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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 .