France: Fighting Chance

A prolonged economic crisis seemed to face France after its spring disorders and the huge wage increases that ended the general strike. Little more than two months later, that outlook has changed remarkably. Though still far from being out of danger, France has a fighting chance not only to recover from the strike but even to benefit from it.

To overcome the strike setbacks, Premier Couve de Murville has turned to “the only policy imaginable” — swift economic expansion. In keeping with that goal, the French Cabinet last week unveiled a 1969 budget that calls for an 11% increase in government spending, to $30 billion. While creating a deficit of about $2.5 billion, such outlays are expected to help boost French industrial production by 7% next year, enabling the French economy to achieve a substantial 5½% to 6% growth.

There are already a few signs that the expansionist strategy is taking hold.

French workers, besides splurging on vacations at a rate unprecedented in a holiday-happy country, spent enough of their higher wages to lift July retail sales 10% above the 1967 level. Strike-depleted inventories have shrunk so low that many industries expect a manufacturing boom in the fall. Says Finance Minister François-Xavier Ortoli: “The outlook is better than we could have ex pected. The economy is righting itself.”

Idle Factories. Some critics feel that Ortoli’s optimism may be premature, but France has, in any case, been long overdue for a dose of expansion. Charles de Gaulle’s stubbornly conservative economic policies, aimed at strengthening the franc and avoiding inflation, slowed the country’s real economic growth to a point (4.4% last year) that was unhealthy for both France and its Common Market trading partners. The output of French factories rose a mere 2.2% in 1967 and, as a consequence, one-fifth of the country’s industrial capacity lay idle early this year. The resulting unemployment plainly aggravated the social unrest that welled into revolt during May.

Paradoxically, that cushion of unused plant and manpower, plus the country’s still ample $4.75 billion reserves, is what now gives France its opportunity for an economic rebound without serious inflation. Despite the staggering wage gains of French labor (13% to 14% for all of 1968), the Gaullist government aims at holding price increases to 3% during the last half of this year. It is relying on what one Finance Ministry official calls “a battery of tools to regulate prices without actually enforcing price controls.” Under the French contrat de programme, for example, thousands of industrial and retail firms have signed agreements not to boost prices beyond the government-specified 3%. Even so, some price gains have already overtaken the wage increases. The cost of draft beer has risen 10% in Paris, a loaf of bread now costs 120 instead of 100 (a 20% jump), and many restaurants have increased the price of a $1.40 meal to $1.80 (a 29% rise).

Delicate Manipulation. Even if the government can keep a lid on prices—and that is a big if—the French economy may well require more delicate manipulation in the months ahead. Unemployment is still rising, and some industries plan to lay off nonessential workers to help meet their added payroll costs. Thousands of small firms are expected to go out of business entirely when the full impact of the wage raises hits them in the fall. Despite exchange controls forbidding most Frenchmen from taking more than $200 a year out of the country, the flight of capital remains a drain on the franc.

Like a racing driver skidding on a turn, France is stepping on the throttle in the hope of regaining the economic straightaway. It is a difficult maneuver but, if it works, the French economy by the end of next year could wind up in better shape than before.