2016 saw the escalation and spread of populist nationalism throughout Europe, marked by the shock result of the Brexit referendum. The election of Donald Trump to the White House this past November has only served to bolster the moral and confidence of populist parties in Europe. Nowhere is this more evident than in France, where Marine Le Pen’s anti-globalist Front National (FN) party has seen a meteoric rise in the build up to this spring’s French presidential election. As the eurozone’s second largest economy and its most liquid government debt market, with nearly 60% of all French bonds held by foreigners, France is currently the focal point of global financial market anxiety. A potential Le Pen presidency is what economists refer to as a ‘tail risk’– an event that has a remote chance of happening, but would have massive consequences were it to occur. Given the recent string of unpredicted political events, the concern is justified.
Le Pen released her election campaign platform in early February. The platform is notably short on macroeconomic and practical detail, but she pledges to take France out of the eurozone (the group of EU nations whose national currency is the euro) and to hold a referendum on France’s European Union membership unless the EU agrees to revert to a loose coalition of nations with neither a single currency nor a border-free area. Le Pen has pushed her agenda of protectionist economic policies and anti-immigration reform to garner the support of those disenfranchised by France’s current economic stagnation and national security concerns. While the EU could survive without Britain, the same cannot be said were France to leave. France is a founding member of the EU and along with Germany has been the motor of European economic integration over the past 50 years. The economic implications of a potential ‘Frexit’ would resonate across the world and undoubtedly spell the end of the EU.
However, Le Pen has recently softened her stance on an EU exit, as she attempts to attract more voters from mainstream parties. She has proposed that France re-adopt the franc, and that Europe return to a basket of recognised national currencies linked through a common currency system similar to the ECU (European Currency Unit), which was used before the introduction of the single currency in 1999. 1.7 trillion euros, 80% of France’s public debt, could eventually be redenominated into francs if Le Pen wins. The remaining 20% falls under international law and thus would stay denominated as euros. This would amount to the largest sovereign default on record (higher even than Greece), threatening the global financial system. The FN has proposed the swapping of euros for francs on a 1-to-1 basis. However, the franc would quickly lose parity with the euro. Manufacturing unit labour costs, viewed as a broad measure of price competitiveness, have been much higher in France than the eurozone as a whole since the single currency was introduced. Based on this, devaluation would most likely occur. This would be compounded by inflation imported from the eurozone through more costly euro-denominated goods. It is consequently predicted that the new franc would fall 10-15% even before accounting for a likely ‘fire sale’ (the selling of goods or assets at heavily discounted prices) of French assets. Euro periphery countries would be even more vulnerable to the eurozone disintegration, and could plausibly follow France’s rejection of the single currency.
Investors have already been preparing for the worst, as French debt, mostly held by foreign investors like Japanese pension funds and insurers, is being traded at volumes not seen since the acute phase of the eurozone crisis in 2011. By raising the possibility of ‘Frexit’, a Le Pen victory will naturally lead to an intensification of political uncertainty not just in France but across the region as a whole, and dampen eurozone area investment and consumer spending in the short term. Business confidence would be driven down, and investment activity in the region would be reduced. The fear of a potential Frexit would generate substantial capital outflows from France, in anticipation of a currency devaluation. A devalued franc would in fact play into the hands of the FN, as they hope that it will result in increased French exports.
Le Pen’s imposition of strict immigration controls and ‘intelligent’ trade protectionism would significantly reduce France’s growth, as its industries become less competitive in international trade, carrying downstream negative implications for the other eurozone member states, with Greece (severe debt), Italy and Portugal (banking crises) the most at risk. Given the tight integration of European banks and the low level of sovereign interest rates, a French exit from the eurozone could trigger the simultaneous bankruptcy of a number of European banks and governments alike. The negative economic consequences resulting from Le Pen’s protectionist policies would create spillover effects into the rest of the eurozone.
More broadly, a Le Pen presidency would have radical implications for US, Russian and European economic relations. Le Pen has voiced her support of Russia and Putin, and if elected vows to strengthen France’s relationship with Moscow. She has publicly condemned France and the EU’s anti-Russia sanctions policy. A friendlier relationship with Russia could in fact be beneficial to Europe, as economic sanctions imposed on Russia are felt most sharply in key European economic sectors such as France’s defence industry and British finance. Additionally, France is the leading foreign investor in the Russian economy, having invested more than $1 billion in Russia in 2015.
As anti-globalist and Eurosceptic leaders surge in the polls across Europe, many hope that the emotional voices will not outweigh the rational. The French presidential election is a two-round system, and should no candidate win an outright majority on April 23rd, a run-off between the top two will be held on May 7th. A Le Pen win would be the beginning of the end for Europe and would see the global economy radically affected.