France needs reforms not austerity says Sarkozy

PARIS, Oct 3 (Reuters) French President Nicolas Sarkozy acknowledged today the economy was not doing as well as expected, but said there would be no let up in his reform drive and no austerity package to boost state coffers.

In a pep talk to members of his ruling UMP party, Sarkozy said the only way to boost sluggish growth was by modernising the French state and appealed to his restive parliamentarians not to lose their nerve despite looming difficulties.

Lacklustre growth, rising unemployment and a plunge in consumer confidence have brought an abrupt end to Sarkozy's political honeymoon following his May election triumph.

The French economy minister has suggested budget cuts might be needed, but Sarkozy ruled out such a move today, saying the only way forward was an overhaul of everything from the labour market to pensions, from taxes to universities.

''There is no hidden austerity plan,'' Sarkozy said in a 50-minute televised speech from his gilded Elysee Palace.

''I want to attack the causes (of the problem). Attacking the causes does not mean having an austerity plan, which has never resolved anything,'' he said. ''Reform is not a purge.'' France has predicted growth of 2.0 to 2.5 per cent for this year and next, but economists say it is likely to come in below that in 2007, jeopardising Paris's European Union budget deficit commitments.

When previous president Jacques Chirac suffered a similar problem shortly after his first election victory in 1995, he opted for a bout of belt-tightening that ultimately lost him his parliamentary majority.

Taking clear aim at his predecessor, Sarkozy said France had repeatedly avoided reforms over the past 20 years and could no longer put off such painful measures as bringing an end to special pension privileges enjoyed by many state sector workers.

''There is a critical mass of reform capable of shunting society forward,'' he said. ''I am clearly following a strategy of doing all the reforms at the same time to create a critical mass for change.'' Since taking office, Sarkozy has overseen an initial wave of tax cuts, a shake up of universities and a tightening of judicial sentences for young offenders.

However, voters have not yet seen an improvement to their purchasing power -- a prime concern during the election campaign -- and the main consumer morale indicator slid last month.

Economic problems aside, Sarkozy's own parliamentarians are upset by the president's determination to open his government to leftist politicians and to promote opponents to top positions.

This unhappiness burst into the open at a gathering of UMP politicians last weekend and newspapers said Sarkozy was furious at the attacks on a policy he thinks is needed to ease political tensions in France and help ease the reform process.

''I want all of you to reflect on the fact that for a president of the republic, this openness should not be a choice but a duty,'' he told his unusually subdued audience.

It was the second time since taking office that he had called in his supporters for a team talk and analysts said his speech indicated he faced genuine dissent within the ranks.

''We knew there was debate on the right ... but there must have been even more going on than we thought for him to have the need to address them with that passion, for such a long time and with so many arguments,'' Dominique de Montvalon, deputy editor of the Le Parisien daily, told LCI television.

REUTERS SBA AS0250