Tensions build along the Rhine: A renewed French campaign to break the strong franc is ringing alarm bells in Bonn and Frankfurt. John Eisenhammer reports

AS IF TO show the world how little it had been unsettled by the upward push of American interest rates, the Bundesbank this week made an unexpectedly bold 50-point cut in both its key rates. The decoupling from events across the Atlantic is clear and deliberate.

Rather more unsettling, by contrast, have been events closer to home, from a country with which the links are stronger, reaching into the broadest aspects of economic and European policy.

The past few weeks have provided a rude re-awakening for those in Germany who thought that European currency tensions were a thing of the past. The voices are growing louder again, among French intellectuals, economists and the political class, arguing that the price being paid for maintaining a strong franc is unsustainably high, and calling for an end to the pain. The most audible voice is that of Jacques Chirac, the neo-Gaullist leader, but his words are echoed elsewhere on the Right, as well as across the Socialist Left.

The subject, invariably, is unemployment - the prism through which France's entire political debate is currently refracted. Already at a record high of 12.2 per cent, joblessness is predicted by the Organisation for Economic Co-operation and Development, despite a slowly improving economy, to continue rising into next year to 12.4 per cent, or around 3.5 million. Among youth, the percentage of those unemployed is in the mid-20s.

Poll after poll shows unemployment to be not just a dominant pre-occupation, but an obsession. This is driving the campaign, which has begun in earnest, for the presidential election in the spring of 1995. For those arguing that the curse of unemployment needs to be broken now, it is but a short leap to challenging the wisdom of the strong franc.

While the defence of this policy enjoys powerful advocates, not least Edouard Balladur, the Prime Minister, and President Francois Mitterrand, the number of doubtful and openly hostile voices, is swelling again.

It was above all Mr Chirac's utterances, his call for a fundamental switch in the course of economic policy, and for a referendum on unemployment, that set alarm bells ringing in Bonn and Frankfurt. Mr Chirac is a leading contender for the presidency. Were he to succeed, one of the central pillars of Franco-German relations would be in grave risk of collapse. For the deal on which so much of the two countries' relationship and aspirations depend is that, in return for Paris' keenness to promote European economic integration, Bonn and Frankfurt insisted on stability.

The renewed doubts emanating from France, which are likely to grow as the election campaign unfolds, appear to make another surge in European currency tensions pre- programmed. The fact that France's economic fundamentals remain for the most part strong seems, in this context, almost irrelevant. It is the political uncertainty that is encouraging the doubts and worries, just as in 1992 and 1993.

The French economy is gradually improving and interest rates are coming down gently in the wake of Germany's. But this may not be sufficient to draw the sting from a political conflict stoked by the social fires of high unemployment.

For the Germans, this resurgence of uncertainty about the wisdom of the strong franc, and the calls for radical action to promote growth and jobs, underlines once again the broader cultural dimensions of economic and monetary policy. Time and again, in discussions with German politicians, businessmen and bankers, one hears unstinting praise for the enormous progress made by the French in recent years in holding to the discipline of a strong franc policy, only to hear the inevitable 'but . . . their stability culture is not yet mature, solid, deep-rooted.'

It is said that not enough of the general public, intellectuals or the political class really believe in the virtues of a stability policy to provide a French equivalent to that vital popular support environment and extremely high pain threshold that allow the Bundesbank to get away with what to outsiders sometimes looks like blue monetary murder.

To mention Britain in this context only provokes a smile of comiseration. Bundesbankers praise Eddie George, the Governor of the Bank of England, as a sound man with his central banker's heart in the right, unemotional, place. But what few shreds of stability credibility Britain may have had were blasted away in the currency debacle of 1992.

In German eyes, Britain still has everything to prove, and the road to righteousness is a long and hard one. While a policy can be formed overnight, a culture can only be nurtured. The price of the doubts about Britain's commitment to stability is to be found in the difference between German and British long- term rates.

France, too, for all its efforts to convince itself and others of its strong franc sincerity, still pays a premium for doubt, and there is no prospect of this gap closing while the political uncertainty persists.

Even Mr Balladur's once- bright star has waned in the sky across the Rhine. Certainly, he is seen as one of the strongest guarantors of the strong franc strategy, and for that Germany would dearly prefer to see him get the better of Mr Chirac in the presidential contest. But broader doubts are growing.

Noting how Mr Balladur has caved in on every serious social conflict, be it against the farmers, fishermen, students or staff of Air France, a recent prominent article in the conservative Frankfurter Allgemeine newspaper, the most widely read in German business and political circles, argued that all intentions of controlling France's ballooning public deficit have been cast aside in a desperate bid just to get to the elections without confrontation or trauma.

Having taken office last year pledging to correct the effects of Socialist profligacy, Mr Balladur has allowed the state deficit to double. The article sees Mr Balladur as a follower of the credo of the former president, Georges Pompidou, whereby buying your way out of social conflicts may increase inflation but avoids revolution. Even the defender of the franc, in unforgiving German eyes, has not really absorbed the culture of stability.

(Photograph omitted)