French bank governor issues urgent appeal over euro

The governor of the Banque de France has launched what he called "an urgent appeal" to France's small and medium-sized businesses to prepare for the January 2002 switch from francs to euros.

"We haven't fully realised how urgent it is," Mr Jean-Claude Trichet said when he presented the annual report of the Banque de France yesterday. "This is more important than the Millennium Bug. Our whole economy is at stake."

The latest study by the French chamber of commerce shows that less than one-tenth of small companies have adopted the euro. But the National Euro Committee says it takes 18 months for an SME to make the adjustment.

The committee says SMEs ought to have switched over by the autumn of 2001, when French shops will begin stocking euros. The French post office will sell "euro-kits" to the public in December 2001. Franc and euro notes and coins will both circulate from January 1st until February 28th, 2002. In recent weeks the French press have emphasised the low level of public awareness and the likelihood that the process will be costly and complicated for consumers.

Yet despite Mr Trichet's disquiet over lack of preparation for the euro, most of the news in his introductory letter to President Jacques Chirac and the legislature was good.

France has enjoyed "a durable, non-inflationary upturn in activity" since the second quarter of 1999. Consumption increased 2.2 percent last year, while corporate investment rose 7.6 per cent. France's overall growth rate of 2.9 per cent - while feeble compared to Ireland's - nonetheless outstripped the average of 2.4 per cent for large EU countries. Furthermore, France enjoyed the highest external surplus in Europe and the second highest in the world.

Mr Trichet credited France's low inflation rate with these results. "Average unit wage costs in the manufacturing sector have, since the start of 1987, increased some 16 per cent less in France than in the euro area as a whole," he said. Although inflation quickened at the end of 1999, according to the EU Harmonised Index of Consumer Prices, French prices increased only 1.4 per cent last year, again making France the best performer in Europe.

Long-run low inflation has dramatically reduced French unit production costs. "Since the introduction of the single currency, it is more important than ever that we very closely monitor the indicator for unit production costs, as it determines the competitiveness of the goods manufactured in our economy and therefore the current level of employment," Mr Trichet wrote in his introductory letter. He explained it more simply to journalists. In a globalised world, "the rules of the game are that consumers buy where they want to and investors invest where they want to".

Although French unemployment is still relatively high at 9.8 per cent, Mr Trichet said 42 per cent of French businesses are encountering "serious recruitment difficulties, especially for skilled labour". He recommended greater efforts in education and training and extensive use of overtime in sectors where there is a labour shortage.

"We could have even lower unemployment," Mr Trichet said. "As low as in the best-performing economies in Europe and the world - if the level of public spending, which can be likened to the overheads of our economies, was lower and if the labour market functioned in a way more conducive to job creation."

The Monetary Policy Council which Mr Trichet heads recommends French public spending be reduced to below half of GDP as quickly as possible. It accounted for 52.4 per cent of economic activity in 1999.

Increased investment was essential at a time when 31 per cent of French firms are experiencing production bottlenecks, Mr Trichet said. He also recommended that the government "embrace technical progress, the digital revolution, new information and communication technologies, biotechnology and material sciences".

If the US economy should experience a slow-down or soft landing, "I hope that Europe can continue to enjoy robust, non-inflationary growth", Mr Trichet concluded. "It's a great challenge for us."