FRANCE: BALANCE-OF-PAYMENTS DEVELOPMENTS SINCE THE SMITHSONIAN AGREEMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050033-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 33
• Publication Date: April 1, 1973
• Content Type: IM

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25X1
Confidential
D
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
France: Balance -of-Payments Developments
Since the Smithsonian Agreement
Confidential
ER IM 73-36
April 1973
Copy No.
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France: Balance-of-Payments Developments
Since the Smithsonian Agreement
France's balance-of-payments position in early 1973 is strong. Its exports retain their
competitiveness in world markets, in large measure because the effects of domestic inflation
and of the 1971-73 currency realignments have generally been less adverse to France than
to its main trade rivals. Trade surpluses of better than US $1 billion annually are keeping
the current account in the black and the basic balance in near-equilibrium. France's
traditional deficit in trade with the United States, however, will grow from the 1972
level of $800 million annually as the dollar devaluations increasingly affect trade volume.
This may strengthen French resistance to trade concessions favoring US interests.
The external payments position remains highly sensitive to volatile movements of
short-term capital, but there appears to be no serious problem on the horizon. During
recent periods of international monetary speculation, the franc has remained relatively
strong, reflecting in part the healthy state of the economy. Continuing strength of the
franc, moreover, is suggested by the results of the recent parliamentary elections, which
appear to favor political stability and economic growth.
Note: Comments and queries regarding this publication are welcomed. They may be
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Background
1. France's balance of payments* fluctuated widely during 1967-71,
largely in response to the civil disorders in May 1968 and the franc
devaluation in August 1969. In 1968, capital flight, a sharp drop in tourism,
and a weakening trade balance all combined to produce a record $3.7 billion
payments deficit (see Table 1). By mid-year, order had been restored and
the strong GNP growth resumed. This brought a resurgence of confidence
in the franc, and capital flows quickly reversed. But prosperity caused
imports to rise far in excess of exports; the resulting trade deficit re-ignited
capital outflows during the second quarter of 1969. These pressures led
to the 11 % devaluation of the franc in August 1969.
2. French exports, which
had been increasingly handicapped
by rapidly rising domestic labor
costs, benefited as unit labor costs
in dollar terms (see Figure 1) 140
dropped sharply in the wake of
devaluation. From 1969 to 1971, ?130
exports rose nearly twice as fast as
imports, and in the latter year the
trade surplus reached $1.1 billion. 120
3. Although tourism did
bounce back quickly from the sharp 110
decline associated with the civil dis-
order of 1968, the deficits on invis-
ibles remained fairly large because of
adverse trends affecting other com-
ponent accounts (see Table 3) The
Unit Labor Costs
in Manufacturing
(in Dollar Terms)
relative decline of France's mer- 91967 68 69 70 71 72
chant marine enlarged the deficit on 515440 3.73
transportation Increasing payment
of dividends to non-residents and
interest payments on bank credits cut into traditional surpluses in the net
investment income account. Finally, the increasing number of foreign workers
in France, together with rising wage scales, resulted in a steadily increased flow
of workers' remittances abroad.
In this memorandum the tern balance of payments refers to the balance of official settlements
unless otherwise stated.
Figure 1
France: Selected Indicators
100 /
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France: Balance-of-Payments Summarya
Billion US $
1972
1967
1968
1969
1970
1971
Estimates
Current account
balance
0.2
-1.1
-1.8
-0.2
0.5
0.5
Merchandise
tradeb
0.3
0.1
-0.9
0.3
1.1
1.3
Services and
transfers
-0.1
-1.1
-0.9
-0.5
-0.6
-0.8
Long-term capital
movements
Negl.
-0.9
0.2
0.1
Negl.
-0.7
Basic balance
0.2
-2.0
-1.6
-0.1
0.5
-0.2
Short-term capital
movements'
0.1
-1.7
0.5
1.8
2.7
1.9
Allocations of
SDRs
--
-
--
0.2
0.2
0.2
Official settle-
ments balance
0.4
-3.7
-1.1
1.9
3.4
1.8
Official financing
Change in official
reserves
0.3
-2.8
-0.4
1.1
3.3
1.8
Net change in other
official financing
0.1
-0.9
-0.7
0.8
0.1
0.1
a. Because of rounding, components may not add to totals shown. A more deiailcd balance of
payments, with quarterly data for 1971-72, is presented in 'table 2. Balance-of-payments data for
1967-70, in dollars, are from OECD sources. Data for 1971-72, originally expressed in francs, have
been converted to US dollars at the rates shown in Table 5.
b. F.o.b./f.o.b. basis.
c. Including changes in commercial banks' foreign position; also net errors and omissions.
