ECONOMIC GIANT—POLITICAL PIGMY EUROPEAN COMMUNITY HAS FAILED IN MONETARY CRISIS

Press, Volume CXI, Issue 32788, 13 December 1971, Page 16

ECONOMIC GIANT—POLITICAL PIGMY EUROPEAN COMMUNITY HAS FAILED IN MONETARY CRISIS

(By

IAN DAVIDSON,

European editor of the "Financial Times.” London)

(Reprinted from the "Financial Times" by arrangement) On January 14, 1963, relations between Britain and France fell to absolute zero, with the veto on the first British negotiations in Brussels • eight days later, the “rapprochement” between Germany and France reached a climax with the signing of the Franco-German Treaty of Friendship and Co-operation.

Less than nine years later the pattern has been transformed- it WoU l d xu a ? exa ?« era tion to speak of a reversal of alliances, but the contrast between then and now is sufficiently striking even without resort to military terminology.

London and Paris have just celebrated what even the sober Le Monde headlined as “the renewal of the ‘Entente Cordiale? ” If the document released at the end of Maurice Schumann’s recent visit to London was modestly headed a “joint declaration,” its emphasis on the encouragement of the study of French language and culture in Britain had a good deal in common with corresponding aspects of the Franco-German Treaty. It is almost impossible to tell at this stage if the new “entente” represents anything more than a new mood of good-will. The honeymoon between Paris and Bonn lasted only a matter of

months, and even at the best of times the Franco-German Treaty did not work very well. General de Gaulle intended that the obligations of friendship and co-opera-tion should rest entirely on the Germans, and when disillusion set in, he wrote off the Franco-German

“rapprochment” with the contemptuous remark: “Les traites sont comme les roses OU les jeunes filles—ca dure ce que ca dure . . . (Treaties are like roses or young girls —they only last so 10ng...).” Odd man out

The French have played odd man out in the monetary crisis, in the belief that by refusing to revalue or float the franc they could exert pressure on the United States for a change in the official gold price—and could at the same time maximise their competitive advantage against their trading partners. It requires an effort of will to remember that France and Germany are partners in the European Economic Community, or that the main pressure for monetary union in the Community came from Paris. Naturally, the French blame the German decision to float the Deutschmark in May for the collapse of the moneary union time-table. And though they can hardly blame the Germans for the dollar crisis, they have consistently resisted German requests for a joint European approach which would, after all, represent an interim solution until the idea of European monetary union could be brought out of cold storage.

* Both the Germans and ' the French claim the ' British as allies in this dis- ' pute over the handling of 1 the international monetary ’ crisis; but so far Britain has 1 not committed itself to either ! side, though its panoply of ! exchange controls and “dirty 1 floating” would seem to place it closer to the French in terms of short-term tactics. If the difference of opinion between Paris and Bonn were really about the economic philosophy of free floating versus exchange controls, or about the appropriate exchange rates of the franc and the Deutschmark against the dollar, or about the tactics for dealing with the United States import surcharge, it might not be very serious. Dollar superseded There is, after all. a wide measure of agreement between the Six and Britain on ; the main principles they want to see embodied in a reform • of the international monetary system with the role of the dollar gradually being superseded by Special Drawing Rights in the International Monetary Fund. A reform of this kind, and a solution to the present exchange rate crisis, can only be secured in agreement with the United States and Japan; and there are some optimists who hold out the hope of an agreement at the next Group of Ten meeting. Yet even if one starts with these rather bland assumptions, there is something paradoxical about the French stance. By holding down the franc they are obviously aiming to safeguard their negotiating position, and thus their balance of payments prospects. The implication is that the minimum turnaround in the United States payments balance required by Mr John Connally must be achieved primarily at the expense of other countries, notably Germany and Japan. But the wider the gap that opens up between the French and German exchange rates, the more likely it is that the Community’s system of common farm prices will have to be abandoned for the foreseeable future. The Germans agreed to reduce their farm prices on two previous occasions in order to conform with the farm policy; first at the end i of 1964, when common i cereals prices were originally I adopted, and then in 1969 , after the Deutschmark re-i valuation. It is hardly likely , that they will agree, to a new reduction,, but even were they to i do so, the extra producer t subsidies which would be i needed to compensate Ger- | man farmers for loss of in- i come would represent a < further breach in the prin- < ciples of the farm policy. The British tactic in the, currency controversy also | tends to push the burden on , to the Germans; unlike the < French, however, the British , set no store by the common . agricultural policy. and . would shed no tears M the ‘ abandonment of the principle . of common prices, which inevitably means an increase in ( consumer prices in Britain. t France seeks an ally ‘ Yet it is possible, of course, t that the French are them- i selves reconciled to the , abandonment -of common 9 prices, and now give top s Priority to Community t Inance for export subsidies < on French farm surpluses, on 0 the one hand, and to an „ under-valued exchange rate f for industrial exports on the c other. t

