It was late October, and President François Hollande, faced with an alarming deterioration in the economy, had turned to Mr. Gallois for advice on how to put corporate France on a more competitive footing with the rest of Europe.

Mr. Gallois didn’t sugar-coat the message. His report called for a “competitiveness shock” that would require politicians to curb the “cult of regulation” he said was choking business in France.

The report said that unless France relaxed its notoriously rigid labor market, the country would continue on an industrial decline that had destroyed more than 750,000 jobs in a decade and helped shrink France’s share of exports to the European Union to 9.3 percent, from 12.7 percent, during that period. The report also called for cuts to a broad range of business taxes used to pay for big government and France’s expensive social safety net.

But some wonder whether those measures, even if they can be adopted, would suffice. For them, there is a larger question: Can France be fixed?

While the European crisis has made the French acutely aware of the need to modernize the economy, the country may be running short on time. And there are mixed signals on whether the Hollande government is willing to heed the advice.

As details of the report leaked, the French news media went into a frenzy over whether their country — so resistant to change that the government still controls the price of a baguette of bread — was prepared for such upheaval.

Mr. Hollande quickly provided an answer: a competitiveness “pact” between business and government would better suit French society.

As Mr. Hollande’s finance minister, Pierre Moscovici, hastened to explain, “A shock causes trauma, whereas a pact reassures.”

But many observers say reassurance may no longer be an option.

Even the Germans are alarmed: Behind closed doors, Chancellor Angela Merkel and officials in her entourage are said to be worried that a failure by Mr. Hollande to improve competitiveness could ricochet back to the weakening German economy, further stalling what had long been twin engines of growth for Europe.

“The concern is not just that France could be the next candidate affected by turbulence” from the euro crisis, said Lars P. Feld, an economics professor at the University of Freiburg and an adviser to the German government. “The fear is that it doesn’t manage to cope with the loss of competitiveness and therefore produces little growth or perhaps even stagnation for the next few years,” Mr. Feld said. “And that after that, it could become the new sick man of Europe.”

France still has much working in its favor. Second only to Germany as Europe’s biggest economy, and the fifth-largest in the world, France is a wealthy country with a high savings rate, large foreign direct investment and world-class research and development capabilities.

And the interest rate on French 10-year bonds is only about 2 percent. That is much closer to Germany’s rate than to those of the euro zone’s staggering giants, Italy and Spain, which are above 4 percent and 5 percent respectively, as they struggle to clean up their economies.

Yet, last week the French central bank warned that growth would shrink 0.1 percent in the last three months of 2012, after stagnating for most of the year. Last month Moody’s Investors Service followed Standard Poor’s in stripping France of its triple-A credit rating, saying the government was failing to ignite competitiveness fast enough.

Meanwhile, an ambitious effort Mr. Hollande began shortly after his election in May to cut the deficit to 3 percent next year from 4.5 percent through tax increases and spending cuts may dampen growth further and ratchet up unemployment, which recently neared 11 percent, twice the rate in Germany.

Article source: http://www.nytimes.com/2012/12/20/business/global/challenging-france-to-do-business-differently.html?partner=rss&emc=rss