Fall of the Franc

August 03, 1993

Last September it was the British and the Italians. Now it is the French, the Danes, the Spanish and the Portuguese. All have succumbed to the power of the mighty mark, backed up by a balky Bundesbank, which demonstrates that when Germany's national interests collide with its responsibilities as economic anchor of the European Community, national interests will win every time.

For the French, the decision to let the franc float down as much as 15 percent below parity rates against the Deutsche Mark, as compared to a 2.25 percent limit before the weekend currency crisis, is a humiliation. Just two weeks ago, French President Francois Mitterrand said "franc-mark parity is a requirement greater than all others." Prime Minister Edouard Balladur declared himself "indestructibly attached" to a franc fort (strong franc).

In an economic sense, the franc faible (weak franc) reality now exposed for all the world to see may be a blessing in disguise. Certainly, that has been Britain's experience. Forced to drop out of the fixed-rate system of the European Monetary System when the pound sterling dropped through the floor last fall, Prime Minister John Major's government was at last able to lower interest rates to levels that have gingered a fledgling recovery. France now can do the same to free itself from an induced recession that has raised unemployment rates to a devastating 11.6 percent.

Politically, however, the fall of the franc has been hard to take in a nation that has endowed its currency with mystic symbolism. Not only is it considered an insult, rather than as an opportunity to lower interest rates and "grow" the economy, cutting loose from the mark is seen as a threat to the close alliance with Germany that has been the hallmark of France's postwar security policy.

In many ways, it might have been better if EC finance ministers had scrapped their Exchange Rate Mechanism entirely. This was the advice, just in advance of the latest speculative turmoil, of six Massachusetts Institute of Technology economists, three of them Nobel Prize winners. Writing in London's Financial Times last Thursday, they said European monetary policies and exchange rate mechanisms are "profoundly counter-productive." This echoed a judgment of 20 years ago when the United States abandoned fixed exchange rates and let the dollar float.

Although the French are typically tracing their troubles to an "Anglo-Saxon" reliance on liberal economic forces, the latest upheaval demonstrates once again that government attempts to dictate to the financial markets usually fail. European monetary union and a common currency will come, if at all, only when conditions are ripe, economically as well as politically.

The United States should rejoice in the prospect of lower European interest rates (perhaps even spreading to Germany). This could spark a recovery across the Atlantic of great potential benefit to this country.

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