Like Charles de Gaulle before him, President Francois Mitterrand of France has discovered, says a government aide, that "if you want to have your voice heard in global affairs, you can't do it with a weak currency."
Thus, Mitterrand, who will be host in June for the rich nations' economic summit in Paris, had to intervene last month in the foreign exchange markets--at high cost to French monetary reserves--to stave off a further decline in the French franc, which is undergoing a crisis of confidence.
Pursuing his election mandate to deal with unacceptably high unemployment, Mitterrand acted quickly to "prime the pump": he increased the minimum wage, expanded jobs in the public sector, boosted housing and consumer spending, shortened the workweek and encouraged earlier retirement. At the same time, he assured labor it would have a greater voice in governmental affairs.
Then Mitterrand made good on his commitment to nationalize 11 large corporations and the balance of the banking industry, just about doubling the size of an already large public sector in France, which had included, among other things, coal, electricity, gas, railways, Air France, the Renault company, other transport and the postal system.
Mitterrand's nationalized additions covered Dassault aircraft, ITT-France (a subsidiary of the U.S. company), CII-Honeywell Bull, Matra (a defense conglomerate), Compagnie Generale d'Electricite (the largest electrical engineering group), the huge Saint Gobain and Pont-a-Mousson industries, and assorted chemical, pharmaceutical, aluminum, computer and steel companies.
French spokesmen smoothly assure skeptics that the typical nationalized company there is competitive and "bottom-line" oriented, totally different from the inefficient, nationalized company in England, or the company under the political patronage system in Italy. Nonetheless, Mitterrand's new nationalization moves have created great uncertainty in financial markets.
For example, guidelines have already been issued to the banks to pay more attention to small and medium businesses and less to luxury residential construction. That's a ready use of the credit system to further social priorities. "And if we have a major industry that looks like it's going broke," says an official, "a nationalized bank will be asked to do its duty. But that's no different than before Mitterrand. "
The net result of all of this is that the expansionist Mitterrand program--a sharp reversal of the experiment with freer markets (except in international trade) under former president Valery Giscard d'Estaing and prime minister Raymond Barre--has worked to stimulate consumption, and to improve economic growth--a record superior to negative growth rates in West Germany, England, Holland and Belgium.
Nonetheless, there is concern about the long-run impact of French socialism. So far, the private sector investment has not responded in a positive way. Clearly, there is a renewed worry about inflation and the growing deficit in France's international accounts, all of which is symbolized by a weak French franc.
Before Mitterrand came in, the French franc was around 4.96 to the dollar. It fell sharply after his election last year to around 5.70, and then plunged to a current low of 6.31. Since the end of 1979, when the franc was only 4.02 to the dollar, there has been a depreciation of 57 percent against U.S. currency.
More important (all European paper money has suffered by anywhere from 35 percent to 65 percent against the dollar in that period because of distressingly high American interest rates), the franc has been losing ground against the currency of its key trading partner, West Germany.
In March, the franc fell from about 2.55 to 2.61 to the mark, despite Mitterrand's effort to prop it up through intervention by the Bank of France. That's a significant decline of about 2 1/2 percent, or as much as the franc could drop and stay within the limits allowed by the European Monetary System. Like all governments battling volatile changes in the international value of their money, France insists that "the markets are completely wrong."
If the markets "force" a devaluation of the franc, a government official said, "it would shake the foundations of the EMS. We are determined to keep the parities where they are."
But privately, French insiders acknowledge that the markets are sending a valuable warning signal to Mitterrand. Says a shrewd observer of the French scene: "The exchange crisis is probably a fortunate thing. It will strengthen the hand of those around Mitterrand who say to him: 'Be careful.' " Internationally renowned economist Edward M. Bernstein, who recently joined the Brookings Institution, put it this way:
"The best hope for avoiding a disruption of French production and impairment of productivity is that in carrying out his program, Mitterrand's pragmatism will triumph over the dogmatism of the Socialist Party."
That's a narrow tightrope to walk. Mitterrand came in after the famous "Plan Barre" had failed over four years to reduce inflation or cut unemployment, which had increased in France for eight consecutive years. It now stands at about 8.7 percent, which in U.S. equivalent terms is roughly 12 to 13 percent of the labor force.
Moreover, as a European diplomat observes, last year's riots in Great Britain sent shock waves throughout Europe, with the jobless rolls--especially for young persons and women--rising everywhere and the economic outlook generally grim. In France, one of the richest countries in the world, the mal-distribution of income has the potential to germinate a major social upheaval.
The problem for Mitterrand and his party is complicated by the fact that he also promised to deal with a crippling inflation that last year ran at a 14 1/2 percent rate, well over the European average. And critically for French trade, this inflation rate, driven relentlessly higher by nominal wage increases that far outpace productivity, threatens to run three times the German rate.
Mitterrand assured critics that his expansionary program wouldn't push the French nation budget deficit this year to more than 90 billion francs, or 2.6 percent of gross national product. But in a scenario strangely reminiscent of the one here, private estimates are that the deficit will in fact be on the order of 120 billion to 130 billion francs, at least 3 percent of GNP.
(One difference between Reaganomics and the Mitterrand program: the deficit in the United States can be traced primarily to the excessive Kemp-Roth-Reagan tax-reduction bill, while the one in France is caused by a Keynesian-style expenditure policy.)
The critical question, almost all analysts agree, is whether Mitterrand will be able to keep wages under better control. What agitates the financial markets is a belief that his effort to ease unemployment by spreading the work through shorter work-weeks and earlier retirement not only won't succeed, but also will raise costs and further impair France's competitive situation in world trade.
Privately, Mitterrand's advisers are hoping that the new president can cash in his good will with labor in a compact that modifies nominal wage demands in exchange for a promise not only to push through social reforms, but also to press economic growth so that unemployment will decline--or, at the very least, get no worse.
Labor restraint, rather than a Barre-style restrictive monetary policy, would be relied upon as the main anti-inflationary force. No one in French politics likes to use the words "incomes policy" because it puts the main burden on the unions, but that's what it amounts to.
"Giscard couldn't do it," says a French official, "but with the left in power in France, the situation is different. The full voice of labor is heard not only in the government, but at the company level."
The official Mitterrand goal is to reach an economic growth rate of 3 percent, modest by the standard of European capitalist governments in the 1960s, but ambitious against last year's growth rate in France of 0.6 percent and, at best, a 2 percent growth gain in 1982.
Early signs are that labor is willing to play along for the time being, so long as special provision is made for the lowest-paid workers. But the question really comes down to whether Mitterrand can sustain the expansionist tone, and still keep the franc from sinking. The Mitterrand government has set as a goal the reduction of inflation to a 10 percent rate by the end of this year. Given the staggering and continuing high level of French interest rates--higher than elsewhere in Europe--it will be a modern miracle if it comes close.