THE MILD REPERCUSSIONS OF A DEFT DEVALUATION

CURRENCY devaluations by major countries were once regarded as cataclysmic events likely to cause global shock waves that would disrupt trade, employment and international investment. Last week, when world money markets reopened after France’s surprise 12½% devaluation of the franc, the repercussions proved to be notable for their mildness.

Fourteen African countries that once were French colonies devalued their franc-linked currencies and the Belgian franc came under heavy selling pressure, but the more important world currencies fared reasonably well. As expected, speculators sold British pounds and bought undervalued German marks, but not in quantities great enough to produce any crisis—not even after Britain at midweek published figures showing that its chronic trade deficit widened to $89 million in July from $60 million in June.

The pound hit a record low of $2.3813 in London, apparently because the Bank of England felt it safe to support the price at a lower level than the $2.3825 it usually tries to maintain as a floor. The value of the U.S. dollar dropped against the mark in Frankfurt but held steady elsewhere. The free-market price of gold moved scarcely at all—even though that volatile price is supposed to shoot up on any widespread doubts about the value of paper money.

Even politically, the French move proved to be quite the opposite of the disgrace that devaluation has often been thought to be. The financial world rang with praise of President Georges Pompidou’s astuteness in cutting the franc when most of Europe was on vacation, in advance of any crisis, and to a level—18.0040—that most moneymen thought was about what the franc really is worth. Contrasting the months of turmoil that followed the 1967 devaluation of the pound with the calm reception of the French devaluation, the London Times concluded wistfully that “the differences show clearly the differences in political competence between the two governments.”

As French officials well know, devaluation by itself is not enough to restore a country to financial health. By temporarily lowering export prices and raising import prices, a devaluation only gives a country time to overcome the economic weaknesses that undermined its currency. The benefits of devaluation can easily be wiped out by further inflation. If French price increases continue at their current pace of 6.5% yearly, the gains of franc devaluation will be gone in less than two years. In fact, devaluation itself has a tendency to accelerate inflation, because the automatic increases that it brings in the prices of imported products tend to work their way through an economy. To make a devaluation succeed, a country must clamp down quickly on the consumer demand that pushes up prices, pulls in costly imports and diverts to home consumption some of the production that should go into exports.

Last week French Finance Minister Valery Giscard D’Estaing announced an immediate freeze in all retail and-most wholesale prices until Sept. 15. By that time, the Pompidou government expects to come up with a long-range program to contain inflation. Giscard also promised to cut government spending enough to bring the budget into balance next year, following a $2.5 billion deficit expected for this year. He predicted that price increases caused by devaluation could be confined to 1% this year and 2% in 1970. Whether France achieves that goal will depend chiefly on how strongly it resists the demands of French unions, which want more big wage increases. It was the 15% wage increase won by the unions after the general strike of May 1968 that touched off the inflation that eventually made this month’s devaluation necessary.

The Crowbar Pact. Hasty negotiation among France’s five partners in the European Common Market last week prevented broader inflationary consequences from the devaluation. The Six agreed to exempt France from the market’s system of uniform farm-support prices. The detailed rules of that system have been described as the most complicated ever devised by the mind of man, but its guiding principle is simple: prices in each country are pegged to a standard “unit of account,” which is the gold equivalent of a U.S. dollar. Since the unit of account was worth 12.5% more francs after devaluation than before, the system would have operated to push French food prices up 12.5%.

The devaluation caught Common Market headquarters in Brussels with the documents containing the 5,600 detailed rules governing the system crated in packing cases for shipment to a new building. Bureaucrats pried open the cases with crowbars. Then, at an 18-hour session, ministers of the Common Market countries bent EEC rules to let France for the next year support farm prices at the same level as before. A new set of border taxes and subsidies will prevent price changes on French food exports and imports. Such special treatment is a step away from economic integration of the Six, but fears that it will deal a sharp blow to Market unity seem exaggerated. Politically, the Market countries have demonstrated that they can cooperate to help a member in trouble. The “crowbar pact” could even speed an overdue revision of farm-price subsidies, which have caused bulging surpluses of butter, sugar, wheat and other farm products.

Next, the Mark. Altogether, the French devaluation has succeeded well enough so far to prompt some speculation that other governments might be encouraged to make more frequent, but modest changes in the official values of their currencies to bring them into line with reality. An early test of that theory is coming in the German elections of Sept. 28, which are turning into a sort of referendum on whether to increase the value of the mark. The Christian Democrats, dominant partners in the coalition government, argue that the French devaluation removes any need for a German revaluation, because it has diminished the gap between the true value of the franc and the mark. The junior-partner Social Democrats contend that the mark remains undervalued in terms of other currencies. Polls show the Socialists leading, largely because they have convinced many voters that revaluing the mark upward will help to keep German prices steady. If and when the mark is revalued, the two most important moves toward a needed realignment of European currency ratios will have been accomplished. Even if the mark’s value remains pegged at 250, France’s devaluation has strengthened the much buffeted international monetary system by removing a source of uncertainty. After the chronic crises that began with the British devaluation, nothing so calms the nerves of moneymen as a major devaluation followed by an anticlimax.