A choice between jobs and 'franc fort'
Thursday 10 August 1995
The fate of the franc matters not only for France, but for Europe and Britain. The franc fort - the policy of maintaining the value of the franc against the mark - has been the linchpin of French economic and monetary policy since its inception 12 years ago. If the French were to yield to a devaluation now it would be a severe blow to the plan for monetary union.
That in turn makes the fate of the franc fort a matter of compulsive interest to Euro-sceptics in Britain. They see in Mr Chirac a welcome reversion to familiar Gaullist nationalism after the nightmare reign of that arch-federalist, Francois Mitterrand. The schadenfreude that would greet a feeble franc can scarcely be imagined.
Yet the commitment of the French economic and political establishment to the franc fort is not to be under-estimated. This was most clearly demonstrated in the aftermath of the disruption of the ERM two years ago. Contrary to market expectations, the French central bank did not exploit the new wider bands to bring down interest rates with a bump. Instead, they were kept up until the franc began to regain ground against the mark. A similar resolve was displayed this spring when the Banque de France jacked up short-term interest rates to protect the franc.
Proponents of the policy can point to the considerable benefits it has brought the French economy. Inflation has been wrung out of the system - indeed, it has been lower than in Germany for four years. The pay-off from increased credibility is cheaper capital, with the gap between French and German long-term rates less than half that between British and German rates.
Nor is it immediately apparent that a strong currency has damaged French competitiveness. The French are running a current account surplus of nearly 1 per cent of GDP. With wage inflation extremely muted and continuing productivity gains, unit labour costs in manufacturing have fallen by 5 per cent below their level of late 1992, when Britain left the ERM.
But there is more at stake for the French than economics. The franc fort forms part of the broader strategy of containing Germany through an embrace that ensnares. First, stake out your credentials as a hard currency that can hold its own with the mark. Then, get a seat at the interest rate table by supplanting the Bundesbank with a European central bank.
Set against all this, however, is the overwhelming need to get unemployment down. During the election campaign, Mr Chirac called for "a reversal of priorities" from the struggle against inflation which was now under control. Instead, "absolute priority" should be given to the battle against unemployment.
Last week, the French labour ministry cut unemployment below 3 million by redefining unemployment. On the old definition it fell by 16,700 to 3,234,000. What cannot be redefined is the fact that unemployment is much too high.The goal of Prime Minister Alain Juppe to create 700,000 jobs within 12 months looks over-ambitious in the extreme.
Advocates of the franc fort say the jobless crisis in France cannot be attributed to the policy. Unemployment is "structural" - that favourite word invoked by those who want to sit on their hands when it comes to proposals to boost the economy for the sake of jobs.
For all its obvious convenience, however, there is something in the argument. With employers shouldering a much bigger burden than their counterparts in the UK in the way of social security costs, there is little incentive to hire people and every incentive to increase efficiency in the existing workforce. Mr Juppe has introduced measures to try to tackle this problems in his recent mini-budget. However, with the other hand, the new French administration has raised the level of a minimum wage already considered to be too high and commonly blamed for the high level of unemployment among young people.
What cannot be disputed is that if the French economy had performed more strongly in the 1990s, unemployment would be much lower. The recovery in the year to March, when GDP grew nearly 4 per cent, brought about the creation of 300,000 jobs. As Julian Jessop, European economist at HSBC Markets, says, France will do well to create many more with growth slipping below 3 per cent in the next year or so.
Equally, there can be little doubt that a principal reason for this slow rate of growth is the perseverance with the franc fort in the testing conditions of the 1990s. One problem is that the strength of the mark has led to an appreciation against all currencies.
Since Britain left the ERM nearly three years ago, its effective exchange rate has weakened by 15 per cent. The French rate has strengthened by 10 per cent. The competitive challenge is felt most acutely from super- devaluers such as Italy, over 30 per cent down on the effective rate.
Another difficulty is that the policy acts as a brake on the easier monetary policy the economy clearly requires. While long-term rates matter more for France than they do in the UK, money market rates at over 6 per cent are too high for an economy with inflation under 2 per cent and still only in its second year of recovery.
Jobs versus the franc fort: that is the battle front of the French economy in the months ahead. The first skirmish has gone to the Banque de France. The markets may have the last laugh.
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