Download The Economy of the Fifth Republic

THE
ECONOMIC
WEEKLY
November 12, 1959
From the London End
The Economy of the Fifth Republic
THE
unceasing d r i v e of General de
Gaulle to control the pace of
the p o l i t i c a l settlement in East-West
relations and his remarkable success
in commandeering for himself the
entire p l a n n i n g of the S u m m i t discussions has
necessarily
projected
France i n t o the forefront of p o l i t i cal powers in Europe. Has there
been any corresponding d r i v e to reconstruct the economic p o l i c y of the
F i f t h Republic? Does France portray an economic .strength w h i c h
matches
its
political
influence?
These are
necessary
questions for
il goes w i t h o u t saying that w i t h o u t
securing a f i r m
economic basis in
France m u c h of General de Gaulle's
political postures w i l l prove o f little
consequence.
The economic recession of 1957-58
w h i c h affected most of the industrialised countries h a r d l y touched
the French economy. There was a
slight and short pause in the f o u r t h
quarter of 1958 but in general the
r a p i d post-war expansion in indust r i a l p r o d u c t i o n has been maintained. E m p l o y m e n t
continues
at a
h i g h level and for once there is no
perceptible pressure on the French
exchange reserves. French official
publications g o
further
i n their
description of the economic recovery:
the chronic p r o b l e m of inflation has
been mastered
and for
the first
time in 1959 prices were held w i t h i n
planned l i m i t s .
CHRONIC
PAYMENTS
DEFICIT
The nature of the inflationary
problem in post-war France needs
to be noted. The
volume of real
savings w i t h i n
France was never
sufficient to finance
the
t o t a l of
private investment plus the regular
budgetary
deficits of the
French
state. The deficit covered not o n l y
p u b l i c investment but also a proportion of the Government's
current
expenditure w h i c h was not covered
by revenue. Hence
that p a r t of
the shortfall of
savings accounted
by the budget deficit
over p u b l i c
subscriptions to Government loans
was f i n a n c e d b y open i n f l a t i o n i n
the f o r m of
b o r r o w i n g s f r o m the
Rank of France. T h e savings defic i t in the p r i v a t e sector was financed
by the simple device of m a r k i n g up
prices.
The consequences
of this crude
i n f l a t i o n a r y process was all-embrac-
i n g . There were chronic physical
shortages and bottlenecks. The demand f o r labour made necessary a
considerable i m m i g r a t i o n of workers f r o m N o r t h
A f r i c a and elsewhere.
Wages
rose
with
the
strengthened b a r g a i n i n g powers of
the trade unions. The balance of
payments was in chronic deficit and
the foreign exchange reserves were
in constant danger of depletion.
M o r e serious was the deep and continued mistrust of the currency on
the part of French citizens. This
found expression in the accumulation of foreign currency balances
and the h o a r d i n g of gold.
"CATEGORICAL
IMPERATIVES"
The overthrow of the F o u r t h
Republic was not confined to certain
changes in France's constitutional
structure; it involved as well the
abandonment of many of the assumptions of economic policy of the past.
Tlie economic habits of the *o\d
system' were
seen by the new
regime to be
irreconcilable with
what was termed the 'categorical
imperatives' of French economic
policy. These objectives, to which
everything else
was
subordinate,
were officially described in the most
c o m p e l l i n g terms. First, to enable
a ' re-assertion of France's position
as a w o r l d power' the most r a p i d
economic expansion was necessary;
France had to "catch u p ' w i t h other
Western nations
both in terms of
industrialisation and what was called 'economic weight'. The second
categorical
imperative
concerned
the fullest utilisation of the physical
resources of the
Overseas
FrancZone.
The
objectives
were
seen to
demand an end to all those practices
and habits w h i c h in one way or
another provided the
stimulus to
p r i c e i n f l a t i o n . There was a further consideration in French p o l i c y ,
The Common M a r k e t h a v i n g come
to be regarded in France as a v i t a l
instrument for containing the ascendancy of West
Germany
in the
European economy- made necessary
a reform of the financial system so
as to q u i c k l y restore the competitiveness of French industry and
confidence in the franc.
MONETARY
The
monetary
1559
REFORMS
reform
arising
from these considerations was the
product of the
Rueff Committee.
I t involved a n immediate reduction
of budget deficit, the a b o l i t i o n of
the indexation clauses of wage contracts, i e, the freezing
of most
wage rates, confining price rises to
no more than 4 per cent in 1959
and to devalue the franc by 17
per cent (net 13
per cent after
accounting f o r the internal
price
r i s e ) . These reforms
were to be
followed by the restoration of the
c o n v e r t i b i l i t y of the franc and the
liberalisation of i m p o r t s .
The reform very q u i c k l y restored
confidence w i t h i n
France. There
was a sharp
influx of short-term
funds
previously
held
overseas.
