Franc facing 'crunch' day on exchanges

Chirac's commitment to maintaining strong French currency set for severe test

STEPHEN JESSEL in Paris

PAUL WALLACE in London

DIANE COYLE in Washington

The French franc is expected to come under further assault in the foreign exchange markets today after the pummelling it took on Friday.

"This is the crunch point," said Peter Spencer, professor of financial economics at Birkbeck College, London, and an expert on European monetary developments. "Once the market has a currency in its sights, an assault is likely to continue," he added.

The attack on the currency looks like developing into a major test of President Chirac's commitment to the "franc fort'' policy, developed under Francois Mitterrand, of linking the franc to the German mark with the ultimate ambition of entering monetary union in 1999. The Banque de France is likely to be forced to raise interest rates to defend the franc.

However, with the economy weakening and unemployment rising in August, such a step would run counter to President Chirac's objective of creating 700,000 new jobs by the end of next year.

"An aggressive and prolonged defence of the franc using interest rates is unlikely," Julian Jessop, European economist at HSBC Markets, said.

French political leaders yesterday attacked the actions by currency speculators, and reaffirmed their intention to cut the budget deficit to meet the Maastricht criteria for economic convergence and European economic and monetary union.

"I do not want to cut the deficits to please the markets or those I shall call the London gnomes," Alain Juppe, the French Prime Minister, told an RPR party meeting in Avignon. "We must be at the rendezvous of the strong ... those countries which refuse to let things slide ... and at the great rendezvous which Europe has set for the end of the century."

Speaking in Washington, where he was attending the meeting of finance ministers and central bank governors of the G7, Jean Arthuis, the Finance Minister, blamed speculators "who take their money and run" for Friday's assault on the franc, when it lost five centimes against the German mark.

However, Kenneth Clarke, Chancellor of the Exchequer, who is also at the G7 meeting, said: "Markets make their judgements on the fundamentals of economic performance." Referring to the blame heaped on the "gnomes of London'', he said, jokingly, "it used to be the gnomes of Zurich. London is the main foreign exchange centre in the world ... but they are international market makers."

Economists believe that the scope for France to successfuly defend the franc against a further, and sustained, assault by currency speculators is limited.

Mr Jessop said: "An aggressive and prolonged defence of the franc using interest rates is unlikely. The central bank has only been able to sell the 'franc fort' to the politicians on the basis that it means lower interest rates. If interest rates actually have to be raised to defend the currency, the game is up

"There is no doubt that the French franc is too high and real interest rates are too high. The French economy could grow much more strongly without rekindling inflation if it was released from the straitjacket of the 'franc fort' policy."

Slow growth in the economy is making it difficult for France to bring down the budget deficit from its current level of 5 per cent to the 3 per cent level in 1997 that is one of the conditions of the Maastricht Treaty for eligibility to monetary union.

This week's strike of civil servants against the government's proposed pay freeze shows the difficulties Mr Juppe is facing in convincing the markets that the French are willing to swallow the fiscal medicine necessary to achieve EMU.

Start your day with The Independent, sign up for daily news emails
Sport
The Queen and the letter sent to Charlie
football
Arts and Entertainment
Eurovision Song Contest 2015
EurovisionGoogle marks the 2015 show
News
Two lesbians hold hands at a gay pride parade.
peopleIrish journalist shares moving story on day of referendum
Arts and Entertainment
<p>
<b>Kathryn Williams</b>
</p>
<p>
When I was supporting Ray La Montagne I was six months pregnant. He had been touring for a year and he was exhausted and full of the cold. I was feeling motherly, so I would leave presents for him and his band: Tunnock's Tea Cakes, cold remedies and proper tea. Ray seemed painfully shy. He hardly spoke, hardly looked at you in the face. I felt like a dick speaking to him, but said "hi" every day. </p>
<p>
He was being courted by the same record company who had signed me and subsequently let me go, and I wanted him to know that there were people around who didn't want anything from him. At the Shepherds Bush Empire in London, on the last night of the tour, Ray stopped in his set to thank me for doing the support. He said I was a really good songwriter and people should buy my stuff. I was taken aback and felt emotionally overwhelmed. Later that year, just before I had my boy Louis, I was l asleep in bed with Radio 4 on when Louis moved around in my belly and woke me up. Ray was doing a session on the World Service. </p>
<p>
I really believe that Louis recognised the music from the tour, and when I gave birth to him at home I played Ray's record as something that he would recognise to come into the world with. </p>
booksKathryn Williams explores the works and influences of Sylvia Plath
News
Liz Kendall played a key role in the introduction of the smoking ban
newsLiz Kendall: profile
Life and Style
techPatent specifies 'anthropomorphic device' to control media devices
Voices
The PM proposed 'commonsense restrictions' on migrant benefits
voicesAndrew Grice: Prime Minister can talk 'one nation Conservatism' but putting it into action will be tougher
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?