Giscard provokes outcry over franc


IT seemed so simple. Mr Valery Giscard d'Estaing, former President of the Republic and former Finance Minister, had all the answers. "France is suffocating!", Mr Giscard wrote in the weekly L'Express late last year. "France is suffocating under the weight of (social) benefits and under the effect of endless state interventionism, which prevent us adapting to the new conditions of the world economy."

The decade old policy of the strong franc is, Mr Giscard said, the root of the problem. The franc was over valued compared to the deutschmark and the US dollar. "This mis adjustment explains in part the stagnation of our economic activity for the past four years and the persistence of unbearable unemployment."

The pegging of the franc to the stronger deutschmark had pushed up the French currency vis a vis the dollar. "This process is the principal cause of the difficulties with which the French economy is struggling," Mr Giscard said, suggesting that the franc be allowed to depreciate to the rate of FFr5.5 to the dollar.

From the outcry provoked by Mr Giscard's ideas, you would have thought he had proposed banning Bordeaux wine or camembert cheese. The president, prime minister, finance minister and opposition Socialists all condemned the former president's attack on the strong franc as approaching treason.

After all, the franc fort policy is the cornerstone of the drive toward monetary union to which France is so committed. "President Giscard's position crystallised debate on the monetary policy we are pursuing," a high ranking official said. "It triggered support for our policy." Al though Mr Giscard is a convinced European, his initiative was acclaimed by anti Maastricht politicians.

Ironically, the US economic recovery and the rising dollar have nearly accomplished the depreciation suggested by Mr Giscard without French government intervention.

A basic flaw in Mr Giscard's argument, monetary officials said, is that the franc deutschmark link within the European Exchange Rate Mechanism does not determine the franc dollar rate. The 12 currencies in the ERM float freely against the dollar and yen.

Both French politicians and the French public have ardently supported European Monetary Union. "We have made the euro a tool for growth," President Jacques Chirac said at the Dublin Summit, after agreement was reached on the Stability Pact. "The euro will enable us to avoid the currency fluctuations that cost so much in the past." Asked whether the march towards a single currency had become irreversible, Mr Chirac replied: "Honestly, I believe so. The only question now is how many countries will be in the first wave.

The French government's efforts to educate the public about EMU have paid off. In a Gallup poll published by Le Figaro this month, 73 per cent of Frenchmen said it was in France's interest to belong to the European Union - far ahead of the results in Britain and Germany. Sixty one per cent of French people surveyed said they would vote for monetary union if a referendum were called.

In Mayenne, the home region of the Finance Minister, Mr Jean Arthuis, the euro is already in experimental use. The entire political establishment - including Mr Philippe Seguin, the Euro sceptical Speaker of the National Assembly - now accept the euro.

The main concern of critics like Mr Seguin is that the European Central Bank be counter balanced by a political weight, so that monetary policy is not left entirely to bankers. The French have made no secret of the fact they would like the governor to be a Frenchman; the name of Mr Jacques Delors has been mentioned.

This has been at the heart of current tensions with Germany, where the Bundesbank governor Mr Hans Tietmeyer is determined that the European central bank operates free of political influence.

The franc has been one of most stable currencies within the ERM. "The central bank is proud that it has achieved the lowest medium and long term market rates in Europe and the third lowest in the world - after Japan and Switzerland," Mr Jean Claude Trichet, Governor of the Banque de France, told The Irish Times.

"It is not that we have pushed our interest rates down aggressively. You gain those very low rates by proving you are trustworthy." Along with low interest rates, France is enjoying very low, 1.5 per cent, inflation.

President Chirac reportedly wants to see French interest rates - currently around 3 per cent - fall still lower to encourage investment and growth. But Mr Trichet is said to be cautious. When Mr Chirac appointed two close associates to the central bank's Monetary Policy Council (CPM) this month, French commentators interpreted it as a sign that the president was putting pressure on the central bank to lower rates still further - a move the stock brokers were hoping for.

But at the CPM's first meeting this year, on January 16th, the council left interest rates untouched.

The French economy grew at a disappointing rate of 1.3 per cent in 1996, according to the Organisation of Economic Co operation and Development. The OECD predicts 2.5 per cent growth this year, but already economists are revising this figure downward. Credit Lyonnais last week said it expected only 1.9 per cent growth in 1997 - not enough to dent unemployment.

Nonetheless, 30 out of 37 industrial sectors analysed by the bank are expected to make profits this year, compared to only 23 out of 37 in 1996. The L'Expansion economic forecast centre foresees 2 per cent growth unless there is a stock market crash in the US, in which case French GDP would increase only 1 per cent.

At that low growth rate, France could not meet the Maastricht criteria for monetary union. As it is, the 3 per cent deficit spending requirement will be met through a little creative accounting: a one time £4.52 billion payment from France Telecom pension fund prior to the phone company's privatisation found its way onto the government's balance sheet.

Without the payment, the 1997 budget deficit would have reached 3.5 per cent.

Despite high unemployment and slow economic growth, French exports and the French stock market both experienced record years in 1996. France ended the year with an £12 billion current account surplus - the third highest in the world, according to the French central bank.

This is proof, say Mr Giscard's detractors, that the franc is not overvalued. But the export figures are artificially high because France imported so little due to low consumer demand.

Trade with Ireland was an exception: Ireland exported £2.2 billion worth of goods, making France the Republic's third largest market. Industrial components and computers accounted for most of this, according to Mr James Maguire, the director of the Irish Trade Board in France.

The success of the Paris stock market - which belatedly started to catch up with the New York, London and Frankfurt markets in 1996 - seems to confirm French writer Mr Viviane Forrester's thesis that companies are getting richer while the average French citizen gets poorer.