The most alarmist reactions suggested that European construction had been harmed. 'Is Europe broken?' asked the popular evening newspaper France-Soir. The conservative Le Figaro and Le Monde singled out Germany for blame. 'All of Europe is today paying for the mistakes made by the Bonn government in its application of the German unification process,' Le Monde said. Le Monde's main headline said the ERM agreement would 'hinder' European union.
Mr Balladur, flanked by Edmond Alphandery, the Finance Minister, Jacques de Larosiere, Governor of the Bank of France, and other top monetary officials, said the Brussels agreement to widen the bands for the franc and four other currencies by 15 per cent each side of their central rate had been negotiated to preserve the European Monetary System. The franc, he said, had been 'maintained at the same level' by keeping the same central rate while 'Europe and the EMS . . . persist'.
France has cut interest rates several times since the Gaullist Mr Balladur took over the government after the right won parliamentary elections in March. Speculation against the franc flared last Thursday after the Bundesbank failed to cut a key interest rate that France had awaited to allow it to cut its own rates further as a measure to boost the economy. This signalled the end of the fixed parity between the franc and the mark that Mr Balladur and his Socialist predecessors in government held dear.
Jean-Claude Betbeze, the director of economic studies at Credit Lyonnais, the banking group, said the new situation would bring 'a very big autonomy to national policies'.
Many analysts said the French government, with this new freedom, could now speed up interest rate cuts without reference to Frankfurt. Le Figaro said that, in the short term, 'the accelerated drop in rates would just be a repetition of what happened last September in Britain and Italy when, under pressure from the monetary turmoil, the pound and the lira had to leave the EMS.'
Mr Balladur, reacting just a few hours after EC finance ministers wound up their talks in Brussels, said the French government would not impose cuts. 'We have to leave it to natural movements,' he said. 'We must not try to interfere or to force them (cuts) which would only lead to poor results.'
Kermit Schoenholtz of Salomon Brothers said the ERM currencies were now 'effectively floating' and short-term interest rates could be expected to fall sharply, dropping to below 5 per cent in France by early 1994, eventually stimulating growth.
The main political casualty of the crisis is likely to be Paris's privileged relationship with Bonn. Mr Balladur said 'the re-unification of Germany prompted it to make choices which are not necessarily compatible at all times and in all their consequences with all the interests of its partners.'
He said, however, that he regarded the Paris-Bonn alliance as 'fundamental' and diplomats from other EC countries said they expected the French government to work hard to preserve this axis, which both Paris and Bonn consider central to European construction.
However, amid general anger in the media at German policies and with likely stirrings from politicians opposed to the Maastricht treaty on European union who oppose France's economic dependency on Germany, some damage to the relationship seems inevitable after the summer break.
Le Figaro said the EMS needed 'harmony in Franco-German relations' to function. 'This existed for a long time, politically and economically. But the fall of the Berlin Wall arrived to pull down this bamboo scaffolding' as Bonn made the wrong economic choices.
'Since nothing more could be expected from Germany, the shock of re-unification had to bring a new shock for the EMS,' Le Figaro said. 'Facts are stubborn. Markets are there to remind politicians when they forget this. The German chancellor should meditate on this.'
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