THE NEW MONETARY LOOK
By NICHOLAS DAVENPORT
The position in Paris before Christmas was so fantastic—so it seemed to me on a brief visit—that one felt certain that either farce or tragedy was bound to be enacted. But which? The negotiations over a free trade area, which had broken down, had been left to French officials who were not at the centre of power. They were madly insisting that France, who had broken all the OEEC rules for trade liberalisation, could really start up the Common Market of the Six and discriminate against the trade of the outside Eleven ! It was plain that unless she pulled herself together France was incapable of _being even a member of the Common Market. It was an hour of decision and the General accepted it without flinching—though that cannot be said of some of his Ministers. He told his people over the radio to face the truth. 'I have taken the decision to put our affairs in order—reellement et profondetnent:
So the franc has been devalued by 171 per cent. and made convertible for foreign holders, taxes are to be increased, subsidies abolished, the budget deficit reduced by half and trade with all members of the OEEC liberalised up to 90 per cent. It was certainly a hard decision to take—the rise in the cost of public services (railways, gas, electricity, etc.) will cause real hardship—but it enables France to take her place in the drive for a Euro- pean trade recovery, it removes the threat of
immediate discrimination against the eleven out- side members of the OEEC, and it paves the way for a working arrangement between the free-trade eleven and the cartel-minded six. But whether it will stop the French inflation is very dubious. The budget deficit is still—after the cut—about 600,000 million francs and as long as the Algerian war goes on the economic recovery will be put off. At the moment there is a sizeable trade recession.
Nine other European countries besides France are making their currencies convertible for foreign holders and it was clearly impossible for Great Britain to stand aside. The OEEC is preserved but the European Payments Union is abolished. This was already provided for in the European Mone- tary Agreement of 1955, which takes effect as soon as member currencies have been made convertible. I cannot, therefore, see how the Labour Party can now make any protest. One can regret the passing of EPU, as I do, but no more. Under the EPU rules differences were met at monthly settlements in gold and dollars but only up to 75 per cent., the balance being held as credit or debit. Obviously one could not allow debtor countries, now con- vertibility has come, to obtain dollars on the 25 per cent. credit basis at the expense of the gold and dollar reserves of creditor countries. The European Monetary Agreement, which now takes the place of EPU, provides for monthly settle- ments, but only on 100 per cent. gold and dollar terms. The payments will be made not at the middle point of the exchange rates as under EPU, but at 'the declared margins,' indicating that settle- ment will in fact be made through the ordinary exchange markets, not through the EPA. A Euro- pean Fund is to be set up with a capital of $600 million to provide members with short-term credits, but unlike EPU these credits will not be extended automatically but only at the discre- tion of the OEEC to help members in temporary balance of payments difficulties. Incidentally, large credits are being made available to France to help her carry through her economic reforms. This is being done through the Bank for International Settlements and the German contribution to the credit is to be £211 million. It may be regretted that the EPU system of credits has passed away but the new EPA agree- ment comes into force when the International Monetary Fund has agreed to raise members'
quotas by 50 per cent., which will increase the Fund's resources by $5,100 million, of which $2,300 million will be in gold and dollars. At the moment its uncommitted resources were only $1,500 million. The new EPA organisation is a branch of the OEEC and it will receive the sup- port of the IMF. It is not, therefore, expected that the European economy will be shorter of credit than it was under EPU. In fact, it is obvious that a big international effort is to be made to finance an expansion of European and world. trade. The threat of a world recession was serious enough.
Having put the best interpretation I can upon
the secret moves behind the official scenes I will now express the fears which may be causing Mr. Gaitskell to lose some sleep. First, if France does pull her economy together and get recovery going, she is still capable of steering the Common Market towards the cartelism she favours. She is still capable of splitting Europe into two rival economic camps, forcing the six to discriminate against the eleven. She is still scared of British industrial competition under free trade —German competition she will accept for the larger political gains—and she is still resentful of recent British criticism. If the OEEC liberalism is for the moment preserved, it is still in jeopardy. All we can do, it seems, is to wait and see. If discrimination does emerge, we must preserve our freedom of action—and retaliation.
Secondly, for external purposes we are back on a gold standard (which, personally, I deplore) and we are exposing ourselves to the economic risks which this standard entails. If sterling falls in the exchange market, foreigners can now draw
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on our gold and dollars as of right and the Government will either have to reimpose import controls or pursue an internal deflationary policy (as in September, 1957), which will necessarily cause unemployment and slump. Mr. Thorney- croft showed that he preferred the latter of the two alternatives. No wonder the Labour Party is a little frightened.
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