4. Long-term capital flows were generally close to equilibrium
throughout 1967-71. During the 1968 crisis, however, outflows accelerated
and inflows tended to dry up; the result was a 8900 million deficit for
the year (see Table 4). The net outflow slackened later in 1968, but then
picked up again the following spring as the franc weakened. After the August
devaluation, the capital market returned to normal, and for 1969 as a whole
there was a net inflow of long-term capital. The inflow dropped sharply
in 1970 and vi; tually disappeared in 1971. This reflected not only the
speculative attraction of the short-term market during the international
monetary upheavals of 1971 but also a new and growing willingness of
French business to invest abroad.
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5. Short-term capital flows exhibited a similar, although more
pronounced, up-and-down pattern in 1968-69. The stampede of funds out
of France which resulted from the civil disorders produced a $1.7 billion
deficit in the short-term capital account for 1968. Leads and lags in foreign
trade payments contributed to the outflow. Turning about sharply after
the May crisis, they generated a net capital outflow of $320 million during
the second half of 1968 and another $550 million during the first half
of 1969. With order restored, with the franc devalued and gaining a new
aura of strength, and with interest rates in France relatively high, short-term
capital inflows soared to $1.8 billion in 1970 and to $2.7 billion in 1971,
when international monetary unrest was severe. The inflow was large for
both bank and non-bank transactions.
6. By the eve of the Smithsonian agreement, France was in a
favorable balance-of-payments position. There was an official settlements
surplus of $3.4 billion in 1971, and the prestige of the franc in international
financial circles stood in marked contrast to the situation just three years
earlier. A swelling trade surplus was covering deficits elsewhere in the current
account. The basic balance, which is less sensitive than the official
settlements balance to speculative distortions, was in substantial surplus.
Moreover, the economy was continuing to grow rapidly, and the political
climate was tranquil. Inflation was causing some concern and unit labor
costs again tilted upward, but France's competitive position continued to
improve somewhat because costs elsewhere in Western Europe were rising
even faster.
The Balance of Payments in 1972
7. Although the value of the franc in terms of gold was not altered
by the Smithsonian agreement, French trade faced a new spectrum of
exchange rates in 1972. The West German mark and the guilder had been
floating since May 1971 and the US dollar, since August. The Smithsonian
agreement in December 1971 had formalized a new set of exchange rates
that resulted in an average 1.8% net devaluation of the French franc in
relation to the currencies of all its trading partners. The changes in the
rates for the currencies of France's major trading partners are shown below
in terms of the French franc:
US dollar
-7.89
Italian lira
-1.00
UK pound
no change
Netherlands guilder
2.76
Belgian franc
2.76
German mark
4.61
Swiss franc
4.89
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Relative to the currencies of the other EC countries, the devaluation
averaged 2.8017. With respect to the currencies of the less developed countries,
however, the franc was in effect revalued by about 2.5%.
8. Because the exchange rate realignment was quite small for the
franc, the Smithsonian agreement had little impact on French trade last
year. The franc's relative devaluation did slightly increase the cost of
France's imports, but the trade balance was probably more influenced by
the favorable delayed effects of the 1969 devaluation.
9. In 1972, French trade improved upon its remarkable growth of
recent years. The trade surplus (f.o.b./f.o.b. basis) rose to a record
$1.3 billion. This, together with some increase in the deficit on services
and transfer payments, resulted in a $500 million current account surplus.
In dollar terms, exports rose 25.4% and imports rose 25.9% during 1972.
In franc terms the increases were about 8.6% less. Export volume was up
12.5% and import volume rose 11.5%. Price increases of 2.6% for exports
and 4.0% for imports accounted for the remaining portion of the total
increase in trade value. Trade expansion was rapid in all major categories:
agricultural commodities led export growth, while for imports the leader
was finished consumer goods.
