Le franc-tireur
FINANCE-FRANCE EDOUARD EXON
`Mr Wilson, as soon as he had been informed of the result of the first round of the French parliamentary elections, addressed to MM Mitterrand, Guy Mollet and Billeres the follow- ing telegram : BRAVO FOR YOUR DEFEAT STOP YOU HAD A NEAR ONE STOP I KNOW WHAT IT COSTS TO INHERIT FROM A RIGHTWING GOVERNMENT DISAS- TROUS ECONOMIC SITUATION STOP SINCERELY YOURS.' (Le Canard enchain, 26 June.) That France's economic situation is now `disastrous' no one seems seriously to doubt. and the circumlocutions employed to conceal the fact are merely proportionate to the speaker's closeness to power.
Everyone cites the example of 1936, when a similar wave of strikes and consequent wage increases led to a 25 per cent increase in inter- nal prices within nine months, and two de- valuations of the franc within a year. But, as Alain Vernay has pointed out in the Figaro, there are very important differences between that situation and the present one.
First, the 1936 explosion was preceded by a period, not merely of restraint, but of savage deflation involving, in 1935, an actual diminu- tion of the GNP by nearly 20 per cent. Secondly, the franc was already a desperately weak cur- rency before 1936. Thirdly, the increase in France's total wage bill resulting from the 'Matignon Agreements' of 1936 was of the order of 40 per cent (up to 15 per cent for the wage increases proper, 4 per cent for the introduction of paid holidays, and 20 per cent (!) for the in- troduction of the forty hour week). The increase this year, even allowing for the increase in the minimum wage and the shortening of the work- ing week, is likely to be only about 16 per cent —which is not so very drastic when one con- siders that an increase of 7 per cent was expec- ted even if this had been a 'normal' year.
The Blum government made a number of what seem now elementary blunders, notably in not introducing exchange controls, in re-estab- lishing the free import and export of gold in January 1937, in soaking up much of the capital needed for investment in two large government loans, and also (like the Wilson government in 1964) in refusing devaluation for prestige reasons only to find itself forced to devalue later in less favourable conditions where it was less easy to put the blame on the opposition.
In short, it is clear that 'disastrous,' when used of the present situation, is a relative term. But France has not forgotten the terrible infla-
tions of the Third Republic, and her economic thought is-still haunted by fear of their recur- rence. Ironically enough, the present situation results at least partly from this phobia, for there could scarcely have been so violent an industrial explosion this year if the govern- ment had not deliberately slowed down expan- sion for fear of overheating, with the result that productivity increased much faster than produc- tion, and the economy was running at only 70 or 75 per cent of its capacity—which is why there are now 500,000 unemployed.
In theory, this should now be an element of strength in France's position, and it is even arguable that the wage increases, by increasing the purchasing power of the working class, will provide the stimulus to production which the government had failed to give. This reasoning led some OECD experts to welcome the crisis-at first. But that was before the failure of the `Grenelle Agreements' of 27 May, and before anyone realised how long the strikes were going to last. By 3 June M Pompidou was declacing that there was no longer any hope of the GNP increasing by more than 4 per cent this year, and hinting that if the strike went on much longer it might not increase at all. The OECD experts are now rewriting their report, but apparently have not yet made up their minds on a final judgment.
It is, of course, vain to hope that increased purchasing power will stimulate home produc- tion if the latter is quite unable to compete with foreign prices. In this respect France is now much more vulnerable than she was in 1936. having just abolished the last customs barriers within the Common Market and implemented the first of the Kennedy Round tariff cuts. The approach of this deadline was already causing concern to many French industrialists before the present crisis, for French prices were already insufficiently competitive. Despite all the gov- ernment's efforts, the cost of living had risen by 40 per cent in France between 1958 and 1967, as compared with 15 per cent in the us, 23 per cent in Germany and Belgium, 29 per cent in Britain and 37 per cent in Italy and Holland.
M Couve de Murville, before his translation, undertook to try to limit the further rise resulting from the crisis to 3 per cent. But there are signs that he was already losing this battle. He had, for example, to agree to an increase of 8 per cent in the price of bread, and one of between 30 and 40 per cent in the price of haircuts. Taxi fares have also gone up as a result of the strike, and most newspapers have increased their price by 20 per cent. Wine has gone up too, except in Paris, and it seems that petrol and sugar may well be next.
By imposing temporary import quotas on cars. textiles, household electrical goods and steel, the government has given a breathing space to the most vulnerable industries until the end of the year. But if, when that expires, the price battle appears to have been lost, there will be no alternative but devaluation. M Couve de Murville and his successor know this, but the trouble is that so does everyone else, and that means that, whatever the Bank rate, the pressure on the franc is going to get worse as the autumn goes on. Already in May and June the Bank of France has lost more than one fifth of its pro- verbially enormous reserves—which only goes to show that not even a non-reserve currency with strong gold backing is proof against general scepticism about the maintenance of its present parity. Which leads one to wonder whether the government will not decide to cut its losses and devalue now.
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