France and Germany vow to defend franc: Old partners may link currencies to show their alliance is still at the heart of the Community

FRANCE and Germany yesterday underlined the solidity of their political relationship by committing themselves to defend the French franc. If tension on currency markets continues, they may make a high-profile gesture to link their currencies, banking sources said yesterday.

Both sides were putting on a tough act, demonstrating that the Bonn-Paris axis is the still the lintel of the European Community. The central banks and governments of the two sides said the franc-mark relationship did not need correction. 'Together with their European partners, they will continue to co- operate according to the rules of the European Monetary System (EMS),' a statement said.

The immediate strategy seems to be to raise interest rates and intervene in support of the currency. The next step may be to limit flows of capital, officials in Brussels said yesterday.

But banking sources in London and Paris said that if the franc is still in trouble, it could be the occasion for a high-profile gesture to cement the EMS more firmly. 'Ideas are circulating about linking the hard-core currencies,' said a monetary source in Paris. These include the franc, mark, Belgian franc and Dutch guilder. The softer currencies would be given wider bands in the EMS, allowing them more room for fluctuation.

Discussion has mainly been at the level of central bankers, and the idea could meet resistance from politicians in Bonn. So far the intention had been to postpone action until the autumn. But a crisis in the Franco- German link, so politically vital to the European Community, could bring more rapid action.

There are two weak links, the foreign exchange markets believe, and they are tugging on them. The first is the Bundesbank, which has been slow to lower interest rates. The second is in France, where the markets suspect the new government coalition may not be ready to suffer the pain of high interest rates required to stay in the EMS at present levels.

The Economy Minister, Edmond Alphandery, said this week the economy was coming out of recession and that the currency was competitive.

The government may decide to spend its way out of the recession by easing budget policy, said Bernard Godemont of Nomura Research Institute in Paris. But he said that for political reasons, the government would have to hold firm to the Franco-German monetary link.

'For 30 years, the French centre has existed only for Europe,' he said. 'If they let go of that, they let go of the presidential race.'

A firmer core to the EMS would reassure investors that European monetary union - a single currency - was coming sooner rather than later, and that Paris and Bonn stand shoulder to shoulder. To underline this, Chancellor Helmut Kohl of Germany and President Francois Mitterrand of France met this week. They discussed plans for a special summit of EC leaders later in the year to relaunch the Community after the ratification of the Maastricht treaty.

Economic slowdown should not be an excuse for braking the EC's development, said President Mitterrand. 'This is one more reason why we must march forward with European unity,' he said. Mr Kohl stressed the importance of monetary co-operation. 'It is very important to us that the countries which are in the European Monetary System stay there,' he said.

Franc pulls through, page 17