Let Them Eat Francs

By Frederick Painton

Mitterrand devalues in an effort to salvage his Socialist policy

No matter matter how political leaders may try to disguise it, the devaluation of a nation's currency always reflects an embarrassing failure of economic policy. President Franc,ois Mitterrand was warned by his advisers a month ago that the feeble French franc's pegged level within the European Monetary System could no longer be defended on world currency markets. Yet his pride kept him from admitting this painful reality until after the seven-nation Versailles summit conference. With its lavish displays of fireworks, fountains and nonstop pageantry, that diplomatic spectacular may in many ways have represented Socialist France's last carefree fling. Within a week after it ended, Finance Minister Jacques Delors traveled to Brussels to present his European partners with a package of self-imposed austerity measures. They included a 10% devaluation of the franc against the West German mark, as well as a four-month freeze on wages and prices.

Prime Minister Pierre Mauroy quickly launched a campaign to convince his skeptical countrymen of the need for such common sacrifices. Few doubted that the credibility, and possibly the survival, of his government was hanging on the success of those efforts. Coming only eight months after an 8.5% devaluation against the mark, last week's realignment was the turning point in the 13-month-old attempt by the Socialist government to spur economic growth and curb unemployment through government spending--an approach diametrically opposed to that of the Reagan Administration. Said Yvon Gattaz, the peppery president of France's National Council of Employers: "No developed country can, without damage, go against the anti-inflation policies practiced in the rest of the world."

The damage inflicted on the franc springs mainly from an inflation rate that clings stubbornly around 14%, vs. 6.6% in the U.S. or 5.6% in West Germany. Even as French competitiveness on world markets has deteriorated, the pickup in industrial production promised by the Socialists has failed to materialize. More than 2 million French, 8.7% of the labor force, are unemployed, a rise of 15% since Mitterrand took office. Inevitably, the franc has come under attack as confidence in Socialist economic management has dwindled. Since March, France's central bank has spent about $8 billion to support its currency, leaving the government with a parlous $2.7 billion in reserves.

The franc's plight has been aggravated by the persistent strength of the dollar. As high U.S. interest rates draw funds into greenbacks, the dollar last week rose to its highest against the Japanese yen in several years, and set postwar records against the French franc, Italian lira and Canadian dollar. According to a closely watched indicator published by the Morgan Guaranty Trust Co., the dollar's trade-weighted value is now higher than it was in 1970. Fulfilling an agreement reached at Versailles, the Reagan Administration last week broke with its free-market doctrine, selling dollars in foreign-exchange markets in order to prop up the weaker currencies.

In France, Finance Minister Delors had little trouble convincing even his most radical colleagues in the Cabinet of the need for what he called an "electro-shock" for the ailing French economy. Food and fuel were the only items exempted from the freeze on industrial and retail prices. Only workers at the minimum-wage level were to be allowed raises slightly above the anticipated inflation rate over the next four months. The austerity package also calls for holding the budget deficit for 1982 and 1983 to 3% of gross domestic output, which means paring $2.55 billion from this year's budget. In addition, employers' and employees' contributions for social security and jobless insurance will be increased to reduce the yawning deficits in those programs. As a result, Delors expects inflation this year to be reduced to about 10%. If not, said the former business management professor, "I don't think I'll need to resign. I'll be sent off to my studies."

From the conservative opposition, the devaluation and government controls produced a chorus of protest. Accusing the Socialists of "irresponsible" government, Gaullist Leader Jacques Chirac said that "France has now become the sick man of Europe." Former President Valery Giscard d'Estaing termed Socialist policies "shocking and tragic."

Among France's partners in the European Community, there were also doubts that the Socialists could, in the short course of a four-month freeze, succeed in purging the economy of inflation. The West Germans, who have lent the French billions in recent months to prop up the battered franc, seemed particularly skeptical. Wrote the Bonn daily General-Anzeiger, which is close to the government of Chancellor Helmut Schmidt: "This is not the last sacrifice that the Federal Republic will have to make for its less disciplined neighbors." But West German financial officials indicated that they were willing to make that sacrifice in order to maintain some diplomatic leverage on French policy. Economists noted that wage and price controls, which were tried by President Richard Nixon in 1971 and by Giscard in 1976, had only temporarily repressed inflation.

In Paris and other capitals, there was skepticism about the Socialists' willingness to abandon the lofty ideals of their electoral program. President Mitterrand only indirectly acknowledged a significant shift in economic policy -- as if he were distancing himself from his belated avowal of pragmatism, in case it failed He compared the new measures with the Tour de France bicycle race. Said he "The object is always the same, victory. Only sometimes you are on flat ground and sometimes you are pedaling uphill." For Mitterrand it will be uphill for quite few miles. -- By Frederick Painton. Reported by William Blaylock/Paris

With reporting by William Blaylock

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