Shrinking the Snake

Something like an old-fashioned monetary crisis gripped Europe last week. Currencies wobbled, governments felt threatened, and the carefully worked-out international agreements aimed at keeping exchange rates stable seemed on the verge of collapse. The French franc lost 3.7% of its value against the dollar and the Italian lira 8.6%. The British pound, weakened by confusion surrounding the surprise resignation of Prime Minister Harold Wilson, continued to trade at record low prices. As anxiety began to shake the money of other nations, traders rushed to buy up strong West German marks. That left West German authorities struggling to avert a formal upward revaluation of the mark, which would discourage exports and slow the country's recovery from recession.

The latest trouble, which had been simmering since January, turned worrisome two weeks ago (TIME, March 22), when the lira's drift downward accelerated and the pound fell below the psychologically sensitive $2 mark. The basic cause was economic disarray in Italy and Britain, which have the highest inflation rates among major European countries. The declines immediately made the goods of both countries cheaper in world markets, and moneymen began selling francs in the belief that the French government, which is struggling with a 10% inflation rate, would have to let their value fall to keep French exports competitive.

Following a testy European monetary meeting Monday, an angry French Finance Minister Jean-Pierre Fourcade in effect accused the British of precipitating a crisis. He charged London with deliberately letting the pound drop in order to stimulate exports at the expense of Britain's trading partners--a charge that British Chancellor of the Exchequer Denis Healey denied. Fourcade also made a last-ditch attempt to keep the franc in the so-called European snake --an arrangement that bound France, West Germany, the Benelux countries, Sweden, Norway and Denmark to hold their currencies within a 4.5% range of fluctuation against each other. Fourcade proposed that the permitted variation be widened slightly, allowing the franc to drift gently down and the mark and Dutch guilder to bob up a bit. West Germany agreed, but The Netherlands balked, contending that Dutch exports and thus the nation's economy would be damaged. The French concluded that they had no alternative but to leave the snake and let the franc sink.

First Stage. Sink it promptly did--to a low of 4.775 to the dollar and a close of 4.72, v. 4.551 the week before last. That was the first stage in a decline that moneymen thought might eventually come to 10%. The drop seriously embarrassed the government of President Valery Giscard d'Estaing. It was Giscard, a staunch proponent of currency stability, who had brought France back into the snake last July, over the objections of his top economic advisers.

The markets had not quite digested the French move when they got a second bombshell: Wilson's unexpected resignation. In the ensuing tumult, the pound traded as low as $1.9115. Whether the pound recovers in the weeks ahead depends largely on the progress of Wilson's successor in cutting the nation's 16% inflation rate.

The nervousness generated by the troubles of the franc and pound intensi fied the already alarming slide in the lira. In a single day, the lira fell from 842 to the dollar to 880; it closed at 875--down 27.6% from 686 as recently as Jan. 20. To boost government revenues and restore confidence in the lira, the government of Prime Minister Aldo Moro started a harsh austerity policy. Among other things, it raised taxes on auto sales, lifted the price of gasoline by 14.3%, to $1.73 a gallon, and raised the government bank lending rate a startling four points, to 12%. Significantly, Prime Minister Moro, whose Christian Democrats are operating a minority monocolore government, was forced to consult with the Communists before he could start that program.

The Danish and Belgian currencies also came under pressure, because Denmark suffers from chronic trade deficits ($128 million in the first nine months of 1975) and Belgium is burdened by an 11% inflation rate. At week's end there was growing concern that one or both might be forced to follow France out of the snake. At the same time, the value of the German mark against other snake currencies threatens to rise above the 4.5% range. There are persistent rumors--denied by German officials--that the nation might once again revalue its currency upward.

Although the gyrations will presumably stop soon, they already have had pernicious effects. Some economists estimate that the fall in the lira has doomed Italy to a 20% inflation rate this year--v. 12% last year--by making imports more expensive. The European snake has been reduced to a small grouping of Germany and some close economic allies; it cannot be, as it was once supposed, the foundation of European economic unity. The central problem is to find a way to let currency values shift to reflect changing economic conditions, and yet keep them reasonably stable; the current turmoil illustrates that so far no one seems to have the answer.

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