French industrialist Louis Gallois called for a patriotic effort to reverse declining competitiveness via shock therapy as he handed in a review which the Socialist government commissioned and is now under pressure to heed.
Gallois is prescribing slashing €30 billion from payroll taxes and loosening labour laws to reverse a long decline in industrial competitiveness that has eaten away at exports and bled factory jobs.
The widely leaked recommendations have set frustrated industry heads against a government reluctant to shift part of the tax burden from employers to households which are already struggling with rampant unemployment and an austerity budget.
Gallois said the 22 recommendations set out in the review were tough but necessary.
"The French people need to support this collective effort which could be a magnificent project for our country: winning back our industry," he told reporters as he left the prime minister's office. "This will require real patriotism."
President Francois Hollande said "strong decisions" would be taken based on the report, despite having lowered expectations for radical reforms by ruling out any "shock" measures.
Industry leaders, who say shouldering some of the highest labour charges in the world puts them at a disadvantage against foreign rivals and is the cause of a ballooning trade deficit, have joined forces recently to demand a radical shake-up.
Gallois suggests slicing €20 billion from employers' social contributions and €10 billion from those paid by workers, and compensating with spending cuts and higher consumer taxes.
Hollande's aides have thus far said raising taxes on households is out of the question as the country grapples with its toughest austerity budget in years to meet deficit goals.
"This report is a contribution. It's the government that governs," cautioned Social Economy Minister Benoit Hamon.
Hemmed in by his pledge to cut the 2013 deficit to 3% of economic output from 4.5% this year, Hollande has limited his language to promising a "competitiveness pact".
"A shock causes trauma whereas a pact reassures," Finance Minister Pierre Moscovici explained last week.
The government has said its response to the report, due on Tuesday, would focus on measures that do not affect labour costs, such as investment in innovation and training.
Finding a solution to the lag in competitiveness that has left France trailing Germany in industrial exports, putting a strain on the economic balance between the euro zone's central economies, is Hollande's biggest challenge.
With French growth stalled for three quarters and jobless claims at a 13-year high, Gallois recommends compensating for lower payroll taxes by raising VAT and increasing a social levy paid on pensions, investments and rent income as well as wages.
Leery of angering an already disgruntled public, Hollande has already scrapped a VAT hike his predecessor Nicolas Sarkozy proposed for the same reason.
Moscovici has argued that shifting more of the tax burden onto households too fast risks choking domestic consumption, a key growth motor. He rebuffed a call by the AFEP business association to raise VAT to 21% to enable lower labour costs and said the focus would be on innovation.
Where booming Germany clocked a 2011 trade surplus of €158 billion, France saw a record €70 billion deficit as its share of euro zone exports has slid to 13% from 17% a decade ago and its global market share also shrank.
German unemployment is at 6.9% versus 10.2% in France, which has lost 750,000 industrial jobs in a decade.
Many economists fear the report by Gallois, ex-chief of aerospace group EADS, could end up stuck on a shelf alongside a similar review ordered by Sarkozy when he took office in 2008. That report, by economist Jacques Attali, also called for an overhaul of labour laws and cuts to labour costs.
"The worst would be for this to end up in our cemetery of buried reports," Le Figaro daily said of the Gallois review.
