Ordeal at Home, Uncertainty Abroad

Both internally and internationally, the economic impact of France's upheaval might be of more lasting importance than the political. The Fifth Republic--and, indeed, even De Gaulle --may survive, but no matter what course events take it seems certain that France's economy is in for a long ordeal. The general workers' strike sapped French industry of more than $100 million a day in output--and this at a time when it was already showing signs of stagnation. France's growth rate, which climbed above 7% in the early 1960s, last year ebbed to 3.75%. The De Gaulle government had high hopes of increasing the figure to at least 5% in 1968. Now France will be lucky to achieve real growth of 4% in the entire year.

Still more cause for concern is the likely inflationary impact of any settlement. The package negotiated by Premier Georges Pompidou--and rejected by most of the nation's striking workers --included an increase in the minimum wage from 440 to 600 an hour, a 10% general pay increase for all workers in private industry, a 40-hour week (v. an average 46.3 hours now), and improved social security medical benefits. That settlement would cost at least a total of $3 billion, but the strikers wanted more.

Special Taxes. Whatever they finally get, the cost will certainly aggravate French industry's already tight profit squeeze. The workers were largely justified in their demands, since their wages lag behind those in every other Common Market country except Italy. But despite its relatively low payrolls, French industry, plagued by inefficiencies in production and distribution, has yielded slender profit margins. State-owned Renault, for example, earns less than a 1% return on sales, compared with 5% for West Germany's Volkswagen. Compagnie Francaise des Petroles works on a 4.5% profit margin v. 8.6% for Royal Dutch/Shell.

To keep profits from vanishing altogether, any wage hike of the magnitude demanded by France's workers must be followed by a round of price increases. Higher price tags on French goods, together with a big increase in consumer income, would swell imports and cut exports at a time when the country has already run into balance of payments difficulties. The French payments surplus, which amounted to $286 million in 1966, dwindled to nothing last year; even before the crisis, France was expecting to run a slight deficit this year.

France's payments position stands to get an additional jolt on July 1, when the Common Market is due to abolish all remaining tariffs on trade between member nations. At the same time, the Market is scheduled to introduce uniform external tariffs, which will promptly be reduced in accordance with Kennedy Round agreements. This figures to hurt France, since it presently enjoys some of the highest tariff levels of any of the six Common Market members. Elimination of all tariffs within the Market, meanwhile, will completely open French borders to the goods of such powerful trading partners as West Germany and Italy--which, in view of the current situation, leads to fears that France may try to maintain its tariffs past next month's deadline.

Even if it goes along with the upcoming tariff cuts, France could still adopt a protectionist course by imposing a special tax on imports. A more conventional cure for inflationary troubles, of course, would be a tax increase to sop up demand. But France's taxes are already high, and it would be difficult, if not impossible, to raise them without making Frenchmen even more restive. Indeed, the De Gaulle government has promised to cut income taxes and consider giving industry new tax relief.

A Good Thing. The crisis eroded confidence in the franc. In Europe, tourists who wanted to exchange French currency had trouble finding buyers, wound up paying far more than the official rate. On the London market, the price of the franc dipped as low as 19.80 U.S. cents, well beneath the exchange rate of 20.225 cents. Intervening in order to prop up the price, the Banque de France instructed the Swiss-based Bank for International Settlements and the New York Federal Reserve System to buy up francs in its behalf.

The initial flight from the French franc, mostly into West German marks and Swiss francs, was not as widespread as it might have been. One reason was that relatively few French francs were in foreign hands. The real danger came from Frenchmen, some of whom were already carrying suitcases filled with francs across the border to sell in Switzerland. Because of the shutdown of French banks, such activity was fairly limited. But once the banks reopen, there could be a rush to withdraw savings. Historically distrustful of their own currency, many Frenchmen began keeping their money in francs only after De Gaulle came to power in 1958. The current crisis could very well scare much of it back into foreign currencies.

Faced with that prospect, the De Gaulle government slapped tight restrictions on the movement of private capital--both francs and gold --out of the country. With traffic in francs thus curbed, France called off its efforts to support the currency in Europe. But the Federal Reserve Board at week's end was still buying francs at Paris' behest, and France obviously was going to be forced to dip deeper into its substantial reserves--including $5 billion in gold, $1 billion in dollars--if the run on its currency worsened. That not only ruled out the likelihood of any further French-government raids on Washington's gold stock, but also meant that some French-held gold might even find its way back to the U.S. Any inflationary upsurge in the French economy, meanwhile, would help spruce up trade figures of West Germany--which already accounts for 19.2% of France's total imports--as well as those of Britain and the U.S. Thus, said David Rockefeller, president of New York's Chase Manhattan Bank, on a visit to Brussels, a French trade deficit might even be "a good thing for the dollar in the long run."

Devaluation? Clouded by uncertainty, world gold markets were nonetheless calm, with prices for the metal closing out the week below their record levels. Yet the danger to monetary stability was far from over. There remained a good chance, for example, that individual Frenchmen would start exchanging their francs for gold rather than foreign currency, thereby jeopardizing the two-tier price gold system by driving the free-market price farther above the $35-per-oz. official price. More ominous still was the possibility that inflation and a persistent trade deficit could eventually force France to devalue the franc. Increasing French exports and slowing down imports could play havoc within the Common Market, force other countries to devalue their own currencies and put added pressure on the competitive positions of both the U.S. and Britain.

France's large reserves, which conceivably could be used to finance balance of payments deficits for several years, mean that devaluation, while a possibility at any time, may yet be avoided. It all depends on how effectively France manages to put its economic house in order, and that will require, in particular, a sorely needed modernization of an industrial system that has long been overprotected and underproductive. Thus, even when France is well away from the brink of political chaos, its government will have another, equally delicate task ahead.

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