The European Crisis: Why franc exchange must stay the same: Devaluation threat

PARIS - The franc's stability is the cornerstone of French economic policy, which explains an almost pathological determination not to devalue, writes Julian Nundy.

The policy's main modern architect was Pierre Beregovoy, now Prime Minister, when he became finance minister in 1984. It is a policy which is credited with keeping inflation down, now around 3 per cent, but with pushing unemployment up - it is expected to go over three million this year.

The franc was last devalued by the 1986-88 conservative cohabitation government of Jacques Chirac, but determination to keep the franc strong against the German mark resumed when a Socialist government was returned in 1988 and Mr Beregovoy took back the reins of the finance ministry. Since then, the policy has earned general praise from economists, and even from Edouard Balladur who was finance minister in the 1986-88 interim.

Devaluation in France is seen as a humiliation, a reminder of the days when the franc was one of the sick currencies of Europe.

The Bundesbank's commitment to the franc was greeted with relief in Paris as an example of the German bank's willingness to co-operate. 'At last the Bundesbank's got its feet wet,' one dealer said. The Bundesbank had come in for fulsome French praise at the beginning of last week when it agreed to cut interest rates. But that euphoria was eclipsed by the confusion which rocked the European Monetary System in the run- up to the French referendum on Maastricht and in its aftermath.

Before he became Premier, Mr Beregovoy said 'any devaluation, the sign of bad management or of past mistakes, makes a country poorer, especially the little people'. Opponents of this policy, and they are remarkably few in France, come out with the classic pro-devaluation argument that it would improve exports - something economists at the Organisation for Economic Co-operation and Development say is only a short-term phenomenon - and therefore boost employment.

Among anti-Maastricht French politicians, another argument is that the insistence on maintaining parity effectively puts France in 'the mark zone'. While Germany has been dealing with the problems of unification, however, French industry has gained, with Peugeot and Renault rushing to help residents of the former East Germany replace their Trabants.

Some French economic commentators have complained that some of the pressure on the franc could have been eased if President Francois Mitterrand and Chancellor Helmut Kohl had made some comment on the EMS troubles after they met in Paris on Tuesday. Instead, they made no statement and a planned media briefing was cancelled abruptly, creating an impression of discord.

Insisting yesterday he had no intention of devaluing, Michel Sapin, who has been France's Finance Minister since Mr Beregovoy became head of government in April, said it was his goal to hit the speculators profiting from the current turmoil 'where it hurts them, that is in their wallets'.