Comment

Madame 'Frexit' looms large as the French political centre disintegrates

France
The EU establishment is watching with horror as the Front National's Marine Le Pen creeps into real contention 

Project Fear has proved to be a Gallic hostage to fortune. Those malevolent predictions of instant Brexit trauma have played into the hands of Marine Le Pen's Front National.

One quarter of economic data has succeeded another, and then another, and the British economy is still growing faster than the eurozone and faster than France, where the broad (DARES) unemployment toll rose to 4.53m in December.

French economist Jacques Sapir says France has lost 660,000 jobs under the tenure of President François Hollande, a leader who told the nation that his record should be judged by the employment curve.

It had already shed 392,000 over the preceding eighteen months under the austerity overkill policies imposed on France by the eurozone machinery in the mad years of the crisis, and executed without a murmur of dissent by a certain François Fillon.

Doubtless Britain's Brexit pain is merely deferred, but that was not the argument made at the time, and repeated thereafter in tones of canonical certainty. The French establishment asserted, day-in, day-out, that Britain was already spiraling into crisis.

 "Project Fear was a dreadful mistake. Everybody should have known that it would take at least two years for the fall in direct fixed investment to be felt, " says Giles Merritt from the Friends of Europe think tank in Brussels.

"We now read in Le Monde that the UK has been the fastest growing economy in the G7, so of course Frexiteers are emboldened. Everybody here is transfixed with horror over what is happening in France," he said.

Marine Le Pen has laid out her stall for the first round of the presidential election in April. Her "Free France" manifesto begins with a pledge to restore full sovereign control over the currency, economy, laws, and territory.

"Six months after my election, I will organise a referendum on the withdrawal from the EU. The only currency that will circulate in France will be our new French coin, and the debts will denominated in the national coin," she said.

Ms Le Pen has shrewdly created a smokescreen. She wants to keep the empty shell of the euro - for now - proposing a basket of national currencies akin to the old ECU (European Currency Unit) for use by "states and large companies".

The franc and the euro would in theory co-exist but everything she aims to do necessarily implies monetary divorce, including her plan for the Banque de France to finance treasury debt with printed money. The aim is to ensure that the broad M3 money supply grows at 5pc a year, a form of nominal GDP targeting.

France
French unemployment has never recovered from the crisis, and the broader measures are still rising Credit: INSEE

Her policies look highly expansionary: a state-led industrial blitz behind trade barriers,  or what she calls "intelligent protectionism".  She aims to boost French defence spending from 2pc to 3pc of GDP within five years, beefing up the forces by 50,000, and building a second aircraft carrier, the 'Richelieu'.

Whether she will have the votes in the French parliament to carry through these policies is an open question, but what is clear is that the Front National will secure a very large bloc in the Assembly for the first time. The political centre of gravity will shift dramatically. Those betting that she would be an instant lame-duck may be deluding themselves.

Clemens Fuest from the IFO institute in Munich says Frexit is a "horror scenario" and would destroy monetary union almost instantly. Capital controls would have to be introduced across Europe the day after her election.

But the question rarely explored is exactly how the fall-out from such a shock would be distributed. It is far from clear that France would suffer the sort of ferocious devaluation that some suppose, or would be forced into debt restructuring.

The country is more or less in the 'middle' of the EMU system. The new franc would rise against the lira, the escudo, the drachma, and so forth, but would fall against the D-Mark bloc. The external euro debt contracts of French firms - mostly hedged by external assets in any case - might not change much viz a viz a 'synthetic' post break-up euro.

Two-thirds of France's €2 trillion public debt is owned by foreigners. Markets would clearly act pre-emptively on any sign that French opinion polls were tightening, although the European Central Bank could contain that through the elections.

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The risk spread of French 10-year bonds over German Bunds is rising Credit: RBC

France might emerge in rough equilibrium, the least destabilized of the big eurozone states. It is Germany and its northern satellites that would have to deal with a violent revaluation shock, you might say the delayed retribution for their chronic current account surpluses within monetary union.

