Whether they dreamed of it or dreaded it, the statesmen of Western Europe had all come to accept the fact that a new era will dawn on New Year's Day 1959, when the long-planned European Common Market finally begins to forge France, West Germany, Italy and the Benelux nations into a single economic unit. Last week, in dramatic preparation for the new era, ten European nations carried out at one fell swoop the most far-reaching international currency reform since World War II.
Immediate cause of this coordinated shake-up was a portentous rumor that began to buzz through Europe's chancelleries as 1958 waned. To celebrate the inauguration of the Common Market, so the story ran, West Germany planned to make the Deutsche Mark freely convertible currency—a move that might well transfer the banking capital of Europe from London to Bonn.
Brooding over this unsettling report, British Chancellor of the Exchequer Derick Heathcoat Amory two weeks ago took advantage of a routine Paris meeting of the Organization for European Economic Cooperation to discuss some highly private business with West German Economics Minister Ludwig Erhard and French Finance Minister Antoine Pinay. The fruits of that chat were harvested late last week, when the British treasury laconically announced that it had decided to make the pound sterling "externally convertible."
Since British subjects will still be rigidly limited in the amount of sterling they can convert into hard currencies, the British action falls short of true convertibility. But henceforth, foreign businessmen will be able to change pounds freely into dollars (at an official rate ranging between $2.78 and $2.82). The result, so London hoped, would be to maintain the pound's position as Europe's leading medium of exchange—a vital matter to the British, who. with only 4% of the world's money, do 40% of the world's banking.
Given this go-ahead from the world's top trading nation, other European nations followed suit. In rapid succession, West Germany, Italy, the Scandinavian countries and the Benelux nations all proclaimed their currencies externally convertible. (Denmark, responding to the drama of the occasion, revealed that it was following the British example even before the British treasury set the example.)
The Squeeze. All this, despite the fact that Britain has long been contemplating external convertibility, had the effect of putting a painful squeeze on France. Yet Pinay had not opposed the British and Germans; in fact, it was he who proposed advancing the date to Dec. 27. With the franc officially valued at 420 to the dollar but selling in the free market for 470 or worse, General de Gaulle's government was already faced with one harsh fact: unless the official value of the franc were brought into line with its true value, French products would be too highpriced to compete freely—as they must within the six-nation Common Market—against those of Germany, Italy and Benelux. Now, in addition to devaluing the franc, France had also to make it convertible—or else face a capital flight away from the franc to the convertible pound or Deutsche Mark. Unlike Britain, whose gold and dollar reserves are at a seven-year high, France is running a $60 million foreign-trade deficit every month.