Strategy for Stability

The sudden devaluation of the franc last month won wide admiration as a model of deft financial maneuvering. But its ultimate success depends on the follow-through--whether or not France can curb inflation before the trade ad vantages of a cheaper franc are frittered away in rising prices. Last week, as Frenchmen returned to work after their August holiday, the Pompidou government greeted them with news of austerity to come. Finance Minister Valery Giscard d'Estaing announced an at tack on inflation that will employ nearly every fiscal and monetary weapon available to modern governments.

The goals he set--if achieved--could make France the envy of other nations. Moreover, he ambitiously promised to reach those goals in less than a year. They are: 1) a balanced budget by Jan. 1, 1970, 2) an "equilibrium" between consumption and production by April 1, and 3) an end to France's foreign-trade deficit by July 1 .

Holding the Line. In appealing for na tional support to "win the battle of the franc," Giscard cautiously sought to avoid stirring anew the industrial strife that upset the government's economic plans during the student riots of 1968. In fact, the burden assigned to ordinary Frenchmen was relatively light and aimed primarily at restricting credit. Car buyers will have to put down 50% of the purchase price instead of the present 30% and pay off the remainder in 18 months instead of 21. For house hold appliances and furniture, the down payment will be 40%--up from 30%--and the term will be shortened from 18 months to 15. To encourage consumers to divert their money into savings accounts, interest rates will be raised from 4% to 6%.

A government pledge to hold the line on wages is far more likely to stir opposition. Giscard indicated that the government would try to hold wages to a 4% rise during negotiations next month, matching the increase so far this year in the cost of living. To sweeten the medicine--and partially disarm the opposition--the minister slightly eased the tax load and promised to raise family allowances for low-income groups, as well as to increase old-age pensions for everybody.

Businessmen received far less gentle treatment. The price freeze imposed with devaluation will be continued in slightly modified form. Bankers will now have to pay an "exceptional" tax on profits, based on their increased earnings from checking-account deposits. Industries that depend on imports--which are more costly after devaluation--will be allowed to raise their prices only 0.6% this year and 1.25% in 1970. Any further increases will have to be announced a month in advance and negotiated with the government.

Government Example. Giscard suavely sought to appease industry by promising that the government would set an example of restraint. The 1969 deficit will be cut from $1.26 billion to $722 million, he vowed. Planned price increases by government-run gas and electricity utilities will be canceled. Military conscripts will be released a month early to swell the ranks of labor. And for the long term, the Finance Minister relayed a pledge from Premier Jacques Chaban-Delmas: so long as he is in office, government spending will rise no faster than the gross national product.

The new austerity, Giscard promised grandly, will "finally make France into a model industrial state," with a "regime of permanent price stability." Perhaps so, but next morning the franc dropped slightly on the Paris exchange, reaching its lowest level since devaluation--a reflection of skepticism among international moneymen that the measures go far enough. The crux of the government's program lies in persuading the unions to accept a 4% wage gain when prices have risen 8% since the last wage settlements in June 1968. France's largest union, the Communist-dominated General Confederation of Labor, has already rejected the government proposition. As a hedge against further erosion of the franc, Paris has already lined, up $2.5 billion in new international credits to resist any speculative run.

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