10. France's foreign trade
is heavily oriented toward Figure 2
its neighbors, particularly France: Major Export Markets
the five other members of 1971
the original EC. Together Total: $20.7 Billion*
with the United States,
Switzerland, and the
est
United Kingdom, these Rest of World Garm
an
countries account for 23.9%
more than two-thirds of Franc Zone
French exports (see Fig- 10.590 Belgium-
Luxembourg
ire 2). In recent years, 5.2E 12.5%
France has run trade sur- Switzerland
6.0?o Italy
pluses with only two of
United States 51% 12.2`0
these countries, Switzer- 6.3%
United Kingdom
land and Italy. The Sur- Netherlands
plus with Switzerland 'Balance-of-payments basis.
515447 7.73
jumped 45% in 1972, sur-
passing $600 million,
while the surplus with
Italy increased slightly to about $180 million. For the most part, France's
trade deficits with its other major trading partnero peaked in 1969 and
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have since declined. France's largest deficit has generally been with the
United States. This deficit reached $950 million in 1970 but receded to
about $800 million in 1972. Trade with West Germany has recorded deficits
since the mid-1960s. This deficit reached a peak of $800 million in 1969,
and in 1972 was only about $459 million.
11. It is too soon for the Smithsonian rate changes to have had a
substantial effect on French trade with any country. Even though the dollar
and the deutschemark - among the currencies of France's major trading
partners - inderwent sizable changes relative to the franc, the US and West
German shares of the French import market evidenced no discernible change
during 1972. This is not surprising, however. There is a substantial lag in
the response of trade flows to changed price relationships: in the case of
the 1969 franc devaluation, approximately a year elapsed before the
anticipated effects began to be seen in the flows of imports and exports.
12. Reflecting a marked decline in net investment income and a surge
of workers' remittances abroad, the service and transfer payment balance
worsened in 1972, to a deficit of some $800 million. Net earnings from
services, however, closely matched 1971's surplus of $600 million. The
$1.4 billion deficit from transfer payments reflected a net outflow of about
$900 million of private fund- and $500 million of government funds.
Capital Flows
13. Last year, France posted an overall surplus of more than
$1 billion in its long-term and short-term capital transactions. As in each
previous year since the 1969 devaluation, the movements of short-term
funds were dominant (see Table 4). The volume of international capital
transactions continued to be affected by a variety of measures employed
by Paris to insulate the domestic economy from inte.national financial
disturbances, including regulation of the foreign position of French banks
and restrictions on foreign borrowing by French firms. Although the
exchange controls were used during 1968-69 mainly to reduce capital
outflows, more recently they have been applied primarily to restrict inflows.
In both cases, however, the controls have been only partly successful. Sizable
flows of capital have been diverted into channels such as leads and lags
in trade payments. France also maintained its two-tier foreign exchange
market throughout 1972. While the exchange rate for commercial
transactions was held within the Smithsonian limits, the so-called financial
franc was allowed to float. For most of the year, it maintained a level
roughly three to four percentage points above the commercial franc (see
Figure 3). Toward year's end, however, the premium on the financial franc
had largely been eliminated, and both rates stood very close to the central
rate.
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Figure 3
Franc-Dollar Exchange Rates in France's Two-Tier Market, 1972
14. Thf. net outflow of long-term capital was about $700 million
during 1972. This deficit - the largest since 1968 - resulted mainly from
banking sector operations, especially increases in long-term foreign loans
and commercial credits. The banks' long-term foreign position shifted
abruptly from approximate balance in 1971 to a deficit of $700 million
in 1972. Over the same period the surplus on private non-bank capital flows
rose from $200 million to about $300 million. The main factor here
appears to have been a surge of funds to the Paris Bourse that more than
offset increased purchases of foreign securities by French residents. Direct
investment flows apparently leveled off in both directions, leaving France
with a net inflow in 1972 estimated at $100 million - about half that
for 1971. There was also a small net inflow of long-term loan funds.
15. Short-term capital inflow has been a major factor in French
payments surpluses over the past three years. Leads and lags in trade
payments generated about one-third of the net inflow during 1970-71 but
were much smaller in 1972. The inflow of non-bank capital -- $2.2 billion
during 1970-71 - dropped sharply once the speculative fever subsided
following the Smithsonian agreement. For 1972 the inflow was nearly
$400 million. Net inflows of short-term funds in the banking sector
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($1.9 billion during 1970-71), however, increased during 1972, totaling
$1.4 billion for the year. The main factor here appears to have been French
banks' borrowing abroad at relatively low interest rates in order to finance
foreign exchange loans to their resident customers. Other circumstances
contributing to the inflow were increases in franc deposits of non-residents,
induced by the availability in France of relatively high interest returns and
by the repeal late in 1971 of regulations on the banks' external position.
