Daniel Lacalle

France Elections, A Risk to the Euro?

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France is such a socialist country that, in the polls, the four candidates appear each with 20% vote intention. The voter has a “wide” variety of choice: the Socialist, the Social-Democrat, the Communist and the National Socialist.

However, what should amaze anyone is the fact that nearly 40% of the voters are choosing an anti-Euro option.

The rise of anti-Euro populism is not due to “austerity”. And populism is not defeated with more interventionism. France is the proof.

In France there has been no austerity, as the Natixis shows in “A big misunderstanding: The French think that there has been austerity”. Not only has public spending and the state intervention increased to 57% of GDP, with the government controlling major companies and nearly 70% of the economy, France has carried out for years a wrongly-called “expansive” Keynesian policy, despite two decades of stagnation. France is the example of a failure of central planning statism that some blame on the fact that there was not enough of it.

In the face of a misdiagnosis (“populism is due to the -ineexistent- budget cuts”), politicians propose the erroneous solution (“populism must be fought with more interventionism”), and what this does is legitimate the wrong message of magical solutions that lead the voter to prefer the most radical ideas.

Among those magical solutions, there are few things more ridiculous than the populist promise that everything will be great if France gets out of the euro and defaults.

In a delirious interview with Melenchon, the populist ultra-left candidate, he said that he counted on the “atomic bomb”. Stop paying the debt. A genius. “If we stop paying the debt, the economy does not suffer, only bankers suffer,” he said. On the other side of economic schizophrenia, at the far right, LePen’s party claimed that “70% of the French debt is issued before the monetary union, so it can be redenominated in French francs.” And they didn’t blink.

They forgot that their country runs a structural deficit and that it cannot finance that huge amount of expenses if it defaults.

They forgot that more than 40% of the French debt is in the pension plans, social security and savings of its citizens, which would sink their beloved welfare state.

They forgot that, in order to finance public expenditures of more than 1.2 trillion euros (57% of GDP), France needs a secondary market that supports the monetary policy of the Central Bank and a currency that is accepted globally as a reserve.

They forgot that, if France defaults on public debt, the risk premium of SMEs and families in their country soars and credit dries.

They forgot that their local financial system is three times the GDP of France and that, if a default sends it to bankruptcy, they can say farewell to citizens’ deposits.

Every populist always comes up with the brilliant idea of ​​doing what has never worked and thinking that this time will be different. Melenchon and LePen, like the rest, look at Venezuela or Zimbabwe and think that it has not worked because they were not in charge.

They forget that such a destruction is not solved by printing French francs, because it ignores the history and the disaster that inflationary policies were for Europe, always with the same result. Sink the economy, blame the external enemy, inflationism, war and back again.

The fallacy that a country will solve structural problems devaluing the currency is more than dismantled by reality. As if the ECB had not carried a massively expansive monetary policy, within the euro, they believe that the problem is that it is not devalued enough. France has spent ten years with an expansive fiscal and monetary policy, as shown by Natixis, and they think the problem is that it was not enough. That it did not work because the populists were notin power.

Default and devaluation destroy the average citizen, businesses and families, wiping out savings and deposits, cost of imports soar and the ability to finance their beloved State, collapses.

Lessons from the economic history of France:

Between 1790 and 1793, 3,500 million notes were issued in France, the so-called Assignats, which soon lost 95% of the value artificially decided by politicians. Of course, food prices soared with the loss of value of the currency. Finance Minister Claviere blamed the shopkeepers and the “merchants” and promised to force the machines and print more money.

Prices continued to rise inexorably. Money was worth less and less, and therefore, goods and services cost more and more.

And what did the French government do to make up for the mistake? Print more money, raise taxes and confiscate properties, destroying real investment and trade in the face of lack of legal certainty. The Jacobins introduced the “Law of Maximums” prohibiting price increases. Like Kirchner, Maduro … At the same time, they punished with jail and the guillotine anyone who rejected payment with paper money. This just got the shops closed, because owners just did not want those colored papers that were no longer worth anything.

Of course, now it is different. At that time, the state was not in debt more than 100% of its GDP, with more than 40% of that debt in the hands of families, with a structural deficit and a public expenditure of almost 60% of GDP.

But it is what populists want to repeat, with the argument that “this time is different”.

All populist inflationists always talk about the United States and the dollar to justify their monetary mirage and forget to be a global reserve currency, have a functioning secondary market and an attractive and dynamic market-based economy. The US dollar is not the global reserve currency because it is decided by a committee. It is so because the world trusts its economy.

I remember an episode of Game of Thrones in which a character said “he would not mind burning down the kingdom as long as he is appointed the king of the ashes”. That’s the populist strategy. To destroy the economy and proclaim themselves as the only savior, as the solution to their own sabotage. Poor France.


Daniel Lacalle is a PhD in Economics, fund manager and author of Escape from the Central Bank Trap (BEP), Life In The Financial Markets, and The Energy World Is Flat (Wiley).

Image courtesy Google Images, CNN

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