The Bitter Taste of Reality

To calm skeptics, Mitterrand devalues the franc

No sooner had he moved into the Elysee Palace than he set about reflating the economy to fight France's record 7.7% unemployment. True to his campaign promises, he reversed predecessor Valery Giscard d'Estaing's cautious policy by introducing a budget calling for 27% higher public spending and a $17 billion deficit. He made good on a longstanding pledge to take over private banks and key industries. He increased welfare benefits to families, the aged and the handicapped. But last week President Franc,ois Mitterrand was forced to administer a dose of economic medicine.

The main problem was that skittish investors were selling their francs for sounder currencies, like the German mark. In a single week, the Bank of France spent $1.5 billion buying up francs to preserve their value. To help ease the strain, eight European countries agreed to a complex realignment of their currencies that had the net effect of devaluing the franc 8.5% against the mark.

While making French exports cheaper, the move would also make imports more expensive. In an attempt to protect consumers, Finance Minister Jacques Delors ordered a six-month freeze on the prices of most services and a three-month ban on price hikes for such staples as milk, sugar and bread. Manufacturers were urged to hold price increases to 8% next year (vs. the current inflation rate of 14%), and importers were ordered not to widen then-profit margins. To show that it, too, could cut back, the government announced that it was postponing $2.6 billion of budgeted spending. One of Mitterrand's aims was to help persuade unions to curb their wage demands.

The new economic measures brought the hibernating political opposition out in force for the first time since the Socialist victory. "Five years of such policies will set France back 20 years," fumed Raymond Barre, the former conservative Premier and an economics professor. Declared defeated President Giscard d'Estaing, in his maiden public comment on Mitterrand's performance: "Devaluation after just a few months in office rings out like the first sound of an alarm bell."

The Socialists argued with justification that their policies alone did not bring about the move. Since 1979, when parities were fixed within the European Monetary System, France's inflation rate has averaged more than twice West Germany's. This reduced the competitiveness of French products to the point where, even if Giscard had been reelected, a devaluation would have been necessary. Franc,ois-Xavier Ortoli, Finance Commissioner for the European Community and a Finance Minister under President Charles de Gaulle, described Mitterrand's decision as "sound management." The price controls received less favorable reviews.

Said Alain Chevalier, managing director of Moet-Hennessy and spokesman for the Patronat, France's business lobby:

"Blocking prices and wages has never succeeded in blocking inflation."

The smooth devaluation was possible only with the cooperation of West German Chancellor Helmut Schmidt, who was Mitterrand's guest last week. Accompanied by the President's black labrador, Nil, the two leaders looked like a pair of country squires as they ambled along the wooded lanes near Mitterrand's country home in Latche, south of Bordeaux. If they walked with a lighter step, it was perhaps because recently each had cause to help the other. Mitterrand was grateful to the Chancellor for supporting the devaluation, which imposes stiffer competition upon West German business. For his part, Schmidt already had Mitterrand to thank for publicly backing his battle against West German pacifists opposed to the deployment of new U.S. nuclear missiles.

Mitterrand's haste in launching reforms reflects not only his own sense of mission but the pull of radicals in his party still feeling the heady fumes of their election victory. Known as the maximalistes, the group regularly tries to keep the moderates in Mitterrand's government from making practical compromises. For example, since many are strongly opposed to the development of nuclear energy, they tried to reduce the number of new reactors to be built from Giscard's plan for nine to only four. Mitterrand had to overcome their resistance to carry his own middle-course program, which envisions the construction of six.

"We cannot give up nuclear energy," he was quoted as saying privately last week.

"If we did, the price of electricity would double."

If he is as pragmatic as that about the economy in the future, Mitterrand may be able to avoid the land of stumble that occurred last week because he had tried to go too far, too fast. qed

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