France The Key SIGNIFICANT EUROPEAN CURRENCY CHANGES

Press, Volume XCVIII, Issue 28793, 14 January 1959, Page 10

France The Key SIGNIFICANT EUROPEAN CURRENCY CHANGES

IBy -LYNCXUS~ of the “Bconomu*”] [From the "Economist’- Intelligence Unit]

London. December 30. The most eventful week-end in ' the financial world since the wave of devaluations of September, 1949, has taken the whole of Western Europe a giant stride nearer full convertibility of currency. In the developments that pressed on one another with such dramatic speed immediately after the Christmas holiday, two events were dominant. The first was the devaluation of the French franc and the fundamental financial reform in France that is accompanying this move. The second was the decision to make all sterling held by nonresidents convertible into dollars or other foreign currencies at a uniform rate and in a unified market. It is true that similar action making for convertibility for foreigners was taken by other countries, and notably by Germany, France, the three Benelux countries, Sweden and Denmark: but in the context of international trade and finance it is on the developments as they affect sterling that the limelight must fall. The timing .of this move towards convertibilty was set by events in France. There have for some time past been discussions among European countries about a concerted move to convertibility. Detailed plans for such a step were prepared as l<mg a B° as 1® 55 an d pigeon-holed but these were ready to be applied at a moment’s notice. Nothing, however, could be done to implement these plans while France was struggling amid political instability, chronic budgetary deficits, and persistent inflation. The pressure on sterling which developed at the time of the Suez crisis and which later rose to a climax in September, 1957, was also a major deterrent to further progress along the road to convertibility:

Major Reform in France During 1958 the weakness of sterling vanished and Britain was able not only to rebuild Its gold and dollar reserves but to show the world a balance of payments surplus the like of which has not been seen in the history of this country. -France, for her part, seemed to rediscover its political stability and self-confidence with the advent of General de Gaulle and Was able to tackle a major reform of its currency. As soon as France could 'move, the road was clear for collective action in the direction of greater convertibility and freedom of payments in Europe. It was not only, the timing that was set. by .France .but also the speed at which events had to unroll. France had to set Its monetary house in order before January, 1959, the day on which the Common Market comes into effective operation. Devaluation was required to bring French prices into competitive alignment with those of its partners in that market. Devaluation had in its turn to be underpinned by creating the necessary atmosphere of confidence which could only come from a fundamental reform of the budget and other- -measures. Including the introduction of a new unit of account, the “heavy franc.” This is the thirteenth devaluation of the French franc since 1914 and there is every prospect that it' will succeed far better than the preceding dozen. France, at long last, has a Government strong enough to hold down costs and prices and not to allow the advantages of this devaluation to be frittered away in a short time. This confidence in the success of the French devaluation is reflected in the parallel moves of the Government to make the franc convertible for foreigners and, most striking and Surprising of all, to liberalise no less than 90 per cent, of France’s imports from the other countries of O.E.E.C. France has in this way made her peace with O.E.E.C. and has provided the happiest augury for the solution of the Common Market-Free Trade Area difficulties since they reached the saddening deadlock of December 15. French hostility to the concept of a free trade area was in large part rooted in the fact that French industry and agriculture were not competitive. French industry which in the course of the last few years pas been thoroughly re-equipped and modernised, will no longer be hampered by an-artl-ficial rate of exchange and this fact offers hope of a fundamental change in the French attitude to this issue. Indeed. French industry should now be eager to seize the opportunities of increased markets offered by the free trade area and no longer shrink from them as it has tended to do in the past The spirit of economic collaboration in Europe has been considerably strengthened by the move towards greater convertibility which is of a truly collective character. A great deal of nonsense has appeared in certain French newspapers about the “vindictiveness” of Britain’s move to convertibility. That view seems to have been based on the reasoning that the convertibility of sterling for foreigners must involve the disappearance of the European Payments Union, from which France has been securing a considerable amount of credit. Far from being a hostile gesture the move towards convertibility was made after very close consultation between Britain and other European countries. Moreover it requires Britain In concert with other countries of Europe to place short-term credits at the disposal of France in order to provide the reserves with which to defend the new franc and fill the coffers which have been sadly depleted by the run on the franc which preceded the devaluation. Legal Recognition The steps taken by Britain to make the pound more convertible do little more than recognise legally a state of affairs which has in fact existed for some time past. All non-residents who acquired sterling in the course of normal commercial operations were able to convert .their sterling into dollars or other currencies. If they lived in the dollar area they could do so in the official market. If they resided anywhere outside the dollar or sterling areas, they had at their disposal an active foreign exchange market in transferable sterling in which they could convert their sterling into dollars at rates wflich for the last few months had been within } per cent of those quoted in the official market. The unification of there two rates and of the markets in wh’ah

these types of sterling were dealt in, is a somewhat technical development. It will, however, bring a great deal of additional financial business to London because the market in transferable sterling has in the past operated in foreign centres, namely in Zurich and New York. Much of this business can now be expected to gravitate to London. There should also be an increase in the business done by the bunion market, because in the past many sellers of gold, including the Russians, sold this gold on the Continent to obtain sterling at the slightly more advantageous transferable rate. That business will now come to London.

Although the exchange market adjustments to the new state of affairs will be of somewhat technical character, the principle of greater freedom shines forth from them. For the moment the decision of the Government may merely increase the convertibility enjoyed by non-resident holders of sterling, but it is a pointer to further liberalisation of exchange control for the resident in the United Kingdom, Now that sterling is 100 per cent convertible for, say, the German seller of * motor-car to Britain, there is very little justification left for maintaining restrictions on imports of