1The European Payments Union and its associated rules for liberalizing European trade was an American initiative designed to multilateralize intra-European trade and payments and ultimately close the dollar gap. Set up in July 1950 exactly half way through the European Recovery Programme it was based on providing dollar aid to finance an automatic settlement mechanism in Europe which was to be a stepping stone to the full convertibility of European currencies and the operation of the Bretton Woods system.

2The scheme deeply divided the French and when in February 1952 in the face of a payments crisis the French government had to reimpose trade restrictions, its critics seemed to be vindicated. Yet, unlike Britain, France never seriously considered leaving the EPU recognizing that it served its interest better than any alternative.

3Opponents of the EPU initially included the European section of the Quai d’Orsay, the Ministry of Industry, the CGT and the CGA. The debate which took place early in 1950 was on various levels1. On one level it was simply a question of timing. The argument was that France should retain control over its external trade and payments until the Monnet Plan had been fully implemented : in other words that modernization had to precede liberalization.

4On another level it was argued by the Economic Cooperation section of the Quai d’Orsay and the CGT that France would have a deficit with the Sterling Area and West Germany which it would be unable to cover with a surplus from the rest of OEEC. Therefore the EPU would not lead to the rebuilding of French reserves and the restoration of convertibility of the franc. This analysis was based on the interwar experience when France had depended on the receipts from invisible transactions and in the 1930s on it gold reserves to balance its external payments. French gold reserves had been further depleted between 1945 and 1947 to help finance the needs of reconstruction so that by 1949 they amounted to 464.6 tonnes compared with a maximum of 4900.4 tonnes in 19322. It was assumed that receipts from invisible transactions had also largely disappeared. This reasoning led to the recommendation that France would be better off expanding trading links with complementary economies in Eastern Europe and the French Overseas Territories.

5However in 1949 France had a surplus on invisible transactions with the Sterling Area and a surplus on current account with both the Sterling Area and the Non-Sterling OEEC countries. And this continued in 1950, as indicated in tables one and two.

Table One Balance of Payments of the Franc Area on current account in 1949 (in million dollars)

Table Two Balance of Payments of the Franc Area on current account in 1950 (in million dollars)

6A third argument centred on the inclusion of West Germany in the trade liberalization programme, and on the nature of the trade liberalization programme itself. The debate between Britain and France over the method of reducing quantitative restrictions on trade is well known3. Whereas the British advocated a simple percentage reduction in each of the three main categories of 1948 private trade, the French Ministry of Finance wanted it to be done on the basis of common lists of products to be liberalized. Only in that way it was argued would liberalization lead to an increase in intra-European trade and competition between producers. However the British proposal was adopted by OEEC. In view of the arguments which the announcement of the French list provoked within France, this was probably the wisest course of action. Within the Ministry of Industry, which had not been consulted, the Direction of Mechanical and Electrical Industries objected to the fact that steel was not on the list whereas industries using steel were to be liberalized4. Given the lower price of German steel, all users of French steel were at a comparative disadvantage and yet they were to be exposed to European competition before the steel industry itself.

7This of course was not the only factor indentified by the Ministry of Industry as responsible for German economic superiority. The inadequacy of Allied military action during the war and their reparations policy after the war meant that West Germany had a production potential in 1950 equal to that of 1938. The stock of machine tools in France, 500,000, was one third that of Germany and they were twice as old, averaging 20 years. Whereas French industry was saddled with debts, the West German monetary reform had amortized those of West Germany. West German industry also benefited from cheaper basic products – the price of coal was 15-30 per cent less than in France, steel was 15-20 per cent less and electricity 25-30 per cent less. German social charges were lower, vertical concentrations in German industry led to savings in fiscal charges. Overcapacity and surplus labour in German industry would reduce marginal costs of production, increase productivity and enable German industry to dump abroad in the future. The conclusion though was not that French industry should be protected permanently against Germany but that trade liberalization should be gradual and be accompanied by a harmonization of the two economies and an end to all German discriminatory practices : in other words integration was to precede liberalization.

8 A fourth argument put forward by the CGT was that exports from the French overseas territories would be exposed to competition on the French market with exports from the overseas territories of other OEEC countries, and that this would undermine the cohesion of the French Union. Rather than be forced to liberalize trade and payments with Western Europe as a condition for further American aid, the CGT preferred to cut back on imports from the dollar area, accept a decline in living standards and forego American aid5.

9The main supporters of the EPU were the Ministry of Finance and the majority of the Economic Council. The Ministry of Finance firmly held the belief that only by restoring competition among European producers would the price and productivity gap with the United States be closed and with it Europe’s need for dollar aid. Without making it a precondition for accepting the EPU it continued to argue that competition would only be restored if countries agreed to liberalize trade in the same products. It was somewhat less convinced of the feasibility of the proposal to set up a European Investment Bank to ease the structural adjustments which such competition would require. At the same time though it recognized that without it domestic pressures from the sectors most affected could well cause the reversal of trade liberalization6.

