France: The Bitter Taste of Reality

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To calm skeptics, Mitterrand devalues the franc

No sooner had he moved into the Elysée Palace than he set about reflating the economy to fight France's record 7.7% unemployment. True to his campaign promises, he reversed predecessor Valéry Giscard d'Estaing's cautious policy by introducing a budget calling for 27% higher public spending and a $17 billion deficit. He made good on a longstanding pledge to take over private banks and key industries. He increased welfare benefits to families, the aged and the handicapped. But last week President François Mitterrand was forced to administer a dose of economic medicine.

The main problem was that skittish investors were selling their francs for sounder currencies, like the German mark. In a single week, the Bank of France spent $1.5 billion buying up francs to preserve their value. To help ease the strain, eight European countries agreed to a complex realignment of their currencies that had the net effect of devaluing the franc 8.5% against the mark.

While making French exports cheaper, the move would also make imports more expensive. In an attempt to protect consumers, Finance Minister Jacques Delors ordered a six-month freeze on the prices of most services and a three-month ban on price hikes for such staples as milk, sugar and bread. Manufacturers were urged to hold price increases to 8% next year (vs. the current inflation rate of 14%), and importers were ordered not to widen then-profit margins. To show that it, too, could cut back, the government announced that it was postponing $2.6 billion of budgeted spending. One of Mitterrand's aims was to help persuade unions to curb their wage demands.

The new economic measures brought the hibernating political opposition out in force for the first time since the Socialist victory. "Five years of such policies will set France back 20 years," fumed Raymond Barre, the former conservative Premier and an economics professor. Declared defeated President Giscard d'Estaing, in his maiden public comment on Mitterrand's performance: "Devaluation after just a few months in office rings out like the first sound of an alarm bell."

The Socialists argued with justification that their policies alone did not bring about the move. Since 1979, when parities were fixed within the European Monetary System, France's inflation rate has averaged more than twice West Germany's. This reduced the competitiveness of French products to the point where, even if Giscard had been reelected, a devaluation would have been necessary. François-Xavier Ortoli, Finance Commissioner for the European Community and a Finance Minister under President Charles de Gaulle, described Mitterrand's decision as "sound management." The price controls received less favorable reviews.

Said Alain Chevalier, managing director of Moet-Hennessy and spokesman for the Patronat, France's business lobby:

"Blocking prices and wages has never succeeded in blocking inflation."