Strain placed on alliance as franc comes under pressure

THE BUNDESBANK's decision not to lower its key discount interest rate deals a heavy blow to the Paris-Bonn axis which, for France, has rested mainly in recent months on German support for the franc.

With the franc under renewed pressure, the current crisis adds grist to the mill of opponents of dependence on what one French banker calls 'monetary purists' in Frankfurt.

Most of the dissent is concentrated within the dominant Gaullist RPR party behind the leadership of Philippe Seguin, the National Assembly president and the main campaigner against ratification of the Maastricht treaty last year.

The argument of Mr Seguin and others has been the classic one that allowing the franc to float would stimulate exports and boost the economy.

Most French industrialists have rejected this argument, giving their support to a strong franc policy to which the last Socialist government held dear and to which Edouard Balladur, the Gaullist Prime Minister, has been faithful since he took office in March.

As France has grown steadily more distant from Germany in the diplomatic field, particularly over the former Yugoslavia, backing for the franc has become the main pillar of the two countries' alliance. If this is seen to have failed the consequences are likely to be far-reaching bilaterally, within the European Community and within the government majority.

Jacques Chirac, the RPR president and leading candidate to succeed President Francois Mitterrand in 1995, is reported to have withheld his public support for Mr Balladur's policy of keeping the franc tied to the mark last week for three days, an indication that he was reluctant to be identified with a policy that was already doomed.

The economic background to the speculation against the franc has come from worse-than-expected statistics since the beginning of this year as the Gaullist-led government took over from the previous Socialist administration. This has made a defence of the franc similar to the battle that raged last autumn more difficult to justify.

Recession has been late in coming to France. Now that it has, analysts expect it to be the worst since the Second World War in depth and duration, while an outlook published by the state statistical institute has dampened hopes of early recovery.

Valery Giscard d'Estaing, leader of the UDF, a partner in France's centre-right government coalition, said the Bundesbank's Lombard rate cut was welcome and should calm markets but would not enable France to cut its own rates further for the moment.

A former president, Mr Giscard d'Estaing said he and Mr Balladur had agreed everything must be done to preserve the European Monetary System and keep the franc in it.