Savings rose and
w i t h the pause
in private
investment in the last
quarter of 1958, the opening months
of 1959 saw a sharp increase in the
l i q u i d i t y of the economy: the money
market was no longer under strain
and shrot-term interest rates eased. In
the field of debt management the
Government for once refrained f r o m
m e d i u m and long-term b o r r o w i n g
and forced the nationalised industries to seek their financial need.s
on the open
market. The
1959
budget deficit has been kept w i t h i n
the l i m i t s specified in the
Rueff
Report.
ON THE EXTERNAL FRONT
On the external
front, France
secured a
substantial
increase in
its exports,
particularly
to the
non-franc
world. Imports
were
reduced by the effects of the devaluation and raw material require
rnents were met by t a k i n g more of
the exports of the Overseas Franc
Zone. M o r e
important
was the
substantial inflow of French-owned
short-term capital held abroad. This
was supported by increased U S
long-term investments f o l l o w i n g the
A m e r i c a n d r i v e to secure a foothold
i n the European C o m m o n M a r k e t .
As a result France's gold and convertible currency reserves increased
substantially. The deficit on the current account of the French Lalance
w h i c h was
over
$1,330
m i l l i o n in 1957 fell to an annual rale of $200 m i l l i o n in the
first half of
1959,
In
1957 the
French deficit in the
balance of
both the current and capital account
THE ECONOMIC WEEKLY
November 21, 1959
was j u s t under $1,000 m i l l i o n . I n
the first h a l f of 1959
this balance
reflected a
s u r p l u s of
more than
$620 m i l l i o n .
portant.
T h e r e g i m e o f General d e
Gaulle has t h e r e f o r e achieved something which no French Government
since 1945 h a d
been able to d o .
French
power and
influence has
been
re-asserted
with
remarkable
force and t h i s is the new f a c t o r in
European
politics.
This
re-assert i o n has been m a t c h e d b y a n equally
r e m a r k a b l e economic recovery. T h e
The
sensitivity of
the
French
economy to the size of the b u d g e t a r y
d e f i c i t is almost p r o v e r b i a l . I n d e e d
the Rueff Commission defined inflat i o n solely i n
terms o f
Treasury
outlays — "the
Government's
current e x p e n d i t u r e or
investment exp e n d i t u r e w h i c h is not
covered by
revenue
on
savings".
Over
the
past year the
prestige of M P i n a y ,
the Finance M i n i s t e r a n d i n d e e d of
the F i f t h
Republic
has
become
associated w i t h the m a n n e r i n w h i c h
Government
expenditure
w i l l be
financed. M P i n a y is c o m m i t t e d to
h o l d i n g the o v e r a l l
b u d g e t a r y deficit t o 6 0 0 m i l l i a r d f r a n c s t h i s year.
It looks as t h o u g h this
ceiling w i l l
not be surpassed.
I n t e r n a l prices
have risen by about 4 per cent but
this i s i n accordance w i t h the calculations of the Rueff
Commission;
t h i s p r i c e rise
gives the
intended
devaluation
a
net
13
per
cent
advantage f o r F r e n c h e x p o r t prices.
EXCESSIVE L I Q U I D I T Y
T h e achievement of financial stab i l i t y a n d f o r the first t i m e a degree
of e x t e r n a l solvency
should not be
allowed, however, to mask the p r o blems o f excessive
liquidity
which
now characterises the F r e n c h monet a r y s i t u a t i o n a n d w h i c h can undermine M Pinay's
monetary
policy.
The influx of
funds f r o m
abroad,
the
dishoarding of
g o l d a n d the
absence of new G o v e r n m e n t
issues
on the c a p i t a l
m a r k e t , have c o n t r i buted t o this
liquidity.
And
this
presents a c e r t a i n
inflationary danger
in a
situation
of
economic
balance.
The
liquidity,
forever
seeking new investment outlets m a y
upset the p r i c e
equilibrium
which
F r e n c h m o n e t a r y p o l i c y has achieved.
Indeed
M Pinay
has
been
f o r c e d to lower the official discount
rate and
remove
c e r t a i n controls
over p r i v a t e b o r r o w i n g .
T h e m o n e t a r y r e f o r m has b r o u g h t
about a new
s i t u a t i o n of
stability
a n d strength f o r the f r a n c .
It may
n o t last f o r l o n g , b u t f o r F r a n c e i t
is the present t h a t seems most i m 1560
more
effective
exploitation of the
resources
of the
Sahara
a n d the
Overseas
Franc
Zone,
(one
of
General de Gaulle's
categoric i m peratives),
m a y now
sustain the
economic
recovery
f o r years to
come a n d so possibly make France's
restored
international
status v e r y
m u c h m o r e longer l a s t i n g t h a n what
it is at the present t i m e .