France's new Socialist government tightened currency controls and raised the money market interest rate today to strengthen the French franc against speculators betting on a widely rumored devaluation.
The moves were aimed specifically at defending the franc against a surge in the value of the West German mark. But in a broader sense, they were designed to resist pressures generated by predictions that the Socialists' economic policies will speed up inflation and, ultimately, force Paris to devalue its currency.
Finance Minister Jacques Delors has vowed to avoid devaluation, regarding the franc's stability as an important symbol of the Socialists' ability to inspire confidence among foreign nations and, perhaps more importantly, France's own businessmen. He said over the weekend that the latest adjustments ensure that devaluation is not going to be necessary, despite what some of his aides called "unhealthy anticipations" in Paris banks.
His steps, which went into effect at the opening of business today, nevertheless were greeted with skepticism among some bankers and currency dealers. The basic problems of inflation and devaluation risks remain just as acute, they contended. This is particularly true, they added, in dealings between the French franc and the German mark.
"Nobody has any illusions, and Delors least of all," a French bank economist said. "It is a simple palliative. It buys them about three weeks."
The new restrictions toughen those imposed soon after the government of President Francois Mitterrand took over last May. From now on, French businessmen importing goods will be authorized to buy foreign currency only in the amount necessary to meet bills already in hand.
Although the franc has recovered against the dollar recently, moving from a record six francs to one dollar in July to slightly more than 5.30 today, it has declined sharply against the German mark. This is particularly important here because West Germany is France's largest single trading partner, accounting for 16 percent of foreign trade.
Finance Ministry officials explained that the U.S. dollar's decline was largely responsible. Currency holders moving away from the dollar because of nervousness about Reagan administration economic policies and a dip in U.S. interest rates were buying heavily into the German mark, pushing up is value in relation to the French franc as well as the dollar, they said.
The Bank of France, roughly parallel to the U.S. Federal Reserve Bank, was reported to have spent more than a billion francs worth of foreign reserves last Friday alone to maintain the franc's value, particularly against the mark.
"We can't do that indefinitely," a Finance Ministry official said.
With the new restrictions in place, the mark dropped back down to 2.385 in today's trading in Paris. This did little to overcome skepticism for the longer term, however.
Economists have said for some time--since before Mitterrand's election--that the franc-mark exchange margins in the European currency exchange agreement would have to be changed to reflect West Germany's economic health, particularly its annual inflation rate of around 6 percent compared to France's more than 13 percent.
A banker said the Socialists' plans to nationalize a dozen major companies and 36 private banks, coupled with massive spending to stimulate the economy, have led to the predictions of sharply accelerated inflation and probable devaluation of around 10 percent. This in turn has increased pressure on the franc.
Mitterrand's government has complained that still more pressure comes from high interest rates in the United States, draining away international capital that otherwise might be deposited in France. In an attempt to attract more capital into France, Delors raised the main money market rate from 17.5 percent to 18.5 percent.