Beware of a black swan if Marine Le Pen pulls off a French election victory this May
‘If the unexpected happens and Le Pen wins, the euro, world economic recovery and global financial stability are heading for disaster’
In amongst the myriad of potential risk factors that could take the euro down this year is the prospect of a seismic shift in France’s political landscape.
French presidential hopeful Marine Le Pen of the far-right National Front has vowed that France should exit the euro currency should she come to power.
If so, it would become a doomsday scenario for Europe and the rest of the world.
Le Pen, who hopes to be elected president of France in May, not only proposes France junking the euro but intends holding a future referendum on France coming out of the European Union. It poses huge existential risks to the future of a united Europe with serious consequences for future European financial stability.
All it would take would be for one European nation to turn its nose up at the single currency and the European project is done for. The consequences for world financial markets would be cataclysmic. Global economic confidence would be devastated yet again, putting the chances of a rerun of 2008’s financial crash very high on the danger list.
Unfortunately Le Pen is not thinking along these lines. Instead she is putting “France First” at the top of her political agenda, targeting the popular appeal among French voters to tip the scales back in favour of a stronger French economy. Markets would be wrong to ignore the risks.
For decades, France has been dogged by poor economic performance – high unemployment, weak productivity, eroded trade competitiveness and frail public sector finances. France continues to fall further behind its main European partner Germany. France’s jobless rate is running close to 10 per cent, well above Germany’s 4 per cent rate. Manufacturing competitiveness in France carries a 20 per cent shortfall relative to Germany. The gaps are widening.
Le Pen wants to stop the rot and restore France’s former economic glory. But she would be wrong to think bringing back the franc would be a panacea for curing the nation’s economic ills. They are the results of years of French policy failures but it is easy to understand the temptation to dabble in exchange rate fixing to redress the mess.
After all, Britain’s ability to boost export-led recovery by “cutting sterling loose” has been a real boon to the UK economy at critical times. Sterling’s 25 per cent collapse in the wake of the 2008 financial crash and the 20 per cent fall following last year’s Brexit vote have both provided vital boosts for the UK economy, an option denied to France since it has been locked into the euro.
Before the single currency’s emergence in 1999, French authorities tended to favour a weak franc policy bias to help bootstrap faster growth. During the 1980s, the French franc was devalued a number of times inside the old European Monetary System to help gain an extra competitive edge. The strategy has failed to pay dividends for France over the long term.
To “cut and run” with a weak French franc is no solution for sustainable long run recovery without a stronger commitment to deep structural reforms and a sound national plan to overhaul deeper economic rigidities, especially in France’s lumbering labour markets. Germany has put in the hard graft in over decades and it has paid off handsomely. A weaker French franc policy could end up frittering away competitive gains and simply lead to higher inflation.
Taking France out of the euro might offer a quick fix, but would carry lethal consequences. Breaking up the euro would open up Europe to a miasma of toxic risks. The collapse of the euro would unravel European monetary union, threaten the European Central Bank’s survival and tear a massive hole in Europe’s fragile financial stability.
Disentangling Europe’s €7 trillion government debt pile would be bad enough, but re-denominating the euro zone’s €3.5 trillion of corporate debt could trigger a tidal wave of global credit defaults. The result could be cataclysmic for world markets.
Markets are still expecting Le Pen to be beaten in a second round run-off of the French presidential elections in May, but would be unwise to rule her out. After all, political pollsters had written off the chances of a Brexit vote or Donald Trump winning the US presidency only to be proved resoundingly wrong.
And, right now, Le Pen’s standing in French opinion polls is strong.
If the unexpected happens and Le Pen wins, the euro, world economic recovery and global financial stability are heading for disaster.
David Brown is chief executive of New View Economics