* French labour costs on the rise as Spain's fall

* Renault adding jobs in Spain, cutting in France

* Spain gaining export market share, France losing

By Leigh Thomas

PARIS, Feb 5 (Reuters) - Already living in Germany's shadow,

the French economy is increasingly losing ground to southern

Europe and Spain in particular, despite efforts by President

Francois Hollande to claw back France's competitive edge.

Though Hollande has reforms in the works to trim France's

high labour costs and introduce more flexibility into the jobs

market, the moves stop far short of what Spain has done.

"A lot of adjustment in Spain is the result of the very

severe crisis and the very drastic measures to reduce labour

costs and make the labour market more flexible," the IMF's

France mission chief, Edward Gardner, said.

"In those terms, France has lost relative to Spain in terms

of competitiveness," he said.

Unit labour costs, often used by economists as a gauge of

competitiveness, have fallen 5 percent in Spain over the last

five years while in France they rose 10 percent, according to

the Organisation for Economic Cooperation and Development.

The hourly cost of employing a French worker was 34.2 euros

($46) in 2011 and 20.6 euros in Spain, the most recent figures

from the Eurostat EU statistics agency show.

With unemployment at 26 percent, some Spanish executives say

workers are now much more open to flexible work time and lower

starting wages to avoid further job cuts.

Eager to halt France's competitive decline, Hollande is so

far banking on 20 billion euros in tax credits to reduce

companies' wage bills and a labour market reform that introduces

more flexibility for employers.

But the head of the industrial lobby Groupe des Federations

Industrielles, Pierre Gattaz, said more still needed to be done

especially on public spending, which is second only to Denmark

in the rich world at 56 percent of national output.

"Today's public spending is tomorrow's taxes and social

charges, and the source of unemployment the day after that,"

Gattaz said. "As long as we don't deal in depth with this

problem, then we will have a terrible tax burden and weak

competitiveness."

After the tax credit for companies and labour market reform,

Hollande aims to turn next to reforming the pension system.

However, he has steered clear of promising deep spending cuts,

which could rattle his power base among public sector workers.













FURTHER TO GO

Spain's falling labour costs have not gone unnoticed by

French companies, especially its carmakers struggling with

depressed demand and high costs at home.

Renault told unions this month it would cut 7,500

French jobs by 2016 by not replacing departing workers. In

contrast, it announced plans in November to create 1,300 jobs in

Spain after getting pay and working time concessions from staff

there.

"I think Spain is going very quickly in the right direction

of re-establishing an industrial competitiveness," Renault Chief

Executive Carlos Ghosn told Reuters in an interview.

The company, which is 15 percent-owned by the French state,

has told French workers to make concessions too to avoid closing

plants in France.

Renault is not alone in beefing up its Spanish operations

with Ford also shifting jobs from Belgium to Spain, which is

already Europe's second-biggest car producer after Germany.

Spain's growing competitiveness is beginning to raise

eyebrows in the French government as French firms increasingly

struggle to beat out Spanish rivals in international tenders.

"I can see very clearly that they are making staggering

bids," Trade Minister Nicole Bricq said, citing contracts in

Latin America and tenders for infrastructure.

Though she did not name projects, Bricq visited Colombia and

Ecuador in December to lobby officials to support French firms'

bids for metros in Bogota and Quito.

France's share of euro zone exports to the rest of the world

have fallen from over 15 percent a decade ago to 12.8 percent

currently, according to Reuters calculations. Spain has seen its

share rise from just shy of 5 percent to 6 percent with much of

the increase coming over the last two years.





EURO PAIN

Moreover, with the euro surging on currency markets, Spanish

exporters are able to thrive with a much higher exchange rate

than their French rivals, according to a Deutsche Bank study.

It calculates the pain threshold for French exporters is as

low as $1.24, well below the euro's current rate above $1.35.

Spanish firms' resistance buckles only once the exchange

rate reaches $1.90 thanks in part to low wages and high

productivity from the workers lucky enough to have jobs in a

country where one out of four people is out of work.

One saving grace for France is that it remains a top

destination for foreign direct investment with inflows surging

last year. But that does not reflect on its competitiveness and

many of those investors are only in France to snatch a share of

the euro zone's second largest domestic market.

Spain is not alone in regaining the competitive edge with

signs that Italy, Portugal and even Greece reining in wages and

improving their trade balances.

"On a purely cost basis, the efforts being made by the

problem countries around the Mediterranean -- Italy, Spain,

Greece and Portugal -- does put pressure on French tradeable

goods and services producers," OECD senior France economist

Peter Jarrett said.

France must either increase productivity, hold down wages or

move into more innovative markets for higher-quality products

not easily reproduced elsewhere, Jarrett said.

"And if they can't do some combination of those three then

activity will migrate from France to those countries," he

warned.

Gilbert Cette, an economics professor at Aix-Marseille

University who advised Hollande on labour reform, said it would

take years to see if those measures bear fruit but said France

had the advantage that it had started reforms on its own terms.

"They waited until they had their backs against the wall to

reform," Cette said. "France is not in a situation of total

crisis and yet it is carrying out reforms."

($1 = 0.7376 euros)