Worries over 'strong franc' overshadow budget debate

The French National Assembly yesterday opened a two-day debate on the 1996 budget that promised stormy arguments about public spending priorities, means-testing of benefits and job-creation schemes. The debate threatened to be upstaged, however, by the old controversy over interest rates and the value of the franc.

The opening salvo was fired on Sunday by the National Assembly chairman, Philippe Seguin. Addressing Gaullist party delegates gathered for the election of Alain Juppe as party leader, Mr Seguin sketched out what appeared to be an alternative government programme, whose priority would be "cutting the domestic budget deficit".

His call to cut the deficit, expected to reach 340bn francs (pounds 45bn) by the end of this year, was accompanied by an appeal for a reduction in interest rates, which he said were destroying chances of economic growth. Mr Seguin's attack on interest rates that are among the highest in Europe appeared directed not just at the Bank of France but at the government's"franc fort" policy, which is seen as handicapping France in the international labour market.

Until now, Mr Seguin's position might have been interpreted as lobbying for the abandonment of European monetary union. The rationale behind the "strong franc" policy is to keep the rate of the franc consistent against the German mark in preparation for the introduction of the single currency in 1999. The deficit has to be cut to 3 per cent of GDP for the same reason: to meet the Maastricht "convergence criteria".

But Mr Seguin, who campaigned against the Maastricht treaty, said he now accepted the single currency. His remarks can only be reconciled if they are seen as a call for the rate of the franc against the mark to be renegotiated at a lower level.

Mr Seguin is not alone in suggesting that France ought to abandon the "strong franc".Monday's Le Monde published three authoritative articles on different aspects of the case.

One, by Jean-Pierre Chevenement, a former minister, said monetary union had proved too divisive. Another, by Professor Gerard Lafay, an academic economist, called for the governor of the Bank of France to be replaced, and with him, the "strong franc". The third, from an employers' representative, said high interest rates were preventing job creation.

However, the question is whether President Chirac, whose campaign pledges included the "strong franc" policy, could break that promise.