Hollande's pro-business reforms could falter ahead of France's 2017 election

By Michel Rose PARIS (Reuters) - French President Francois Hollande's surprise conversion to business-friendly economic reforms 18 months after winning power on a "tax the rich" platform is at risk of running out of steam ahead of elections next year. France's Socialist leader since 2012 will on Monday flesh out his last major economic plan before those elections, government sources say. He declared a "state of economic emergency" in his New Year's Eve address to tackle high unemployment and sluggish growth - in an echo of the emergency security measures brought in after the Nov. 13 attacks on Paris. Rival factions in his coalition want that to mean further action, with the reformist camp led by Economy Minister Emmanuel Macron pushing for an acceleration of free-market reforms. Rebel lawmakers on the left, meanwhile, have called for an economic policy U-turn to woo working-class voters. Hollande is wary of the risk of drawing anger from unions, workers and leftists politicians ahead of the 2017 election, according to economists and political analysts. The departure of the president's top economic adviser - former Barclays and Bank of America Merrill Lynch banker Laurence Boone, who was poached by insurer AXA this week - has been seen by some analysts as a sign that Hollande's reform drive is faltering. "It's a bad signal in the sense that it probably means she (Boone) considers there is not much left to do at the Elysee Palace before the end of Hollande's mandate," said Nicolas Bouzou, head of the Asteres economic consultancy firm. "After the more free-market turn of his second year, we are now seeing a slight move to the left," he said. After upsetting many left-wingers in his party with tough homeland security measures after the Paris attacks, Hollande has since sought to appease them by floating vague ideas of more job training and public funding of infrastructure projects. While analysts think he will press on with reforms of France's strict labour laws - which make it difficult for companies to dismiss permanent staff and could act as a brake on a weak economic recovery - they say the proposed overhaul could be watered down, and the pace of change slow. Hollande and his Prime Minister Manuel Valls have dismissed any suggestion that the reforms could falter, saying this week that the country needed to press ahead with them. The president's office said there was nothing acrimonious in Boone's resignation only a year-and-a-half into the job. "For her, it's the end of a cycle and a good time to go," said a source close to Hollande. "She's leaving on very good terms (with the president)." LABOUR OVERHAUL Hollande came to power in 2012 on an anti-austerity ticket after declaring that the "world of finance" was his enemy and promising to slap a 75 percent tax on millionaires to subsidise jobs for young people. But after economic growth failed to pick up and unemployment continued to rise, he engineered a major pro-business U-turn at the end of 2013. He has since offered 40 billion euros ($43 billion) in tax cuts for companies, cut government spending and eased regulation of sectors such as legal professions and bus transport. His government has said it now wants to conduct a major overhaul of labour laws to give more flexibility to employers, cap compensation packages in cases of unfair dismissal to encourage companies to hire more, and deregulate certain so-called closed-shop professions by removing diploma requirements for jobs such as hairdressers or bakers. Each of these measures is still being formulated, with no firm details made public. Economists and political analysts say they could be weakened - for example the level of the compensation cap - in the face of pressure from leftist politicians and unions, which could be stepped up with worker protests. "His (Hollande's) obsession before the presidential election is to reassure the left, because if he wants to reach the second round, he needs to make sure no other, more left-wing candidate will run against him," said Elie Cohen, an economist at research institute CNRS. The head of the ruling Socialist party, Jean-Christophe Cambadelis, said he was all in favour of giving more flexibility to employers, but warned: "we shouldn't forget the security bit for our fellow citizens." And in a signal that reforms are indeed likely to slow, he said: "I'm not sure 2016 will be a year of work overload for parliament." Societe Generale analyst Michel Martinez dismissed the idea that the departure of Hollande's adviser Boone signalled a change of economic tack because she was not the mastermind of his pro-market agenda and more focussed on euro zone issues. "The objectives for the end of Hollande's mandate are a bit weak, but the subliminal messages that are being sent are clear: we're going towards more flexibility," he said, but added: "The speed of reforms is decelerating a bit." And with unemployment still hovering near record highs above 10 percent, economic growth struggling to pick up, and public debt still rising, France's euro zone partners are anxious that Hollande follows through on his reform drive this year. "In general, there is a worry that France is going to do even less structural reform until the election when its economic performance is sluggish and it cannot afford a wasted year," said a senior EU economic policy official. (Additional reporting by Emmanuel Jarry, Jean-Baptiste Vey, Ingrid Melander, Paul Taylor and Elizabeth Pineau; Editing by Andrew Callus and Pravin Char)