US budget woes also hit France and Canada
Paris — France's minister of finance, Jacques Delors, was speaking here of the budget discussions between Congress and the Reagan administration: ''We consider the argument going on over the budget just as important as the disarmament negotiation.''
Donald J. Johnston, president of the Treasury Board of Canada, spoke at a press conference in Vancouver, British Columbia, last week on the same topic: ''Hopefully there will be a (budget) consensus reached within the United States which will reduce interest rates.''
Both France and Canada have strong economic reasons for wanting what Mr. Delors, in a recent interview, called ''a good budget compromise.''
In fact, French President Francois Mitterrand and Canadian Prime Minister Pierre Trudeau met in Ottawa last month to discuss the agenda for the Versailles summit conference opening June 4.
The two share a somewhat similar plight. Both lead left-of-center governments. Both have followed economic policies intended to maintain economic growth, while the United States, Britain, West Germany, and Japan have put more emphasis on fighting inflation. Thus the two countries are out of step with their industrial trading partners.
When Mr. Mitterrand won the presidential election last spring, his top economic goals were a reduction in unemployment and a redistribution of income in favor of the poor and near-poor in France. The minimum wage was increased sharply - almost 10 percent. Social welfare payments of various kinds were stepped up. The budget deficit increased greatly.
As a result, the economy did pick up some steam. Growth of real output for 1981 was around 0.3 percent, and the government predicts 2.5 percent this year - far above the 1 percent gain expected on average in the European Community.
The Socialist-Communist coalition government had counted on a more rapid economic recovery in the United States and Western Europe, particularly in West Germany, its most important trading partner.
Further, inflation has dropped far more rapidly among France's allies than expected. Last spring it was running about 13 percent in France, 9 percent in West Germany, and around 11 percent in the US. But inflation this year has been running at a 13 or 14 percent annual rate in France. Meanwhile, disinflation has gone well in Germany, the US, the United Kingdom, and Japan, opening a widening gap in price levels with France.
As a result of these trends, economists here expect this sequence of developments:
Faster inflation will reduce the international competitiveness of the French economy. French industry will have a tougher time exporting. In addition, the more rapid growth of the French economy will draw in more imports. The balance-of-payments deficit will swell. The franc will be devalued soon after the summit meeting, within the European Monetary System. That will in turn worsen inflation in France and put pressure on the government to apply the brakes to the economy.
As Mr. Delors sees it, a budget agreement in the US would produce ''a better equilibrium'' between fiscal and monetary policy, resulting in lower interest rates.
''If interest rates would go down in the United States, it would help us,'' he explained. It would enable West Germany and Japan to lower their interest rates, now high because of the danger of capital outflows to the US. West Germany in particular would import more French goods, improving France's balance of payments.
The world, Delors said, depends on social and economic balance, as well as military balance. ''This should be given more attention by our American friends.''
Actually, the French budget deficit is about the same size as that of the US in terms of percentage of gross national product. Mr. Delors knows that, but still expects the US to trim its deficit. ''It is a matter of leadership,'' he says.
For Canada, high US interest rates have often meant even higher Canadian interest rates. Otherwise, Canadians would ship capital across the border in huge amounts, depressing the Canadian economy and dollar. And Canadian governments and corporations borrow heavily in the US and need to offer attractive rates.
Lower US rates and economic recovery south of the border would reduce the current risk of further devaluation of the Canadian dollar. On June 1, it dropped to a record low of 80.06 US cents.
Actually, US interest rates are already moving down and likely to go further - but because of the laws of economics and not because of any summit pressures.
Federal Reserve Board chairman Paul A. Volcker told a Vancouver press conference last week: ''If you make the assumption we are going to make good progress on inflation, then these interest rates are extraordinarily high.'' He added that ''sooner or later'' they will decline.