The nation of France has been rocked by employment riots, terrorist attacks and rampant groups of refugees who have sought asylum within the country’s borders as the demographics of this once-homogenous state have changed and continue to evolve.
Liberal immigration policies and automatic entry for citizens from former French colonies overseas have made France much less recognizable to its older citizens than in decades past. Mosques, burqas and hijabs are common sights both in Paris and in other urban centers of the nation’s sprawling territory.
Politicians such as President Francois Hollande speak of changing lifestyles in the wake of this metamorphosis. Not all citizens of the French Republic are happy with the developments. In fact, there’s a growing backlash against the “Islamification” that many citizens blame for everything from an out-of-control crime problem in the Parisian suburbs (where recently the Korean embassy has warned its citizens not to go) to the horrific terror attacks such as the one in Nice which killed 86 people when a Tunisian-born man ran down scores of the city’s inhabitants with a truck.
Since the 1970s, a far-right candidate, Jean-Marie LePen, has spoken out against many of these perceived ills and desired to restore what he called the “traditional” values to France. Although the elder LePen was not able to claim any substantial political victories, his daughter Marine now heads the party he started, the National Front.
Given the troubles that France’s current and recent past leaders have had — with economics, social woes and corruption — Marine LePen’s chances for victory in the upcoming presidential election have been called anything from “possible” to “guaranteed,” upsetting left-leaning voters and elites and worrying many that France may be due for a “populist uprising” of the kind that recently rocked the United States with President Donald Trump’s election.
While the political aspects of this potential revolution are significant, a number of analysts have been pointing out possible economic consequences that they’re trumpeting as evidence that LePen cannot be “allowed to win.” This is despite national polls saying that LePen is assured of winning at least the first round of elections in roughly two months.
The consequences the analysts are pointing to relate to a manifesto LePen has written in which she’s said she would attempt to take France off of the Euro currency (and possibly out of the European Union — an action some are referring to as “Frexit”) within six months of being elected.
This has spooked European markets, particularly as it relates to French public debt, which is currently worth something like 2.1 trillion Euros. If this amount is re-denominated into French francs instead of Euros (which by law it could be, because that’s how it was originally issued), it would be the equivalent of the largest sovereign default in history, nearly 10 times bigger than the value of the 200 billion Euro Greek debt restructuring of 2012.
The head of Standard & Poor’s sovereign credit ratings, Moritz Kramer, says that “There is no ambiguity here . . . If an issuer does not adhere to the contractual obligations to its creditors, including payment in the currency stipulated, [we] would declare a default.”
Alastair Wilson, the head of sovereign credit ratings at Moody’s, says that any country that leaves the Euro would be considered in default if investors in that country’s debt lost out financially. “The test for us is: do we think investors will be able to get back the value they put in, when they expected to get it back.”
According to still other financial analysts, France’s switching of currencies could be the end of the Euro as people know it, which could well trigger an economic disaster in Europe (and eventually globally), the likes of which the world has never seen. Of course, many of these same analysts were the ones crying wolf over Brexit and the election of Donald Trump in the U.S.
When questioned specifically on French debt, David Rachline, head of strategy for National Front, said that the party has “the right to change [French] currency” and that it would probably be done on a “one franc to one Euro” basis.
But, he hinted, the party could also choose to lower the ratio so the new currency could be worth less. “[Having our own currency] will allow us to do a competitive devaluation,” Rachline said. In Greece, this scenario was contemplated by former Greek Minister of Finance Yanis Varoufakis, but he ultimately realized that the European Central Bank (ECB) had full control of the Greek banking system and all deposits.
If all of Greece’s citizens decided to withdraw their funds at once, there wouldn’t be enough cash to go around. It’s not clear if National Front has considered these ramifications for its own constituents.
At the same time, France is not being bailed out by the EU, so in theory, it has control over its currency, and any losses experienced by bondholders would have to be pursued in French courts. At international law firm Allen & Overy, debt capital markets partner Matthew Hartley said, “Because the bonds are governed by French law, [National Front would] just have to change French law to change the terms of the bonds.”
Mainstream economists joined in the chastising of National Front, saying that even if the Euro were somehow to survive, unemployment would rise, interest rates would rise and the country would become “impoverished,” according to Benoît Coeuré, a board member of the ECB.
But National Front has also hinted that rules governing France’s central bank could be altered to allow for direct financing of the French state, allowing the government to its pay its own debt and French welfare payments. National Front’s goal is to make French industry more competitive, just as Trump has promised to do with American industry in the U.S.
Like Trump, National Front would like to employ its own protectionist trade policies. However, the Euro is not the number one reserve currency in the world — the U.S. dollar is. Also, France doesn’t have the world’s number one military to back up its trading; all it can hope for is that a devaluation of its money would boost exports.
It remains to be seen if Marine LePen will be victorious at the polls. But already, Mikael Sala, the head of a think tank supporting National Front, said that he’s not worried about what financial analysts and economists are saying. “We will be elected by the French people — it’s not our job to please Standard & Poor’s,” he said. “They do not have much credibility after the financial crisis anyway.”
Regards,
Ethan Warrick
Editor
Wealth Authority