The motives behind the French courtship of Britain go far beyond any narrow calculation of commercial advantage, however; put most crudely, the French are afraid of the Germans and hope for allies in London. The success of Willy Brandt's “Ostpolitik” has given Bonn an independence in international affairs which General de Gaulle deliberately intended to curtail through foe Franco-German Treaty, while France’s own role as one of the "Big Four” has been completely overshadowed by Washington’s bilateral moves of detente towards Moscow and Peking. The French have long been conscious that they are outclassed by Germany in terms of economic strength; in international and Community negotiations they have had to get used to the idea that Bonn is no longer ashamed to use its strength.

Thus, the French stance in the currency crisis is not motivated by short-term anxieties over balance of payments prospects so much as-by a desire to maximise longer-term growth and thus even out the economic balance with Germany. Mr Giscard d'Estaing has even suggested publicly that France is, in some sense, "entitled” to be as powerful economically as Germany. If this analysis is anywhere near the truth, it suggests that the political outlook for the European Community is rather dim. More immediately, it indicates that even if some provisional patch-up of the international monetary crisis can be worked out in the Group of Ten, a stable- solution to the underlying problems which it raises is not at all likely.

s No short-term solution f There are, of course, prac- ‘ tical reasons for not expectf tag a stable solution in the 1 short run. Exchange controls 1 by the “dirty floaters" have - pushed a large number of holders of private funds out i of European currencies into i dollars; it cannot be assumed - that a realignment of > exchange rates will necessar- - ily produce a stable situa- - tiop in the foreign exchange j markets. In any case, any < meaningful negotiation on t burden-sharing is bound to i be a long drawn-out affair at - the best of times, while ; American complaints at' European trading practices seem to imply negotiations of great complexity. > But it is the political . disarray in Europe which ! really rules out a stable solu--7 tion to the transatlantic i crisis in the near future. 1 Consider the American com- » plaints at the free trade 7 arrangements being offered I by the Community to the - European Free Trade AssociaL tion neutral countries: they i sometimes try to plant the t idea that these arrangements 7 are in conflict with the ini ternational rules of the ; General Agreement on Tariffs s and Trade. This is simply not 1 true, and the Six give no sign 9 of paying any attention; but the message which under1 lies the American complaints - is that Washington is going ? through what Dulles once ’ called "an agonising re- ! appraisal” over its relations ■ with Europe, and is looking r for ways to justify it. 5 This, after all, is what the 1 international monetary crisis ’ is really about, even if it has ' been masked by arguments ’ over free floating and ex- , change rates. The French, ; above all, have been able to * indulge in the Gaullist ’ illusion of national in- : dependence, despite their withdrawal from NA.T.O. in 1966, because they have been L able to shelter behind the ' United States deterrent and ; the GJ.s in Germany. Bluff to be called? i To-day for the first time they face the risk that their bluff could be called, and it is not surprising that they alone are opposed to any negotiations on mutual balanced force reductions on either side of the Iron Curtain. The European participants in the military side of the Alliance may well make some contribution to the notion of burden-sharing at the forth-coming ministerial meeting of NA..T.0.; but so long as France stands aside, the major effort will be required—once more—from Germany. On the economic front, the growing strength of Europe Is foe mirror-image of the relative decline of the United, States; but the phrase whichwas once applied to Germany —“an economic giant but a political pymnjr—to-day more naturally fito foe Euro-, pean Community. -5 If the member' governments of foe enlarged Community are aware of the challenge facing them, they have so far given no sign of it Yet there are officials in. London and in Paris at least,who are conscious of the seriousness of foe present situation. In the middle of the euphoria of Maurice Schumann’s visit to London, one senior French official remarked sombrely: “The future of Europe will depend on the events of the next six months.”