The Battle for the Franc

By Frederick Painton

As Mitterranomics fails, the French swallow bitter medicine

If there was ever a time when the French looked for a display of leadership, it was last week as President Francois Mitterrand addressed the country to explain the painful consequences of the French franc's third devaluation in 22 months of Socialist government. Speaking on nationwide television, Mitterrand faced a public also confused by a slow-motion Cabinet reshuffle in which, after days of hesitation and debate among his advisers, the President had anticlimactically reappointed Premier Pierre Mauroy, 54, to head a streamlined government composed of virtually the same faces. Considering the difficulty of his task, Mitterrand's rhetorical talents rose to the occasion. In an inspirational vein reminiscent of former President Charles de Gaulle, Mitterrand urged the French to be "mobilized without weakness and complacency in the service of France, even if it is difficult, and because it is difficult."

Difficulty was the recurring theme of the President's appeal. He acknowledged what he called "the expression of your worries" in the municipal of elections that had cost his Socialist-Communist coalition 30 major mayoralties only two weeks earlier. He conceded that the "realignment" of the franc added urgency to the question of whether his economic policies were "good for France." Not surprisingly, Mitterrand concluded that they were. Said he: "In several months over hard terrain we have achieved more social progress than France has seen in the past half-century." But, he said, the nation now had to struggle on three fronts--unemployment, inflation and the foreign-trade deficit. Asked the President: "Without you, what can we do?"

Two days later, Mitterrand's government announced a broad series of austerity measures. In addition to hefty cutbacks in government spending, they included a $285 limit on the amount of currency Frenchmen will be allowed to take abroad and a 1% income tax surcharge to help cover the $1.9 billion social security deficit. To many experts, the emphasis on "rigor" was strangely reminiscent of the policies of former President Valery Giscard d'Estaing and his Premier, Raymond Barre, an approach that Mitterrand had harshly criticized during the 1981 presidential campaign.

Mitterrand's decision to reappoint Mauroy came as a surprise to many Frenchmen. It was Mauroy, after all, who had announced only in February that he "would not be the man of the third devaluation of the franc," and who, during the municipal election campaign, had blandly assured voters that in the struggle for economic equilibrium, "the worst is behind us." A gifted and genial politician, Mauroy has had day-to-day control over the Socialist experiment since Mitterrand's election in 1981. Wrongly anticipating a worldwide economic upswing and applying economic theories that had by then been discredited in most industrial countries, the Socialists tried to spend their way out of recession. But unemployment continued to rise (from 7.2% when Mitterrand was elected to 8.9% now); French inflation declined only modestly (from 14.3% in mid-1981 to 9.2% now) as inflation in other countries fell sharply; and the trade deficit went from $10.8 billion in 1981 to a record $14 billion last year. As the situation worsened, the government applied ever larger Band-Aids: two devaluations of the franc, wage and price controls and, finally, last week's third devaluation. Thus the main question was why Mauroy was asked to lead the fight against a possible fourth devaluation.

The latest franc crisis had been building up for months, but for political reasons the government chose to wait until after the municipal elections were over before tackling the problem. Meanwhile, the election in West Germany of Christian Democratic Chancellor Helmut Kohl made matters worse. Kohl's reassuring conservatism prompted even more speculators to play the deutsche mark against the failing franc. To the French it was "the deutsche mark problem," and Mitterrand expected Bonn to correct it by simply raising the value of the West German currency. To the West Germans and others it was a "franc problem" caused by France's dismal economic performance. When the finance ministers of the ten European Community nations met in Brussels, the stage was set for a collision.

The battle of Brussels, in fact, was an extension of a struggle that had been going on in Paris between two schools of economic policy within the Socialist Party: the moderate, internationalist "Europeans" and the leftist, often nationalistic "Albanians," as they were nicknamed derisively by their opponents, who accuse them of wanting to cut France off from the rest of the world, like Communist-ruled, isolationist Albania. The moderates argued that France must stay in the European Monetary System (E.M.S.), which requires every member to maintain the value of its currency within a narrow range against the others, even at the cost of domestic sacrifice. The "Albanians" urged Mitterrand to bolt the E.M.S. and resort to protectionism.

When Finance Minister Jacques Delors headed for Brussels, his instructions from Mitterrand called for an absolutely final fall-back position of a 5% revaluation of the mark and a 3% devaluation of the franc. Delors, who is normally a firm pro-European, arrived with all guns blazing. Referring to West Germany's reluctance to revalue, he asked, "What am I supposed to do with arrogant and uncomprehending people?" Unless the E.M.S. could be realigned to France's advantage, Delors threatened, France would withdraw, a move that would severely undermine what little European unity exists. Delors held 13 separate meetings with West German Finance Minister Gerhard Stoltenberg, some lasting hours, some just a few minutes. According to a West German insider, Delors's behavior was "beyond belief." He was said to have threatened, raged and thrown temper tantrums. Said Stoltenberg privately of the marathon negotiations: "It was an experience I would not want to repeat." But in the end, Delors's intransigence paid off. He improved on Mitterrand's "final" position by obtaining a 5.5% mark revaluation and a 2.5% devaluation of the franc.

There was no doubt in either Paris or Bonn that the West Germans had made concessions for political reasons. Kohl remembered that Mitterrand had given him much valued backing in his pro-NATO position over the issue of deploying new U.S. missiles in West Germany by the end of this year.

Mitterrand rewarded Delors for his Brussels performance by broadening his powers. In the new Cabinet, in which the number of senior ministers has been reduced from 34 to 15, Delors now ranks second only to Mauroy. Although the proportion of Communists has not changed (two out of 15, plus two junior portfolios, vs. four out of 35 before), the new team seemed designed to placate bankers, businessmen and foreign investors who will be monitoring France's economic performance.

Mitterrand's decision to reappoint Mauroy involved a careful political calculation. Whatever his disadvantages, Mauroy is perhaps the one leader who can cajole the Socialist electorate into swallowing the bitter pill of belt tightening. He pushed through the unpopular wage and price freeze last year. For Mitterrand, there is also an advantage in having Mauroy absorb the unpopularity that the stringent new economic measures will generate. If Mauroy becomes too much of a drag on the party, the President can replace him before the next legislative elections, which are scheduled for 1986. Mitterrand thus has given Mauroy two years in which to perform a healing miracle on the French economy. The next battle for the franc has begun. -- By Frederick Painton. Reported by Jordan Bonfante and Thomas A. Sancton/Paris

With reporting by Jordan Bonfante, Thomas A. Sancton/ Paris This file is automatically generated by a robot program, so viewer discretion is required.