Europe divided: The Front National's absurd economics — #SaxoStrats
- France goes to ballot on April 23 for first round of presidential election
- Front National leader Marine Le Pen expected to make it to second round
- Front National's GDP growth forecasts unrealistic
- Public debt accumulation likely to accelerate under Le Pen stewardship
- Exit of common currency agreement virtually impossible
- Read more on our dedicated Europe divided page
What is very striking in this presidential election is that most candidates (especially François Fillon and Emmanuel Macron) have presented a quite cautious budget framework for the upcoming five years.
They have certainly learned the lesson after François Hollande presented overly optimistic economic forecasts at the occasion of the 2012 campaign which was shown to be completely disconnected from reality and had disastrous economic consequences.
In his programme, the incumbent president expected annual GDP growth to reach 2% from 2014 but it has only reached 0.9% between 2014 and 2016. Regarding public deficit, the goal was to reach 0% in 2017 but it should be around 2.7%, according to official forecast.
As a result of bad understanding of the economic situation, Hollande started to implement inadequate economic policy before being forced to massively increase taxation under the pressure of the European Commission.
A similar negative outcome is expected from Marine Le Pen’s programme. Until now, the far-right candidate has avoided presenting a detailed budget framework, which is the clear signal that the party is still not very confident regarding economic policy. The only data that has been published confirms an over-optimism bias that is not based on any credible facts.
The Front National expects a growth target of 2% from next year and 2.5% at the end of the five-year period. It is quite difficult to understand how the party could achieve such a high level of GDP growth, even considering that around $€86.5 billion spending is planned, without introducing any reforms that could push up economic activity (for instance by tackling the key issue of productivity).
The Front National has tried to deflect criticism by stressing it wants to intensify the fight against fraud and tax evasion. In 2014, this enabled the French government to get back €20 billion and nearly €21 billion in 2015. This is a significant amount but it only represents about one-twentieth of the current state expenditure. Even in the most optimistic scenario, it will not be enough for the Front National to finance all its new measures.
Therefore, in a likely context of weak growth, it is almost impossible that public deficit would increase only by one point in the first year of the quinquennium before decreasing thereafter to reach 1.3% in 2022 as planned by the Front National. Lowering official retirement age to 60 years old again (versus 62 currently) is the social measure that is likely to weigh the most negatively on public expenditure and could lead the European Commission to engage an excessive deficit procedure against the country.
The cost of a euro area exit
For an economist, the main problem is that it is actually impossible to measure the economic effect of the Front National programme. Indeed, the cost of exit cannot be evaluated by econometric models since such a black swan has never happened in modern history. What is certain, however, is that euro area exit would lead to redenomination of the national debt into new franc.
The issue is not so much related to public debt but rather to private external debt of households and companies which reaches nearly 150% of GDP (i.e. more than public debt). It is obvious that foreign creditors will not accept easily a haircut and to be reimbursed in monkey money, which should cause numerous complaints in international jurisdictions and will block the entry of capital into the country.
In addition, an exit will not bring back to France monetary independence and sovereignty. Le Pen has repeatedly stressed her determination that the new franc should evolve into a band of fluctuation similar to the European monetary system. However, such a system is not immune to speculation.
If the market considers that the exchange rate does not reflect the economic situation of a country, investors will attack the currency, as it was the case for sterling in 1992. In these circumstances, a devaluation of at least 20% of the new franc is quite likely. France would be quickly in an untenable situation; it would no longer have the protective shield of the ECB and would be completely powerless in the face of international speculation.
Finally, when the Front National is confronted with the question of currency devaluation, it often emphasises that it will allow regaining competitiveness. The party considers that it would be the good solution for not proceeding to wage devaluation as was the case in Portugal and in Spain.
Undeniably, France has a problem of mid-range positioning but a currency devaluation would only bring a temporary breath of fresh air to the economy (knowing that it would be accompanied by an increase in the cost of imports, in particular for petroleum goods, which would have a negative impact on the economy as a whole).
The country does not face any worrying inflationary pressures at the moment but the devaluation would clearly increase them significantly leading to higher consumer prices. The National Front paradox is that it wants to defend the purchasing power of the French people but, by looking to exit the euro area, it will have the exact opposite impact since it will reduce purchasing power due to inflation.
Protectionism is not a new theme in the Front National programme. In this sense, Le Pen is not completely wrong when she proclaims that she has probably inspired Donald Trump. For many years, protectionism has been cited as the best solution to stop France’s deindustrialization (the share of industry in France’s GDP has fallen from 25% to 10% since the 1960s).
What is new is that protectionism is also perceived as a means of financing social measures. Thus, the party proposes essentially two reforms:
The Front National’s stance is misleading for two main reasons on that topic. Firstly, the arrival of foreign workers in the country should be considered as a sign of the economy’s
According to the Medef (French employers Association), almost a third of companies in the industrial sector are facing recruitment difficulties. France’s goal (or mistake) was to educate students to become professors, psychologists and even economists whereas the country desperately needs engineers, IT developers and welders. If companies do not find those skills on the domestic market, it is completely normal that they look for foreigners to fill the skill gap.
• a social contribution (tax) on the imports of goods and services of 3% applied to countries not respecting social standards, such as China. The Front National hopes that this tax will represent around €15 billion that will be allocated to increase low wages and small pensions. As it is often the case with the Front National’s economic measures, such a tax presupposes a renegotiation of trade and custom rules at the European level. In addition, it will have at least two immediate negative effects. The country targeted by this tax could implement similar retaliatory measures that could harm France’s trade relations, especially if it is China. Moreover, the additional cost of this tax is likely to be passed on to consumers, reducing de facto its expected positive impact on working class and retired people’s purchasing power.
China if it pursues a protectionist agenda. Photo: Shutterstock
Christopher Dembik is head of macro analysis at Saxo Bank