European Union Internal Market Commissioner Michel Barnier, the EU's top financial regulator, called on the French government to pursue its planned reforms despite the Commission allowing two more years to meet its budget deficit target.

Olli Rehn, the European monetary affairs commissioner, said on Friday France badly needed to unlock its growth potential and create jobs, adding Spain, Italy and the Netherlands as well as France - four of the euro zone's five largest economies - would remain in recession this year.

France - which restated on Friday it would bring the deficit below 3 percent in 2014, only one year later than the original deadline - must pursue its retirement and labor reforms to boost its competitiveness and to overcome its unemployment crisis, Barnier said.

"It's a moment of truth for the government which needs to have the political courage to carry out those reforms which will sometimes not be understood, and require effort," he told French radio Europe 1 in an interview.

EU finance ministers had given France until this year to bring down its budget shortfall below 3 percent of GDP and set the deadline for Spain for 2014. But while France expects its economy to expand by 0.1 percent this year, the European Commission forecast a 0.1 percent contraction.

Granting more time is a victory for French President Francois Hollande, who won elections promising a focus on growth and less on austerity but has little to show for his economic policies after a year in office.

(Reporting by Yves Clarisse; writing by Muriel Boselli; editing by James Jukwey)