10The majority of the Économic Council considered that the attempts to recreate a trading structure based on the supposed complementarity of industrialized countries and developing ones were completely misguided. Few developing countries wanted it. France had no option but to trade and become competitive with other industrialized economies. The expansion of French exports since the war was not a sign of French competitiveness but the result of bilateral trading in a situation of global penury. But if French industry and agriculture were not competitive why expose them to European competition before the Monnet Plan had been completed ? Here the majority view was that since American aid was scheduled to end in 1952 and since France had run down its gold and foreign exchange reserves it had now no option but to use the remaining aid to return gradually to free trade7.

11Two events of major importance were responsible for overcoming some of the criticisms. One was the announcement of the Schuman Plan which was to remove the most significant advantages which German industry benefited from at the expense of its French counterparts. An initiative of Jean Monnet, it succeeded in removing the grounds for objection to the EPU of both the Quai d’Orsay and the Ministry of Industry.

12The second was that, quite contrary to expectations, as the German economy got going again, its demand for imports from France increased and far outstripped French imports from West Germany. Thus instead of running a deficit with West Germany, France had a very healthy surplus.

13As a result between July 1950 and April 1951 France registered a net surplus each month with EPU. This enabled the government to comply with the OEEC trade liberalization code so that by February 1951 it had removed quotas on 75 per cent of its 1948 private trade. However April 1951 marked the end of the honeymoon period. It was not until autumn 1954 that French payments with EPU were back in surplus.

14The obvious conclusion to be drawn is that the critics were correct, and that France could not survive when exposed to a degree of competition within Europe. But in fact the deterioration in the payments position was due entirely to the effects of the Korean war. After the war broke out both the French government and French producers took the decision not to join in the international race to stockpile raw materials. Their argument was that it was an exaggerated response to the international situation and would be inflationary8. As a result French exports increased quite dramatically particularly to West Germany, Britain and the United States, between the second and fourth quarters of 1950. But in 1951 first the restrictions on German imports and then later on British imports together with the inflated price of raw material imports from the Sterling Area caused the serious reversal of the French payments position in EPU. (See table three). As long as the United States was prepared to help fund the French deficit the continued membership of the EPU was not an issue in France. The crisis came in 1954 when, with the improvement in the British reserves, the French government expected Britain to announce the convertibility of sterling.

15Whereas the American government had previously been opposed to British plans to make sterling convertible on the grounds that it would break up the EPU and undermine the process of European integration led by France, the situation was rather different in 1954. In view of its declining commitment to the EDC France could no longer claim to be taking the lead in Europe. It felt that if sterling became convertible the Deutschmark and other European currencies would certainly follow and where would that leave France9 ?

Table Three French Trade with its Principal Trading Partners 1950-1951 (monthly averages in million Francs)

16This time the debate was not about whether the French economy could compete with West Germany but whether West Germany would want to sell anything to France if the franc did not become convertible. This would obstruct the workings of the ECSC through which the French steel industry was exporting increasing amounts of steel to West Germany. It would also undermine the modernization of French industry which was being stimulated with imports of German machines, machine tools and parts. (See table four)

17But if the franc did become convertible then French industry would lose most of the protection which it enjoyed in the French Overseas Territories. Since many of these countries did not have tariffs it was largely through exchange control that France was able to ensure privileged access for French exports. Not only would convertibility open up these markets to foreign competitors but it would reveal the full extent of French privilege at a particularly sensitive time politically. It was for this reason that the French planners undertook an investigation into the possibility of forming a customs union with some or all of these territories10.

18While support for maintaining the French Union was fairly unanimous it was also increasingly apparent that France could not afford to continue financing the development of these economies out of the public purse. One of the legacies of the European Recovery Programme was that the Overseas Territories had come to expect a certain level of financing from Metropolitan France.

Table Four Main Items of French Trade with West Germany 1950-1956 (milliard Francs)

19As counterpart funds declined and disappeared they had to be replaced by public funds in the absence of private investment. While it was politically unpopular to recommend increasing taxation to finance this investment, not to do so would be politically disastrous for the cohesion of the French Union. A possible solution was to open these economies up to European competition in return for European assistance in financing their development11.

Conclusions.

20Sterling did not become convertible in 1954. The EPU was renewed although the terms of settlement were hardened and with the improvement of the French payments position France was under relentless pressure from OEEC to lift its restrictions on imports.

21A further cause for concern was the fact that OEEC was extending its liberalization to include the dollar area. Benelux had agreed to 86 per cent and West Germany to 65 per cent liberalization in September 1954, this meant that French exports would have to face increasing competition with dollar exports in many West European markets.

22One option was to devalue the franc to bring French prices into line, but since it was argued that the Deutschmark was under valued this would only have increased West Germany’s competitive advantage12. Tariffs could not be increased. Export subsidies and import taxes, although condoned by OEEC as a market-based solution and thus preferable to quantitative restrictions, were a temporary palliative.

23Once again integration with West Germany was chosen as a stepping stone to trade liberalization and currency convertibility. It was the intention of Mendes France to pursue integration with West Germany on a bilateral basis. In taking this initiative and excluding the Benelux and Italy he was probably much more effective than Jean Monnet in accelerating the momentum for European economic integration.

Table Five The Net Monthly Position of France in the EPU (million units of account)