France: Why chaos could lead to euro crisis (Opinion)

Opinion

In the shadow of the European Championships, a crisis is unfolding that could ruin some people’s summer holidays and keep Europe busy well beyond the summer. The most cautious are even worried about the continued existence of the Eurozone – an idea that seemed completely absurd for many years since the end of the Greek crisis.

We are talking about France and the outcome of the parliamentary elections there at the beginning of July. There has been much speculation about what might have driven French President Emmanuel Macron to dissolve the National Assembly and call new elections without any real need after his bitter defeat in the European elections: Was it the hope that under the pressure of a national election the French would come to their senses and vote for moderate parties? Or was it the cold calculation that with a prime minister from their ranks the right-wing radicals would have enough time to lose their magic in the day-to-day running of government before the more important presidential election in three years?

Nobody knows for sure – it is only known that Macron’s most important advisors and companions all advised him against it. So perhaps it was simply hubris, hurt pride and arrogance that drove Macron. Perhaps he will explain himself at some point. In any case, the preliminary result of Macron’s solitary decision is that Europe must tremble again.

Investors distrust France’s public finances

As is often the case, this trembling can best be observed in the financial markets. France has lost around five percent since the European elections and Macron’s announcement. But even more important is the difference in the yield between German and French government bonds, known in France as “Le spread”: while the yield on German bonds has fallen slightly, that on French bonds has risen. This is not yet a catastrophe, but it is a warning signal. The message is: professional investors distrust France’s public finances. And if not quite acutely, then at least in the likely event that in a few weeks either the extreme right or the extreme left could take over the government in the second largest economy in the eurozone.

sees the far-right Rassemblement National party of Marine Le Pen – for many years part of the Front National – at 32 to 33 percent of the vote. A hastily put-together left-wing alliance can hope for just under 27 percent of the vote. Macron’s own party would currently only come in third place with just over 18 percent of the vote. It is quite possible that the French would then only have the choice between two extremes in the run-off elections on July 7, which are also common in France at constituency level.

One can assume that Macron imagined this election campaign differently. But it is now all the more important to look at what might be coming up in France – and that is exactly what investors are doing with brutal honesty. If you compare the election promises of the two options on the far right and the far left, one thing immediately stands out: even if both camps declare that they want nothing, absolutely nothing, to do with the other, their recipes are strikingly similar – a return to retirement at 60, tax relief for small and medium incomes, particularly through a reduction in VAT, higher state transfers, but (at least for the left) higher taxes on wealth, and so on. Economists estimate the cost of the election promises at 100 billion euros and more – per year. And the pressure will be great for the election winner to keep at least a good portion of these promises.

Macron would retain control over foreign and security policy, but the new government would have power over domestic, financial and economic policy.

Last year, the French budget deficit was more than five percent. And that despite a national debt that is already at 110 percent of economic output (GDP), in figures significantly more than 3,300 billion euros. The plans of the right and the left do not suggest that the deficit and debt ratio will fall any time soon.

France is too big to be saved

Since even politically moderate French people are not really interested in the instructions of Brussels technocrats, the only option left to curb the new government’s appetite for spending is the international financial markets. The new government has to get the money from somewhere if income alone does not provide it. – when the very short-serving British Prime Minister Liz Truss triggered a veritable financial crisis for a few days with completely oversized spending plans a good two years ago and the yields on British government bonds went through the roof because nobody wanted to have British bonds on their books anymore. At that time, the British central bank intervened and calmed the markets, and Truss resigned after just a few weeks.

In the case of France, the matter would be much more complicated. Theoretically, the European Central Bank could also step in and buy up French bonds in a targeted manner in order to reduce yields. However, in the case of a self-inflicted political crisis, this would be ruled out under the ECB’s rules – the central bank also did this during the Greek crisis, for example, when it excluded Greek bonds from its purchase programs at the time. However, Greece was already financed in the long term by an international aid package. In the case of France, this would be unthinkable: the country is simply too big to be supported by European or global institutions such as the ESM and the IMF – not to mention that if there is a radical new government in France, there is unlikely to be any willingness in the rest of the world to do so.

And so, to make matters worse, as if Europe didn’t have enough problems already, a reckless French president has brought the threat of a new euro crisis upon it. Macron and the rest of Europe have only one hope: the warning signal from the markets must be so clear in the coming weeks that – whoever wins the election – the new government will immediately bury its most expensive election promises.