ECONOMIC EFFECTS OF THE FRENCH CRISIS: A PRELIMINARY VIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010016-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 16
• Publication Date: June 1, 1968
• Content Type: IM

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 Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Economic Effects of the French Crisis:
A Preliminary View
Confidential
ER IN 68-66
JUNE 1968
COPY NO. 68
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
IIOLUDID FROM AUTOMATIC
DOWNORAUINO AND
DICLAASIFICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
'7 June 1968
INTELLIGENCE MEMORANDUM
Economic Effects of the French Crisis:
A Preliminary View
Summary
The general strike will probably result in a
substantial weakening of France's balance of pay-
ments. This in turn will reduce the ability of
the French government to pursue independent
policies and may force France to adopt more con-
ciliatory attitudes toward international economic
and monetary problems.
The strike has cost France about $2/ billion,
at least 2 percent of its annual Gross National
Product (GNP). A considerable part of this loss
may be made up during the remainder of the year
because wage settlements and other concessions to
labor will increase incomes and thereby stimulate
the growth of production. But the increase in
incomes will also create inflationary pressures
and strongly increase the demand for imports.
Although exports should continue to do well this
year, the foreign trade balance will worsen and
there will be a substantial loss of earnings from
tourism. A small balance-of-payments deficit had
been expected in 1968; now the deficit may rise
to at least $700 million and could be considerably
larger if there is a substantial outflow of capital.
To cover such deficits, France has already drawn
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Curri::nt
Intelligence and the Office of National Estimates.
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on the International Monetary Fund and may have to
reduce its very large gold reserves, which amount
to more than $5 billion.
Whatever the result of the forthcoming elec-
tion, the French government is likely to be less
able to control inflation. Should a left-wing
government come to power, there is the additional
danger of a large capital flight.
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Economic Developments During the Crisis
1. The general strike that has paralyzed
France for the past three weeks is apparently
petering out. At its peak, it involved about 10
million workers (both strikers and others prevented
from working), or about two-thirds of the labor
force. The strike started with sporadic walkouts
on 14 May, grew to general strike proportions the
following Monday, reached its highest level from
27 May through 1 June, and began declining on
Tuesday, 4 June. By the weekend of 8 June the
full-time equivalent of nine working days of the
entire French labor force will have been lost
because of the strike. Most manufacturing plants
were shut down, some because of lack of materials
rather than walkouts or seizures by labor. Almost
all banks were closed and public services, such
as transportation, mail, and most telephone ex-
changes, were shut down completely. Most water,
gas, and electric utilities were kept in operation,
although their unions were actually on strike.
Hotels, restaurants, and tourist facilities con-
tinued functioning, but tourists were rare. News-
papers continued to publish. By Sunday, 9 June,
the total loss of output during the crisis will
have been 2/ billion dollars -- roughly 2 percent
of the estimated GNP for 1968.
2. The crisis had a severe impact on foreign
exchange markets. Heavy speculation led to a rapid
flight from the franc into other currencies, and
on 30 May the government imposed strict exchange
controls. On 4 June a French drawing on the Inter-
national Monetary Fund (IMF) of $745 million was
announced. This drawing will be used principally
to meet the immediate effects of the unrest on the
French reserve position. The French have announced
that they lost some $307 million from official
reserves as a result of the weakness of the franc
during the crisis. This estimate probably covers
only expenditures to support the franc's exchange
value -- support undertaken on behalf of France by
other central banks, including the Federal Reserve
Bank of New York and the Bank for International
Settlements in Basle, Switzerland. It probably
does not include such short-term capital flight
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as occurred during the crisis or the value of
export receipts not repatriated before imposition
of exchange controls by the French authorities.
Together, crisis-related losses of funds may
approximate the value of the IMF drawing, or some
$700 million.
3. Apart from the union leaders' stated goals
of bringing down the present government, most of
the main strike issues center on the question of
wages. The final settlements probably will not
greatly exceed the original offers made by the
government. Most of the wage increases will
probably range between 10 and 15 percent, including
those granted since the beginning of the year.
For the year as a whole, the average growth of
wages is likely to be 9 to 10 percent, compared
with 6 percent expected before the strike.