By the end of 1972, however, the inflow of short-term capital appeared
to have subsided, and, in fact, an outflow estimated at $80 million was
registered in the fourth quarter.
16. Prospects are good that France will maintain a generally favorable
balance of payments in the next few years. But the surpluses are likely
to be moderate enough in size that few calls for a franc revaluation will
be heard. The magnitude of recent payments surpluses largely resulted from
inflows of short-term capital. This could quickly be reversed if, for example,
the political situation in France were to destabilize. Indeed, the reversal
of short-term capital flows in the fourth quarter of 1972 and apparent
continuation of the outflow in early 1973 was attributed by some to
apprehension that the elections might result in a leftist government.
17. Underlying the expected continuing strength of the balance of
payments is the improvement in France's price-competitiveness in recent
years. Benefiting from the 1969 devaluation, unit labor costs in
manufacturing in France remain well below those faced by its major
European competitors (see Figure 4). Although wholesale prices in France
are now climbing rapidly, spurting inflation elsewhere in Europe, together
with recent exchange rate realignments, has left France with a relatively
small cumulative rise in prices since 1967. Largely as a result of these factors,
French export prices have risen less than those of most of its main
competitors. Furthermore, when the franc was devalued in 1969, many
French exporters apparently chose to increase their profit margins by raising
franc prices rather than to pass the full benefit of devaluation on to their
customers. This could mean that there is still an unexploited residue of
the devaluation - that is, that French exporters could readily trim their
profit margins and cut prices should export growth falter.
18. France's balance of payments should also benefit from the rapid
growth expected in many other countries. During 1970-72 the French trade
surplus grew in spite of the fact that the growth of real GNP slackened
only slightly in France while a number of France's trading partners were
experiencing marked recessions. In most of these countries, resurgent
economic growth in 1973 is expected to result in marked expansion of
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Factors Affecting
Export Performance
In Dollar Terms
Unit Labor Costs in Manufacturing
180
1967=100
West Germany/
I Producer prices, intermediate goods.
2 Nor-agricultural goods.
3 Menufarmred goods.
4 Intermediate goods.
5 Manufactured goods, home market.
West Germany
Export Prices
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import demand, and French exports should benefit accordingly. With foreign
trade headed for another excellent year - probably exceeding 1972's
$1.3 billion surplus - and the invisibles deficit stable, France's current
account surplus is expected to increase to about $1 billion in 1973.
19. The likely improvement in US export performance, as the
December 1971 and February 1973 dollar devaluations influence foreign
demand for US goods, will also make its mark on France's bilateral trad,
deficit with the United States. This deficit should narrow somewhat in 1973
because of the terms-of-trade effect of the latest devaluation. By the end
of 1973, however, it will tend to widen again as the lower franc cost of
US goods increases the volume of French purchases from the United States.
This effect is likely to be pronounced because, for many products, the
chief US competitor in the French market is West Germany. From the
French importer's point of view, US prices have declined about 20% relative
to German prices over the past two years. The US competitive position
in France should be improved especially for such products as chemicals
machinery, electronic goods, pulp and paper, and agricultural products not
subject to the EC's variable levy system.
20. The long-term capital balance should be aided by the French
government's recent removal of restrictions on foreign borrowing by French
companies. From August 1971 until the end of 1972 there was virtually
a total ban on such borrowings, avowedly to reduce the flow of dollars
into France. Foreign borrowing will now be permitted in cases where funds
are not available in France and the proceeds are used to finance investment
in the foreign country. An additional factor favoring long-term capital inflow
is the absence of a substantial premium on the financial franc.
21. The political situation aside, short-term capital probably will be
attracted to France by the relatively high interest rates now prevailing there.
Toward the end of 1972, tighter monetary policies in most EC countries,
including France, pushed interest rates up sharply. The situation is still
relatively favorable to France, and a net inflow of short-term capital is
likely to continue. But the volatility of short-term capital movements must
be emphasized. Interest rates can change quickly, and, more importantly,
fears of political change or exchange-rate realignment can erupt suddenly
and trigger large flows of speculative capital.
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Current
Long-Term
Short-Term
Official
Change in
Net Change
in Other
Year
Account
Balance
Capital
Movements
Basic
Balance
Capital
Movementsa
Allocation
of SDRs
Settlements
Balance
Official
Reserves
Official
Financing
1967
205
29
234
140
....
