WESTERN EUROPE: MARK OF WORRY

SINCE the easing of last November's European monetary crisis, the calm in world money markets has seemed almost uncanny. The French franc has suffered only minor buffeting on currency exchanges. Last week the British pound rose to a six-month high of more than $2.39, lifted by the news that Britain's perennial trade deficit narrowed to practically nothing in January. The dollar, buoyed by last year's slight surplus in the usually deficit-ridden U.S. balance of payments, is stronger than at any time in recent memory. Yet amid such outward stability, signs of skittishness abound.

The price of gold in Paris last week shot to well over $46 per oz., the highest in two decades. That upsurge reflected, more than anything, smoldering fears about the future of the franc. The spark that started the rise, however, was President Nixon's call two weeks ago for "new approaches" to international monetary problems. It was only an offhand remark, but French speculators misinterpreted it as a sign that Nixon might favor a rise in the price of gold or some basic revamping of currency values. When the President discusses money matters in Europe this week, he will find that many financial leaders fear that the speculators will open a new "spring offensive" that could upset currencies in the months ahead.

Tight Corset. As Robert Ball, TIME'S European economic correspondent, reports: "The root of last fall's crisis, the fundamental imbalance between the robust West German mark and the weak French franc, has not been lastingly removed. The tight corset of exchange controls is all that is holding the franc up. Though the controls have impeded any further outflow of francs from France, Paris has failed to lure back the bulk of hot money that it had previously lost. In Europe, the skepticism about France's chances of avoiding devaluation is widespread."

There is little evidence that the disparity between the mark and the franc will end soon. The continuing West German economic surge, which underpins the mark's strength, goes against classic economic theory. Rapid economic growth should almost inevitably produce much higher export prices and the demand for more imports, both of which are damaging to a country's trade position. Yet Bonn has managed to keep its economy expanding with little inflation. West German Economics Minister Karl Schiller said in his annual report that the country's production grew by almost 9% in 1968 and should expand by another 6.5% in 1969--with inflation accounting for barely 2% of the rise in each year. As a result of that performance, the Germans registered a trade surplus of $4.6 billion last year and wound up with $10 billion in gold and monetary reserves, compared with France's $4.1 billion.

Reverse Image. One reason for Germany's trade prowess is that its export prices have remained essentially the same since 1964, while those of the U.S., Britain and Bonn's five Common Market partners have increased by an average of 7 %. If Bonn were to peg the obviously undervalued mark at a higher price, it would relieve the competitive imbalance by making German exports more expensive and imports cheaper. Schiller, who still hopes to avoid revaluation, predicts that various other measures will help pare West Germany's trade surplus to $3 billion this year. Even that may not be enough to ease the monetary pressure.

The French economic picture is the reverse image of that in West Germany. In the first two weeks of February, France's reserves declined $29 million, while Germany's rose more than $121 million. France's ability to compete has been severely hampered by inflation; domestic prices are increasing by an alarming annual rate of 5.5%. One consequence is that French trade deficits have lately been running at more than $200 million a month. Psychology could cause even more havoc than economics. Frenchmen traditionally mistrust their own currency, and they have been spending francs rather than holding them, thus aggravating inflation. As a hedge against devaluation, they are converting francs not only into gold but also into "money substitutes" such as real estate, furs and fine wines. A recent poll showed that 45% of all Frenchmen expect a franc devaluation sometime this year.

Charles de Gaulle has staked his political prestige on maintaining the franc's parity at 20 U.S. cents, but devaluation may be difficult to avoid if, as is likely, French unions demand inflationary wage increases next month. One danger is that De Gaulle, if forced to devalue, might not stop at a reasonable 10% change in parity but insist capriciously on 20% or more. That would give France an enormous trading advantage, and force a competitive devaluation of other currencies. As David Rockefeller, president of the Chase Manhattan Bank, said in London last week, the franc is "the key currency. If you could guarantee that nothing will happen to the franc this year, you could guarantee there would be no monetary crisis."

Aid to Trade. The hope that De Gaulle might become more cooperative on economic affairs is one reason that President Nixon seeks to improve U.S. relations with France. The Administration's anti-inflationary drive at home has helped to harden the dollar on world markets. One result is that Nixon will speak from strength in any money talks in Europe. While showing little interest in a gold price increase or other radical monetary reforms, Washington is pressing for the activation of the International Monetary Fund's "special drawing rights" as the best immediate way to expand the monetary reserves needed to finance world commerce. The SDKs will come into being after 67 of the IMF's 111 member nations approve. So far only 36 have done so, but enough new ratifications should come through to enable the IMF to create SDKs by year's end. The first installment will probably amount to about $2.5 billion, which will be added to the world's reserves of $73 billion. The SDR plan will be an aid to trade, but not a cure for the world's monetary ills. They can only be treated if individual nations, notably France and West Germany, succeed in putting their trading accounts in better balance.

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