How the Bundesbank would cope with a partial default on €750bn of credits owed by other eurozone central banks under the Target2 payments system is anybody's guess, and by then perhaps it would be a €1 trillion or more. Dr Clemens thinks Berlin would have to issue warnings to investors chasing German assets that the money would be redeemed at a pre break-up exchange rates, otherwise it would overwhelm the financial system. "It is a huge danger to Germany," he told the Frankfurter Allgemeine.

Ms Le Pen still has a formidable wall to climb before she comes anywhere close to taking the Elysée, but her prospects are no longer zero. It is this 'tail-risk' that markets are now discounting. It is why spreads on 10-year French bonds have spiked to 78 basis points, the highest in four years.

All the luck is breaking her way. The Socialists have picked an unelectable candidate from the multicultural, metropolitan Left, who promises laxer migration controls. The party might as well hand over its blue-collar base to the Front National, strategically positioning itself as defender of the sacred 'modèle français' and the working poor.

The stench of corruption hangs over the conservative Republicans, so like the 'notables' of the Orleanist monarchy in the 1830s, immortalized by the lithographic satires of Honoré Daumier.

France
A Daumier lithograph of corrupt 'notables' in Orleanist France in the 1830s, so like the French governing class today Credit: The Met

Former president Nicholas Sarkozy is to face criminal trial for campaign fraud. François Fillon - just weeks ago the unstoppable Dauphin - is falling apart. What is extraordinary is that Mr Fillon still thinks he can stonewall his way through the 'Penelope' affair - now encompassing €1.5m of alleged public funds - when so many witnesses have emerged to contradict his claims.

Ms Le Pen once faced the prospect of severe defeat at the hands of this former prime minister. A Right-wing cultural Catholic and champion of French identity, he was her competitor for the nationalist vote. Now she has little to fear.

Instead she faces the perfect adversary in Emmanuel Macron, a pro-European globalist with no party machinery and little experience, a man surfing a wave of ephemeral popularity. “It is a duel of patriots against globalists,” she says, rubbing her hands with glee.

A Sofres-Onepoint poll shows that Mr Macron would win by 65:35 in a run-off election but he is yet to be tested, and nothing stands behind him since he turned his back on his own Socialist Party rather than fighting within to change it.

The French economist Thomas Piketty says the problem with Mr Macron is that he defends the indefensible status quo of the EU's Fiscal Compact, "a monumental mistake which has ensnared the eurozone in a fatal trap." That renders his electoral bid almost pointless.

France
Emmanuel Macron has great charm but he has emerged from nowhere, has no party base, and may prove brittle

The Picketty view - and mine - is that any attempt to overcome the legacy of high debt by running primary budget surpluses for year after year, and decade after decade, is self-defeating. It leads to an investment famine and slow atrophy, ending in civilisational decline if it goes on long enough. It is what Britain did with grim results in the 1920s, before we were - fortuitously - blown out of the deflationary Gold Standard in 1931.

I once heard Mr Macron launch into a lacerating attack on the eurozone's austerity regime - and German policies - at a closed-door meeting in Italy. He knows full well why the eurozone has gone so badly wrong. But in the end he cannot bring himself to rebel. He clings to the illusion that somehow the unworkable structure of monetary union can be repaired, or that Germany will miraculously agree to fiscal union and debt pooling.

As for the polling data, what catches my attention is another survey showing that Ms Le Pen could win 40pc or more in various run-off configurations. It suggests that her campaign of "dédiabolisation" - taking Devil out of the Front National - has partly succeeded. In psephological parlance, her 'negatives' are falling.

The once solid phalanx of French citizens who would never vote for the party of her father and for his Vichy nostalgia has been melting away. If the figure creeps up toward 45pc, it is within the margin of error for populist rebellions. Batten down the hatches.

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