375
261
14
1968
-1,059
-898
-1,957
-1,708
....
-3,665
-2,793
-%72
1969
-1,798
192
-1,606
546
....
-1,060
-3( 3
-692
1970
-152
51
-101
1,848
165
1,912
1,127
785
1971
529
2
531
2,695
161
3,387
3,293
94
1st qtr
-38
-74
-112
378
161
427
530
-103
2nd qtr
126
1
127
446
....
573
165
408
3rd qtr
12
18
30
1,663
....
1,693
1,655
38
4th qtr
429
57
486
208
....
694
943
-249
1972b
483
-668
-185
1,861
173
1,849
1,765
84
1st qtr
-315
-224
-539
619
173
253
216
37
2nd qtr
456
-171
285
664
949
929
20
3rd qtr
-28
14
-14
661
....
647
620
27
4th qtrb
370
-287
83
-83
0
0
0
a. Including net errors and omissions-
b. CIA estimates.
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Year
Current
Account
Balance
Net
Balance
Exports,
f.o.b.
Imports
f.o.b.
1967
205
328
11,256
10,928
1968
-1,059
68
12,876
12,808
1969
-1,798
-859
15,144
16,003
1970
-152
320
18,010
17,690
1971
529
1,109
20,694
19,585
1st qtr
-38
266
4,902
4,636
2nd qtr
126
271
5,193
4,922
3rd qtr
12
238
4,824
4,586
4th qtr
429
334
5,775
5,441
1972a
483
1,295
25,951
24,656
1st qtr
-315
-39
6,035
6,074
2nd qtr
456
487
6,701
6,214
3rd qtr
-28
322
5,780
5,458
4th gtra
370
525
7,435
6,910
Net
Balance
Trans-
porta-
tion
Travel
Invest-
ment
Income
Workers'
Remit-
tances
Other
Prraate
Services
and
Transfers
Government
Services
and
Transfers
-123
223
-5
443
-450
436
-770
-1,127
-12
-132
308
-463
-29
-799
-939
51
130
364
-519
-260
-705
-472
-14
210
365
-639
55
-449
-580
-191
312
317
-706
283
-595
-304
-80
87
75
-139
-61
-186
-145
-70
111
99
-185
83
-183
-226
-5
4
57
-213
98
-167
95
-36
110
86
-169
163
-59
-812
-129
327
159
-872
334
-631
-276
-58
80
33
-186
156
-301
-31
-32
164
66
-207
99
-121
-350
-9
-17
10
-254
29
-109
-155
-30
100
50
-225
50
-100
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France: Capital Account Trends
Long-Term Capital Movements
Short-Term Capital Movements
Change in
Change in
Commercial
Commercial
Net
Private Banks' Government
Non-Bank Foreign Capital
Net
Non-Bank
Batiks'
Foreign
Net Errors
and
Year
Balance
Capital Position Transactions
Balances
Transactions
Position
Omissions
1967
29
79
-50
140
-232
438
-66
1968
-898
-473
-354
-71
-1,708
-1,117
-557
-34
1969
192
317
-1
-124
546
-216
479
283
1970
51
614
-325
-238
1,848
984
5G0
364
1971
2
192
-13
-177
2,695
1,181
1,354
160
lst qtr
-74
-12
12
-74
378
125
229
24
2nd qtr
1
110
-77
-32
446
137
209
100
3rd qtr
1#
45
G
-27
1,663
371
1,215
77
4th qtr
57
49
52
-44
208
548
-299
-41
1972b
-668
266
-686
-248
1,861
376
1,372
113
1st qtr
-224
88
-211
-101
619
95
588
-64
2nd qtr
-171
134
-243
-62
664
113
419
132
3rd qtr
14
81
-32
-35
661
328
288
45
4th qtr b
-287
-37
-200
-50
-83
-160
77
0
a. Including net errors and omissions.
b. CIA estimate.
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Exchange Rates: Francs per US Dollar
1971 annual average
5.53
1st quarter
5.55
2nd quarter
5.55
3rd quarter
5.55
4th quarter
5.48
IP72 annual average
5.12
Ist quarter
5.12
2nd quarter
5.12
3rd quarter
5.12
4th quarter
5.12
For Release hP61d4/ tR-R DPt3`STO0875RO01700050033-9