? 4. The government's offer to raise minimum
wages by 35 percent would affect only about 2/
percent of the labor force, mostly agricultural
and service workers. The effect on costs and
income, therefore, will be small. The nature of
any future link between wages and the cost of
living index is still unknown, but such a link
probably would have little or no effect on wages
this year. Similarly, the proposed shortening of
the standard workweek from an average of about 47
hours to an average of about 40 hours with no
reduction in wages would come into effect over
the next three years; thus the short-term eff%ct
will be slight. Tax reforms have been called for
by the workers, but so far no definite demands
seem to have been formulated. Part of the one
billion or more dollars in wages not paid during
the strike will probably be disbursed after the
settlement or made up in the form of guaranteed
overtime.
5. Other strike issues appear to be more
political than economic in nature. The workers'
resentment over cutbacks in social security
medical coverage and increases in worker contri-
butions probably stems as much from the govern-
ment's high-handedness in last year's reform of
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the entire system as from diminutions of actual
benefits. A return to higher medical benefits
will cost little (probably less than $15 million
this year). The government most likely will have
to postpone the reforms without actually having
to give them up. Token increases also can be
expected in family allotments and old-age pensions.
Recognition of full union rights to organize and
presumably to bargain collectively has already
been offered by both the government and private
employers, and the offer has been acknowledged by
the unions. The demand for a greater union voice
in management, however, is not likely to be pressed,
because French workers have been traditionally more
interested in more tangible gains such as increases
in wages.
Short-Term Economic Effects of the Crisis
6. The settlement package will have two main
effects: (1) it will pump more purchasing power
into the economy, and (2) it will increase produc-
tion costs. Both effects will be inflationary and
will have serious repercussions on the balance of
payments. The full extent of the inflation will
depend on many variables. Perhaps the most impor-
tant is the extent to which the economy can increase
its output in response to increased demand. Before
the strike, the French economy had been recovering
from the 1966-67 slowdown, but there still was
considerable unused capacity and unemployment was
high for France (about 24 percent of the labor
force). Excess capacity and unemployment were
mainly the result of unusually large investment
during 1965-67 in new plant and equipment, much
of which was of the labor-saving variety.
7. The strike settlement will increase pur-
chasing power for the rest of 1968 by at least $3
billion, or about 2.5 percent of GNP at an average
annual rate. This rise in purchasing power will
stimulate the growth of production (especially of
consumer goods). Growth of real GNP in terms of
an annual rate could rise from the 5 percent
reached just before the crisis to around 7 percent
during the second half of the year. Such an
acceleration of growth would offset about half of
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the output lost during the crisis and, for 1968 as
a whole, the growth of GNP would be about 4 percent,
compared with about 5 percent expected before the
strike. Higher output, however, will not absorb
all of the increase in purchasing power, part of
which will force up prices, while part will be used
to buy more imports.
8. Increased wage costs also will create an
upward pressure on prices. In the second half of
the year, wage costs probably will be some 4 to 5
percent higher than they would otherwise have been.
Inasmuch as labor productivity is unlikely to in-
crease more than it would have in the absence of
the strike, much of the gain in output during the
second half of the year will come about through an
increase in employment or in overtime work. For
the most part, French businesses can be expected
to pass on cost increases in the form of higher
prices because profit margins in most industries
have been quite small. Price controls could be
imposed, but there is actually little leeway where
profit margins are low.
9. Overall, retail. prices could increase at an
annual rate of 8 to 10 percent in the second half
of 1968, compared with about 3 percent before the
strike. As usual, wholesale prices will rise more
slowly than retail prices. The higher retail prices
will cut sharply into the workers' newly acquired
gains, but real incomes will be boosted by more
rapid growth in output and imports.
Effects on the Balance of Payments
10. Rapid economic expansion and inflation will
have severe effects on the French balance of pay-
ments. Even before the general strike, a balance-
of-payments deficit of about $200 million to $300
million seemed likely for 1968. The present crisis
may increase this deficit to about $700 million
and quite possibly much more if there is a large
capital drain.
11. The trade balance will suffer for several
reasons. Greater price increases in France than
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abroad will tend to stimulate imports and restrict
the growth of French exports. The main effect in
the short run will be on imports -- especially
consumer goods, which are highly sensitive to a
rise in domestic prices relative to foreign prices.
