Balance Of Payments: A Confluence of Self-interest

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The strains caused by British devaluation and U.S. curbs on the outflow of dollars last week prompted continental Europe to begin changing its economic course.

Top European financial experts agreed that their countries must dip into their stores of gold and monetary reserves to spur economic growth. By doing so, the Europeans expect to help both themselves and other parts of the free world to resist rising unemployment and a slowdown in international trade, two deflationary forces unleashed by the U.S. and U.K. actions.

As a remarkable confluence of self-interest among nations, the new policy was especially welcomed by the U.S., which has been pressing for foreign help to minimize the global impact of efforts to end its balance of payments deficit. Said Treasury Under Secretary Frederick Deming: "The Europeans have accepted the realities of the U.S. position and shown a willingness to adopt offsetting policies."

Priming the Pump. Deming led the U.S. delegation to a two-day Paris session of treasury and central bank officials from ten nations at which the Europeans charted their new course. At a meeting in the elegant privacy of Château de la Muette, home of the Organization for Economic Cooperation and Development, the group agreed that the wherewithal to finance world trade will shrink by $4 billion over the next twelve months as a result of the British and U.S. retrenchments. That is precisely the amount by which the reserves of the six Common Market countries rose during 1967. Thus continental Europe, which managed only a torpid 2.5% economic growth last year, is in a strong position for a shift to deficit spending, government pump priming, and measures to hold down interest rates. By such means, marks, francs and guilders would help to replace the pounds and dollars no longer available to bankroll trade and investment.

That prescription was barely a day old when France adopted it last week. Hardly famous for their international cooperation, the French acted chiefly in response to internal pressures—but that will not diminish the result. Concerned over 4½% (and still rising) unemployment, the Gaullist regime took steps to pump $675 million of new spending money into the sluggish French economy. The government raised family allowances (which form a major part of the income of the poor) by 41%, boosted old-age pensions by $20 a year, and granted a 15% cut in personal income tax payments due Feb. 15. The Cabinet also ordered a 10,000-unit increase in construction of public housing this year, lowered interest rates on loans for construction, exports, farm and industrial equipment, and expanded tax incentives for private and public investments.