves from the left wing of Hollande's Socialist Party, most say they expect fewer internal government divisions.

Deutsche Bank economic Gilles Moec said the issue was one of implementation - with scope for plenty of wrangling ahead.

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"The message from Paris is likely to be clearer, but the implementation of any further reform is actually going to be more difficult," he said in a note. "The reshuffle was one act - the first of many, we think - in what is likely to be a crippling succession war within the French left."

Underlining the lack of confidence among investors in Hollande so far, data showed on Wednesday that morale in the manufacturing industry fell by one notch in August, falling further below its long-term average. Business climate overall also fell, particularly in retail trade.

In two years, Hollande has carried out reforms of France's generous pension system and complex labor market which critics argue go only part of the way needed to give a shot in the arm to the euro zone's flat-lining second largest economy.

Macron will take over preparation of a law promised for September to cut red tape for businesses and open up closed professions such as pharmacists and notaries.

This is a longstanding demand from Brussels and one Hollande hopes will help convince EU peers it is carrying out structural reforms - a condition to win more reprieve on EU fiscal targets.

Hollande also promised last week a plan to boost the depressed housing sector. He gave no concrete details for the plan, due to be spelt out later this week, beyond saying it would tackle taxation, regulatory and funding issues.

Housing has become a major headache for the government, with housing starts in France down to a 16-year low - a serious drag on the economy. Property developers say this is partly due to regulations agreed by the first Hollande government that set limits on the rent landlords can charge in towns with more than 50,000 people.

Hollande has also confirmed the government plans to reform welfare benefits and income tax rules to give poorer households a tax break on a similar scale to one struck down by the constitutional court earlier this month.

The initial plan had been to bring lower-paid workers 2.5 billion euros in payroll tax cuts next year. The government has also promised to extend a rebate of just over 1 billion euros in income tax paid by poorer households into next year.