Even apart from price changes, imports ?,:ill tend
to rise at an increasing rate as the economy
approaches full capacity output.
12. Despite some cancellations of orders
resulting directly from the strike, French exports
are unlikely to be greatly affected in 1968. The
larger, more efficient firms that probably account
for most of the exports are in a relatively good
position to absorb cost increases. Demand for
French exports elsewhere in Western Europe gicw
rapidly during the first quarter of this year z~nd
is likely to remain strong through 1968. Never-
theless, the increase in domestic demand may cut
into the quantities available for export.
13. The elimination of the remaining intra-EEC
tariffs and the imposition of the Common External
Tariff on 1 July will further stimulate imports.
These changes will permit an increase in prices
received by French exporters and thus will at least
compensate for the effect or rising costs on their
profit margins. The French have announced that
they will go along with the tariff adjustments as
scheduled.
14. Tourist receipts will be especially hard
hit because revenue lost now cannot be made up
later in the season. Because of the crisis, the
higher prices 'in France relative to other European
countries, and the unwillingness of many American
tourists to travel in France, the loss in receipts
from tourism could reach $100 million in 1968.
15. Capital movements may have the most impor-
tant effect on the 1968 balance of payments. For
several years, the inflow of long-term capital had
been leveling off while the outflow was increasing.
The surplus on private capital transactions this
year would have been smaller than in any of the
past three years even without the general strike.
Now the balance on these transactions may become
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negative, which could increase the balance-of-
payments deficit to $1 billion or more. Outflows
of short-term capital will remain a danger,
particularly if a left-wing government is elected.
Exchange controls will probably be maintained as
long as the danger exists. These controls can
greatly limit, although not completely prevent,
capital flight.
16. France has huge reserves with which to
combat this weakening balance-of-payments situa-
tion. Before the crisis began, these reserves
amounted to about $6 billion in gold and foreign
exchange, $5.2 billion of which were in gold.
The 4 June drawing of $745 million from the IMF
replenished the foreign exchange reserves and thus
avoided, at least temporarily, the necessity of
selling gold. France can borrow at least $1.1
billion more from the IMF -- $138 million of which
can be drawn unconditionally. But the Bank of
France would probably have to use some of its gold
reserves before.it could obtair conditional loans
from the IMF. Because French L serves and borrow-
ing capacity are so large. France could run balance-
of-payments deficits for a long time without being
forced to devalue the franc.
Outlook-for the Longer Term
17. Whatever the results of the coming elec-
tions for the National Assembly, the government
probably will be less able than in the past to
resist inflationary wage demands and price increases.
Furthermore, in order to cope with such problems,
investment and possibly military programs may have
to be cut. France's external payments position
also would suffer.
18. Since its coming to power in 1958, the
de Gaulle government has established an excellent
record of economic growth and stability, but this
was not achieved without political and social
costs. De Gaulle's aloofness and authoritarian
methods have polarized and united the left to a
degree it could not have achieved by itself. As
a result, a less-than-decisive victory in this
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month's parliamentary elections would force the
regime to pay much greater attention to the views
of the opposition parties and of other pressure
groups.
International Implications
19. Inflationary developments in France will
tend to stimulate small increases in both output
and prices in other countries, especially those
with which France trades most heavily -- the EEC
countries, the United Kingdom, and Sweden. A
faster growth of French imports will directly
increase incomes and purchasing power in these
countries, although the impact will be small..
Indirectly, the French crisis could lead to demands
in other countries for higher wages, shorter hours,
and greater use of overtime.
20. Perhaps more importantly, French foreign
economic policy will no longer have its former
strength and independence. Some benefits could
accrue to both the United States and the EEC
because Franch probably will be forced to adopt
more conciliatory attitudes on international
monetary reform and various internal EEC problems.
Whether or not France sells some of its gold or
borrows abroad to finance its balance-of-payments
deficit, one source of pressure on the dollar will
be removed. This in itself, however, will do little
to resolve the weakness in the US balance-of-
payments position or the weakness of Sterling. The
basic French commitment to European economic co-
operation will not change, and France may even
feel compelled to become a more cooperative Common
Market partner.
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