Consequences of French devaluation

THE RECENT French devaluation differs to the sterling devaluation in 1967 in one important respect, It was a surprise!Whereas the English
government appeared to be the only ones by the Autumn of 1967 who hadn't realised the inevitability of a cut in international value of the pound, the French cabinet were the only people who knew the franc was going to go the same way in the Summer of 1969. It had in fact been widely assumed that since M, Pompidou had inherited the mantle of de Gaulle he would, as de Gaulle threatened to do, defend the parity of the franc until the last. Which is not to say that devaluation would not have occurred but only that the franc like the pound a few years ago would have had to endure a succession of speculative attacks defended with increasing inadequacy by the familiar mixture of trade restrictions, internal deflation, and external borrowings.By short
circuiting all of this M. Pompidou has saved France, and the much battered international monetary system, some needless stress and strain and turned what would have been a certain defeat into a minor triumph.

Deflation of Economy
But whether Pompidou can turn his well-timed stroke into a major piece of economic engineering and build upon the devaluation the firm foundations for rapid internal growth and the replenishment of the external reserves, is quite another matter. The major problem is that the economy is now operating fairly close to its capacity. This means that the required growth of exports cannot be attained by putting to work idle labour and underutilised factories. Instead, domestic spending has to be reduced and output shifted from the home to export markets. Precisely because this latter course does involve sacrifices it is much more difficult to accomplish, Although the details of the government's deflationary programme have not been published-this will come later this month-it is clear that they will involve cuts in government expenditure, increases in taxation and a stern attitude to incomes,
This last is going to be the real test. Encouraged by their success in the revolution of May 1968, the French unions have, since early this year been looking for further increases to compensate for increased prices. During the year prices have continued to rise rapidly and with devaluation adding on another 3% its clear that the unions will be gunning for quite a hefty wage hike, With the elections now out of the way they will also, presumably, have fewer inhibitions about pulling their punches.

Effects Abroad
The direct effect of the devaluation on the external trade of other economies will not be very noticeable. Nevertheless in the present fairly jittery state of the world monetary system the devaluation will surely affect the speculators' estimates of the strength of existing parities. Thus the Belgian franc suffered a severe reaction despite the fact that the Belgian payments situation is quite strong, More ominously however, the devaluation of the Franc has pushed the pound once more into the position of the World's Number One Weak Currency. In this familair but uneviable position the pound will be the target for continuous speculative attacks unless, of course, it succeeds in moving into very substantial surplus, Of that, as the most recent British figures show, there is no immediate prospect, and with the world economy as a whole, and especially that of the United States, forecasted to enter a period of
somewhat slower growth, the security of sterling looks fairly small for the next few months.

The D Mark
Besides making things tougher for the pound the French devaluation has struck at the international monetary system in another way. It had been widely hoped that the habit of international money meetings which had sprung up to deal with the recurrent monetary crises of the past few years, could be used as forum within which to negotiate changes in currency parities.

In this manner a certain degree of order and rationality might be introduced into a system which, for all its sophistication, still tends to be operated according to the most capricious ideas of national prestige, In the present context it had been hoped that an international conference sometime this Autumn might persuade the French to trade a devaluation for a German revaluation. Only in this way it was thought could both countries be persuaded to accept what they had previously claimed to be beyond debate and at the same time relieve the international system of two of its worst sources of instability.The French decision to go it alone, while better than no decision at all, does still leave the problem of the D Mark unsolved. Indeed, it may push it further from solution as there is some tendency for German politicians to argue that the French devaluation now obviates the need for any action on their part with respect to the Mark. Thus does one instance of autarky breed another.

Blow to E.E.C.
Nor is it only in monetary affairs that the French taste for independent action is likely to set an example. The ramifications of the devaluation on the EEC are profound indeed and may exert an influence for several years ov'er the development of the community. ! The reason is that the devaluation lowers French farm prices relative to those of the EEC and thus upsets the complex and delicate structure of the Common Agricultural Policy. Because farm prices are now cheaper than those in other EEC countries the EEC Commission should have been obliged to intervene and buy French agricultural goods until their prices had risen to their old levels in terms of the other EEC currencies. This would have involved an increase in the already large transfers of EEC agricultural funds to France. Because this would also mean a substantial boost to French domestic prices the French government, for once in harmony with the EEC, did not care for the application of the CAP in this either. On the other hand to lower all other common market food prices would be politically unacceptable. Inevitably the CAP itself became the casualty. For the next two years France will tax its exports of food and subsidise its imports so as to keep their prices on the foreign markets in line with those abroad meanwhile allowing food prices in France to rise slowly until they reach their pre-devaluation parity with other EEC countries.

The significance of all of this is that one of the EEC's most determined supporters of the CAP has demanded to be released from its rigours and France's complaint that the CAP was a serious objection to UK entry now looks a good deal less powerful. When negotiations on British entry recommence the British can reasonably ask for a similar" changeover" period. Likewise in the future when any other EEC member encounters serious difficulties it too, may demand exemption from this or that feature of the organisation's rules. The EEC may thus be set on a path towards a much looser form of unity than had been envisaged in the past.