January 3 . 1959 THE ECONOMIC WEEKLY The Franc under Pressure (From Our London Correspondent) "MARKET pressures against the ports fell off in 1958 to about the been expected from such a devalua­ French frane and rumours level of the import programme laid tion operation about Impending devaluation are down for that period. However, Large Scale Borrowing not unusual Ever .so often some French exports suffered sharply The continued weakness in the event triggers off feverish activity due to the recession in world trade. French balance of trade is made on the Paris gold market and a In fact, exports fell short of the considerably worse by the trade flight of short-term capital from programme by nearly ten per cent. balance of the overseas French France occurs. Because of the In these conditions, and in spite of franc area. Metropolitan France frequency of these episodes these a favourable movement in the is responsible for settling the deficit rumours and currency movements terms of trade, the French deficit in of her overseas Empire with all seldom constitute news; the weak­ the balance of trade, running at an countries. In 1957 the deficit of ness of the French franc is chronic annual rate of about $1,300 mn in the overseas French franc area and has become a persistent phe­ the first half of 1958. remains with all non-franc countries, am­ nomenon in Europe's post-war substantial. ounted to $160 mn, after taking ' currency markets. The present Infructuous Measures into account a $48 mn foreign ca­ plight of the French franc. how­ pital inflow into these overseas ever, appears to be different; there The August 1957 20 per cent French territories- What in truth are now a number of unusual fac­ operation which resulted in the this implies is that to secure external tors influencing market operations outright devaluation of the franc balance France must not only solve and bringing about pressures, all was then regarded, at least by the her own trade deficit but achieve a of which reflect the trend towards French authorities, as part of the sufficient surplus which would be or an expectation of certain major aim to secure by 1961 a fairly sub­ adequate to settle the liabilities changes in the European currency stantial surplus in the current ac­ arising in the rest of the French system following the collapse of count of the balance of payments, franc area, the O E E C discussions for a "so that external debts could be France opened the year 1958 with European Free Trade Area, and the repaid and reserves reconstituted." a considerably weakened currency start of operations of the Common To the market, however, the '20 in spite of her devaluation. The Market on January 1. per cent operation had all the ap­ overall 1957 deficit was in practice pearance of the hastily arrived at Heavy Trade Deficit solved by large-scale borrowings decision to stop the flight from the from the International Monetary On purely balance of payments franc during the European curren­ considerations, the foreign ex­ Fund and from the European Pay­ cy crisis of August and September ments Union and by drawing on change market has every justifica­ 1957. In June I958 the system of tion for operating in such a manner the French gold and foreign ex­ levy arid premium on imports and change reserves. With the certain as to weaken the French franc. exports, which the twenty per cent The French balance of payments prospect of another severe foreign operation involved. was abolished exchange crisis in the first half of suffers from chronic deficits. On and on outright devaluation on the current account the deficit has been 1958. the French Government open­ basis of a new parity of exchange ed up negotiations for further growing at a rapid pace since 1956. was introduced. The regular and large international international credits and loans. The borrowings of France have so far In practice, this devaluation did Government of the United States, saved the French franc from com­ not amount to as much as twenty the I M F and the E P U together plete collapse. For France, it is per cent since simultaneously with agreed to grant France credits the course of foreign trade which the twenty per cent operation. ex­ totalling $655 mn of which some very largely decides the shape and port bonuses and countervailing $532 mn were available for use in deficit in the current account of the duties on imports were abolished. 1958. These loans solved the pro­ balance of payments. The immediate and favourable be­ blems of France in the immediate nefits of this operation were there­ future, This together with the In 1957 the balance of trade fore very much limited and appeared gold bought by the French authori­ showed a deficit of $1,390 mn com to last for only a few months. ties on the domestic market explains pared to $1,186 mn in the previous Between the third quarter of 1957 the rise in the gold and foreign ex- year. In the second half of 1957, it and the first quarter of 1958 French change reserves in the first half of will be remembered, the French internal prices rose by almost the 1958 by nearly $ 150 mn In July authorities reimposed severe con­ same extent as the twenty per cent this year the French government trols over imports, so nullifying fall in the external value of the floated a gold loan on the Paris much of their trade liberalisation French franc. The cost of living market which brought in gold to measures which they undertook in rose by fifteen per cent and the the value of $170 mn. Thus, while accordance with their obligations price of home and imported goods on the one hand the trade balance to the O E E C. As a result im- rose also by fifteen per cent. in 1958 tended to remain one of Since this despatch was written the Imports were further tightened by substantial deficit. on the other French franc has been devalued. an import programme, and in the hand France was accumulating gold Its publication was delayed as there ease of exports, a rise in domestic and dollars through an overall in­ was no issue of The Economic prices practically nullified the be crease in its burden of international Weekly on December . 27. 1958 Ed. nefits which would otherwise have indebtedness. WEEKLY

Devalue for Borrow Biggest Thermal Power Station turning, the station will produce With this background the new ar­ in Europe several times as much electricity as rangements for 1959 in particular the Dnieper Hydro-elects THE Starobeshevskaya Thermal Station does. the coming Into operation of the Power Station in Soviet Russia, The production proc Common Market without a parallel the biggest of its kind in Europe, automated. For the first 'time free trade area- augurs a new crisis came into operation on December turbo-generators and boilers are to for the French franc. In January, 24 as its first 100,000 kilowatt be operated from the central among the international loans ob­ turbo-generator began producing switch-board. The station will be tained by France there was the commercial electricity. credit granted by the E P U This burning upto 7 train-loads of coal Amounted to $250 mn which was The new thermal power station a day. The Donbas Power Stations regarded as a special gold credit will have 100,000 and 200,000 kwt. are generating half of the Ukraine's atilisable by France in the of the generators, and boilers operating electricity output. By the end of payment of gold for the settlement at super-high pressures and super­ 1965 Donbas' electric power capa­ of deficits within the E P U. The high temperatures of steam heating city will have increased about two­ important point about this was that With all of the generating sets fold TASS the E P U had. in turn, an obliga­ tion to arrange a counter credit to itself to finance its credit to France. Among the countries who gave the E P U the corresponding credit was Switzerland. With Switzerland, like Britain, outside the Common Market, and thus subject to the discrimination which the Common Market would imply on their trade, the Swiss have intimated that they would withdraw from the European Payment* Union and, according to the foreign exchange market circles, would allow the Swiss franc to have a floating exchange rate. If there is a parallel move towards restoring sterling convertibility, this would immediately cause not only a ter­ mination of the European Payments Union and all its credit facilities but would put the severest pressures on the French foreign exchange re serves and so enhance the prospect of another devaluation of the franc. This is by no means all. The Common Market will Itself place severe burdens on the French bal­ ance of payments. The particularly high internal price level and costs in France will sharpen the French balance of payments deficit in re lation to other countries of the Common Market This can be solved either by a severe deflation within the country, and this is re­ garded as impossible, or by another devaluation. The devaluation of the franc, though its likelihood is confirmed by the state of the balance of pay­ ments and the impact of the Com- mon Market, will affect the prestige ranee and weaken the leader- in continental Europe to which aspires. General de Gaulle is more likely to find alternatives to such a damaging policy as devalu­ ing the franc. But at the moment, the only alternative is to seek new logins and credits.