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8 July 2024

France is one accident from calamity

Behind the chaos of this election, does a financial crisis loom?

By Wolfgang Münchau

Imagine last week’s UK election had resulted in a government coalition between Labour, the LibDems, the Greens – and George Galloway. Hard to imagine, you might think. But something similar just happened in France.

Right now, France and Europe are celebrating the defeat of Marine Le Pen and her far-right National Rally in Sunday’s second round of the parliamentary elections. The winner is the left-wing New Popular Front, a group made up of four parties. This is indeed a moment to behold. But be careful what you wish for. The main political result of these elections is not glorious victory of the united front of anti-fascists, but political fragmentation. It is happening everywhere in Europe. The Netherlands is leading the way. There is more fragmentation ahead in Germany too. Fragmentation is the defining European experience of the 2020s.

The new French government will be backed by a coalition of parties that have traditionally stood in opposition to each other. They could encompass some combination of the following: former Gaullists, Emmanuel Macron’s centrists, two other centrist parties, Socialists, Communists, Greens, and potentially also Jean-Luc Melenchon’s La France Insoumise, one of Europe’s most radical parties of the left.

The far-right will now become the official opposition. It maintained its share of the vote of around one third. It is approximately the same level of support the Labour Party won at last week’s general election in the UK.

The right feeds on France’s dysfunctional economic and social model. The French public sector is bloated. Even after the latest reforms, the French pension system is a ticking time bomb. Its economy is stuck with 19th century agriculture, 20th century industry, and 18th century Mercantilism.

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Macron will be remembered both for his insurrectional liberalism that swept him to power in 2017, and his reckless gamble that resulted in the current political mess. At the last presidential election in 2021 the French elected him but denied him the majority he would have needed to implement his agenda. Macron’s party did better than expected on Sunday, but saw the number of its MPs almost halved. The era of Macron is well and truly over. But no other era has started. France is stuck in a long inter-regnum, a twilight zone that carries enhanced political and financial risks.

France’s National Rally had no answers to France’s economic problems either. It is the focus-group version of the hard-right. Its only memorable idea that would have stood any chance of implementation is a cut in VAT on electricity and gas. The more radical stuff, like the repatriation of immigration policy from the EU would have had to wait until the 2027 presidential elections at the earliest.

I don’t want to downplay the impact a far-right victory in the parliamentary elections would have had on France and the rest of the EU. But had Jordan Bardella, the party leader of the National Rally, become prime minister and pursued his silly economic agenda, he would have shared responsibility for the disappointment that lies ahead. The centre and the left succeeded in their tactical alliance to keep the far-right out of power, but there is no unity beyond that, and certainly no focus on economic renewal. Whatever probably you might have attached to a Le Pen presidency in 2027, it will not have diminished with these elections.

The scenario I worry about the most is a sovereign debt crisis between now and 2027. It would be a eurozone crisis on steroids. France falls into the category of countries that are too big to fail, and too big to save.

France is a country with relatively high public sector debt – 110 per cent of annual economic output. The French private sector is in an even worse financial position. As of May this year, the trend in the French public-sector deficit was still rising compared to previous years. Economic growth is low. The dynamic is toxic.

What will keep the rainbow coalition in power is not a joint agenda, but what the Americans call debt-financed pork-barrel spending. This cannot last.

With all this political uncertainty around, I do not think that France will be able to attract much inward investment in the next few years. The next presidential elections in the spring 2027 is within most investors’ time horizons. Would you invest in a country with a forever looming threat of a far-right government that promises to wreck the EU’s single market? Or a government of the far-left with irresponsible fiscal policies?

Less investment will mean less growth, and less fiscal room for manoeuvre, and either more borrowing or more austerity. This is a scenario where France really would need a radical centre, but the centre no longer has the votes.

The general fear had been that a right-wing government would cause a financial crisis. Historically, it has often been the other way round – financial crises giving rise to right-wing governments, as happened in Europe in the 1930s, and Latin America in the 1970s, and again more recently.

The driver of a French financial crisis would be a vicious circle of low growth and rising debt that could leave the government with a stark choice: to default or, more likely, accept a bailout programme from the International Monetary Fund or the EU. Either would be a national humiliation, and a gift for the far-right.

Financial crises have causes and triggers. The deep causes of a French crisis are easy to make out: a rotten economic and social model, unsustainable fiscal policies, and political gridlock. The triggers are harder to predict: it could be a government crisis, another economic shock, or a large bank going broke.

The elections left the country in a position where it is one accident away from calamity. This is Macron’s legacy.

[See also: Election night should have been jubilant. Why did it feel flat?]

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