BRUSSELS/PARIS (Reuters) - France must rein in public spending, cut labor costs and reform its pension system this year in return for getting two more years to bring its budget deficit back in line, the European Commission said on Wednesday.
The euro zone's second-largest economy must also simplify its tax system to help companies and focus on regaining lost competitiveness to bring the country back to growth, the Commission said in its annual assessment of EU economies.
"The extra time should be used wisely to address France's failing competitiveness," European Commission President Jose Manuel Barroso told a news conference, saying the message to France was "very demanding".
The EU executive wants France to cut its headline deficit to 3.9 percent of output in 2013, 3.6 percent in 2014 and 2.8 percent in 2015.
The French economy, which has been stagnating since its last recession four years ago, contracted again in the past two quarters while the number of jobless has hit an all-time high, making it impossible for France to bring its deficit below 3 percent of output this year.
"I believe there is a growing consensus now in France about the need for those reforms," Barroso added, as the EU executive urged euro zone countries to reform labor and services markets and slow debt-cutting.
The Commission warned that it expects France's unemployment rate to be 10.6 percent this year and keep increasing to reach 10.9 percent in 2014 - contrary to the government's stated promise of halting the rising trend by the end of this year.
French officials said they broadly agreed with the European Commission's recommendations but stressed they had already put reforms in motion and would continue at their own pace, which includes seeking deals between unions and employers to reach as broad a consensus as possible and avoid street protests.
Talks among labor unions and employers to reform the pension system, for instance, will kick off in June and will not be passed into law until the second half of the year, meaning the government cannot yet discuss the content with Brussels.
"The European Commission cannot dictate what we should do, it can only say that France must balance its public finances," President Francois Hollande told reporters.
The European Commission said possible measures for the pension reform included adapting indexation rules and increasing the statutory retirement age and full-pension contribution period, "while avoiding an increase in employers' social contributions", the Commission said.
"The pension system will still face large deficits by 2020 and new policy measures are urgently needed to remedy this situation."
Paris has said it can get its budget deficit back in line with targets as early as next year but the Commission warned that would require too much belt-tightening and so threaten an economic recovery.
The government acknowledged earlier this year that it would not bring its deficit below the EU threshold of 3 percent of GDP this year and slashed its growth forecasts.
(Reporting by Ingrid Melander, Elizabeth Pineau, Robin Emmott and Luke Baker; Writing by Ingrid Melander; editing by Mark John)