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Hire and fire reform top priority for recovering French economy - OECD

By Brian Love

PARIS (Reuters) - French economic growth is slowly picking up but the government's priority should now be to fight stubbornly high unemployment by making it simpler for firms to hire and fire, the Organisation for Economic Co-operation and Development said on Thursday.

The Paris-based international think-tank predicted growth of 1.1 percent this year and 1.7 percent the year after, following a meagre 0.4 percent rise in GDP in 2014.

"Long and complex layoff procedures and the labour courts undermine hiring and economic dynamism," the OECD said in a report on the euro zone's second largest economy.

"The highest priority for structural reform is to improve the functioning of the labour market," it said.

One of the main issues, the OECD said, was a divide between workers who stay put once they secure the protection of an open-ended contract and those -- mostly young people -- who have to settle for the perpetual insecurity of short-term contracts.

France's unemployment rate was expected to increase from 9.9 percent last year to 10.1 percent in 2015 before easing back to 9.9 again in 2016 as the pace of growth picks up moderately, the report said. The rate of youth unemployment stood at 23 percent.

The OECD, a long-time critic of the decision over a decade ago to shorten the legal working week to 35 hours, faulted France for not putting in enough hours.

"The overall result is that, despite the maintenance of a high level of productivity, GDP per capita has fallen steadily further behind the OECD's best performers ... the reason is that hours worked per capita are below 1,500 per year, down from nearly 2,000 in 1970," it said.

In addition to labour reform, France also needed to significantly reduce public expenditure over the medium and long term, said the OECD, which forecast public debt rising to 98.1 percent of GDP this year and 98.8 percent in 2016 versus 95.4 percent in 2014.

"France’s public debt will be close to 100 percent of GDP by 2016, a still unstabilised level that would already be difficult to sustain if and when interest rates start to rise," it said, referring to the likelihood that ultra-low ECB rates would rise once recovery finally took hold across the euro currency area.

The OECD highlighted that French public expenditure at 57.3 percent of GDP in 2014, was second only to Finland in Europe.

"Despite a marked slowdown since 2010, this level of spending requires high taxes that exert heavy pressure and distortions across the entire economy," it said.

The OECD's forecast of 1.1 percent growth in GDP this year was broadly in line with the 1.0 percent GDP rise France's Socialist government is using as the basis for its budget.

Prime Minister Manuel Valls said this week he hoped GDP growth would be edging closer by year-end to the 1.5 percent pace considered necessary to start making inroads against unemployment.

The OECD said the government was already introducing reforms that would help boost the country's growth capacity.

"The government is well aware that reforms are needed to improve the situation, and it has accordingly undertaken or announced a series of structural reforms that, if fully implemented, would have a meaningful impact on growth in the medium term," its report said.

OECD analysis concluded that reforms being pursued so far by the government could add around 0.3-0.4 percentage points of extra growth per year "over a 5-10 year horizon".

(Reporting By Brian Love; Editing by Toby Chopra)