Back to the drawing board
Sam White
Paris Last week's devaluation of the franc in relation to the main currencies within the European monetary system, and inevitably to the US dollar, has brought the French socialist government down to earth with a bump. For it has involved a sharp turn around in economic policy which would be disturbing enough in a long established government, but which is positively bewildering in one which is barely five months old. The emphasis now is on measures against inflation rather than against unemployment and a price freeze is to be accompanied, unions permitting, by a Policy of wage restraint. A record budget deficit (in which, incidentally, compensation for the various nationalisations does not even figure) which was to have been used to reflate the economy is to have half its amount 'frozen' to await better times. Meanwhile the huge reserves built up by the Bank of France have been sadly depleted in What was always known to be a futile fight to prop up the franc. In short, five months after taking office the great socialist plan for reviving the economy, by increasing internal consumption and producing at least a 3 Per cent growth rate, is badly battered: As with the nationalisations plans, which now face a torrent of nearly 1,000 Parliamentary amendments, so with the economic ones. It is now a matter of going back to the drawing board. Of course a devaluation of the franc was always likely While the French inflation rate remained double that of the West German one, but the advent of a socialist government putting O n record its intention to create a huge budget deficit made the matter of 'readjustment urgent; the mystery is why the socialists did not devalue, or let the franc much earlier. It must partly have been ‘-itie to a ghost-ridden past which always associated the arrival of a socialist govern ent with devaluation, but principally, one Imagines, because it would have highlighted the incongruity of the government's first socialist measures. The grim fact is that the government now looks like losing both its battle against unemployment and its newly-opened battle against inflation. How, for example, to persuade workers whose wages are already indexed to the cost of living not to make claims in anticipation of price rises above those already registered? Or how to persuade businessmen that you can reflate the economy by means of a budget deficit without accelerating inflation? This confusion and uncertainty are heightened by the confusion and uncertainty evident in the government. There is, for example, an evident conflict taking place between the Minister of the Budget, M. Fabius, and the Minister of Finance, M. Delors. Their conceptions as laid before the Cabinet are so different that one almost gets the impression that they are not on speaking terms. One day it is Fabius who seems to carry the day with the Prime Minister, M. Mauroy, and the next it is Delors. Take the matter of the budget for 1982. M. Fabius produces one which carries with it a record deficit and which is approved by the government and duly published. The same government only a little later then gives M. Delors the green light to change and amend it in accordance with his own views.
M. Fabius's budget, published just a week before M. Delors went to Brussels to negotiate the new parity for the franc, could not have put Delors in a more embarrassing position or the franc in a more difficult situation. It became not merely desirable that it should be devalued, but urgent. It was a document which seemed not to take the least account of an impending devaluation. Its premises were the opposite of everything involved in a successful devaluation, promising above all more government spending rather than less. In the end, as has been seen, the government was forced to slash the proposed deficit and the final concessions were made all round — the Germans agreeing to revalue the mark and the Italians to devalue the lira — only after M. Delors brandished the threat that France might be forced to impose import controls. Even so, the 'readjustment' was more limited than M. Delors wished for, and the question now is how long it will be before the time arrives when a further one is needed.
What Delors needed for a credible long term parity for the franc was at best a 15 per cent or at worst a 10 per cent devaluation, but instead he got only an 8.5 per cent drop in value against the mark. And instead of the weaker currencies keeping the franc company by devaluing also and, thereby lessening French embarrassment, only the Italians — and then under enormous pressure — finally agreed to devalue also and then by a mere 3 per cent. Only the Germans came to the rescue by agreeing to a sizeable revaluation of the mark of 5.5 per cent, which gave the French with their own devaluation something approaching the depreciation of their currency which they so badly needed. It was a reaffirmation of the Franco-German alliance on a new basis, with France cast in the role of poor relation being repaid for present and future political favours. These favours centre entirely around President Mitterrand's support for the installation of Cruise missiles in Western Europe, against the furious onslaught of half of Chancellor Schmidt's own Social Democratic party. It is a support which, since it comes from a socialist president, former president Giscard could never have matched. Furthermore the German gesture, far from being the sacrifice that it looks like now, may in fact turn out to be to its advantage. For what German exporters may lose on the swings they are likely to more than compensate for on the roundabouts, as a result of cheaper import costs and lower interest rates.
Clearly, devaluation in itself will not restore confidence in the franc, either at home or abroad. Only the government can do that by drawing the obvious conclusions from it. Whether the greater part of the French socialist party is prepared to accept that, and whether President Mitterrand is prepared to impose his authority on it to ensure that it does, are matters of considerable doubt.
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