29. Telegram From the Embassy in France to the Department of State 1
2611. Luxembourg for Butterworth. Department pass ICA and Treasury. Ref: (a) Icato circ X–215, November 16. (b) Paris Embtel 2501, rptd 446 to London, November 20. (c) Paris Embdesp 847, November 20 (copy pouched London).2
French economy prior to Suez
During 1956 persistent inflationary pressures in France have been largely met by substantial increases in imports. Such imports have consisted not only of agricultural products to meet needs caused by crop failure in 1956, but also consumer goods and substantial amounts of raw materials and equipment needed by expanding domestic production. Rising wages, shortages of both skilled and unskilled workers, continuing budgetary deficits, an overvalued currency, and large-scale financial and manpower demands by the Algerian hostilities have continued during the year. Since last January, gold and hard currency reserves have already decreased from about $2 billion to about $1.3 billion.
Prior to Suez, Govt officials recognized that policy of balancing internal disequilibrium by increased imports could only be extended during 1957 at risk of decrease of gold and dollar reserves to danger point. We believed in the absence of favorable developments that further curtailment of hard currency imports was likely by mid-1957.
Post-Suez
In reference (b), Embassy estimated that even assuming a 25 percent reduction in petroleum imports there would be an increased dollar cost of petroleum alone of between $65 and $100 million in six months. Press now reports Govt estimates (apparently on same basis) of $50 to $100 million for six months and we have received a banker’s informal estimate of $100 to $120 million for petroleum, plus $70 million for coal for entire year. Given a change of origin and absolute reduction in petroleum imports, there might be some savings to France [Page 87] in sterling, but on other hand there might be some additional balance of payments requirements to cover increased freight costs of other bulk products from Southeast Asia, which formerly transported via Suez.
In summary, b/p effects on France would be substantial even if Suez and IPC pipeline fully operative by June 1. Continuation beyond that date would cause further serious complications, having in mind decline of reserves during past year and probability that a further decline would have been recorded in 1957 even without Suez complication.
Domestic production
There will be some decrease in production in automotive industry (and possibly some further complications because of overextended financial position of Simca) because of decreased demand. More important effects on production will, however, be in the steel, glass, ceramic, cement, transportation and bakery industries because of their dependence upon fuel oil. Martin Steel (one-third of French steel production) is largely dependent upon fuel oil and an overall decrease in steel production of about 9 percent can be anticipated by January. Given a reasonable distribution system, overall reduction in production of these industries should not be excessive in itself. There could, however, be chain reactions, for example, from transportation industry and from ceramic and glass industries affecting building industry, etc.
Drastic cutbacks in home heating, automobile use, electricity and railroads could save up to two million tons in six months without any substantial adverse effects on economy.
Shortages
Except for petroleum products, early significant important shortages are unlikely. There are adequate stocks of long-staple cotton imported from Egypt and also apparently of other commodities, such as jute, tin, zinc, rubber, etc. However, price increases reflecting increased freight charges can be expected.
Agriculture
There is likely to be difficulty transporting milk and livestock products this winter. Agricultural production is not likely to be seriously affected this calendar year. Spring sowing will make heavy demands upon fuel supplies during March and April which will require some special provisions if production is not to be reduced.
[Page 88]Exports
Aside from obvious but small loss of Near East markets and certain other special cases such as autos, France’s exports do not appear alarmingly vulnerable. However, internal and external transportation difficulties could present technical problems and of course price increases could further price French exports out of world markets and complicate French position Common Market, liberalization, etc.
Imports
In addition to petroleum, increased coal and cotton imports, both from dollar sources, can be anticipated. Costs will increase because of increased freight costs and prices.
General inflationary implications
There will of course be certain deflationary influences. There will be some decrease of employment in automotive industry and possibly in some other industries, and there will be decrease in work week and take-home pay. In addition, certain plans for plant expansion will be terminated or reduced. These factors, however, would be likely to have their effect more significantly in long run while the problem, we believe, is primarily in short run.
The budget deficit will be increased, first through new expenditures for price subsidies, and second through losses in receipts because of failure to realize level of economic activity on which present estimates based. Ability of French Treasury to carry this increased load in period of economic disturbances is problematical, and direct recourse to Bank of France should not be excluded.
We feel, however, major impact price-wise will be caused by businesses faced possibly with cutbacks in production and higher prices for imported products at same time. This condition, together with shortages and general anticipation of higher prices, will, we feel, lead to a general tendency towards higher prices. Inasmuch as legal minimum wage and wage rates in many important agreements in France are linked to price index which, if only slightly increased, will precipitate a new round of wage negotiations and probable increases, this could set off a wage-price spiral.
As indicated above, there are certain developments which could have an important deflationary effect given an adequate time to take hold. However, we believe that abovementioned inflationary effects will become effective so rapidly that potentially deflationary influences will be submerged.
[Page 89]Conclusion
Conditions described above could cause serious economic and social instability in France. There will probably exist some unemployment and reduced take-home pay at the very time that there will be shortages and increases of prices. Cloudy political and economic picture contributes immeasurably to the difficulty of handling these problems, and the longer the period of uncertainties is extended, the greater number of complications will develop. I should like therefore to urge once more that the United States Government do what is in its power today to remove uncertainties concerning coordination of supply and transport of oil to Europe. Conditions described above assume maximum coordination, and therefore a continuation of present uncertainties will further complicate and enlarge problem.
Even given effective action on the part of US Govt on oil, it is clear that France can only face these economic problems in the next few months by increased use its steadily decreasing foreign exchange reserves. Secondary effects will be an increase in governmental control of external and internal trade, together with increased disregard of GATT, OEEC and US trade objectives. Even more significant, however, would be likelihood of a decreased and less effective role for France within the NATO Alliance.
- Source: Department of State, Central Files, 851.00/11–2756. Confidential. Repeated to London, Bonn, The Hague, Rome, Brussels, and Luxembourg.↩
- Reference (a) has not been found in Department of State files. References (b) and (c) contain discussions of the impact of the disruption of Middle East crude oil supplies on the French balance of payments. (Ibid., 840.04/11–2056 and 851.131/11–2056, respectively)↩