On the economic front, leaving the euro would mean a 10-15% fall in GDP, the loss of millions of jobs and cutting French people’s incomes by a quarter.
The facts say one thing, the rabble-rousers say another. The “French sickness” is that our economy has stalled and, for almost four decades, has been trapped in a spiral of decline, mass unemployment, trade deficits, and an explosion of public debt which will reach 100% of GDP in 2017. Faced by this critical situation, Marine Le Pen and Jean-Luc Mélenchon propose to go back to a closed economy with three main focuses. Firstly, Marine Le Pen proposes an increase of 150 billion euros in public expenditure, Mélenchon proposes 300 million. Secondly, the setting up of a protectionist system that means breaking with the wide European market. Thirdly, leaving the euro, which is part of the Front National‘s policy and implicit in that of La France Insoumise if the requirements for sustaining the single currency (devaluation of the euro, an end to the stability agreement, suppression of the the independence of the Central European bank) violate the European treaties and are unacceptable to our partners.
What would this entail for French people? The rise in public expenditure, which is already at 57.5% of GDP – a record in the developed world – could be financed in three ways. By further increases in taxation, even though growth and employment have not yet recovered from the 65 billion euro tax blow that François Hollande decided to inflict in 2012. By the public debt, even though it has reached 2,160 billion euros and the interest over 10 years has increased by one point since the summer of 2016, which will mean 12 billion euros in extra charges over the five years of the next presidential mandate. By printing money if we leave the euro, resulting in high inflation and the risk of default in the medium-term. In all these cases, inflation will rise quickly to between 7 and 10% per year. This will take a slice out of the income and assets of households, and rising interest rates will block investment and aggravate the problem of the obsolescence of our production capacity.
Protectionism is never unilateral. Leaving the wide European market – the largest and richest market in the world with its 150 million consumers and their high purchasing power – together with, in return, the application of customs barriers and regulatory obstacles, will cause French exports to decrease by between a quarter and a half. These exports represent 30% of GDP and generate several million jobs. In many sectors, domestic production will be incapable of substituting itself for imports, which will cause bottlenecks for businesses and shortages for consumers. Protectionist measures will trigger a brain drain and an exodus of entrepreneurs, business activities and capital. At the same time, there will be a halt to foreign investment, which creates hundreds of thousands of jobs every year.
The most brutal breach, however, will be leaving the euro. It will be sure to happen against a backcloth of serious tensions with our European partners and a violent financial crisis, for, if France were to leave, this would mean the dismantling of the single currency, the wide European Market and the European Union.
A return to the franc will mean a currency devaluation of 15 to 20% which will necessitate the setting up of strict exchange controls in an attempt to prevent a massive drain of business activities and capital, as happened in Greece and Cyprus. With devaluation at 15%, the national debt will increase by 320 billion euros; at 20% it will increase by 430 billion. Interest rates will climb by a minimum of 3 to 4 points, as in Italy in 2011, which would swell the cost of servicing the debt by more than 30 billion euros, i.e. the equivalent of the defense budget. The same will apply to the debts of banks, insurance companies and large corporations which would have to be nationalized in order to avoid bankruptcy. Therefore, together with the cost of accelerating public expenditure there will be deficits and inflation.
On the economic front, leaving the euro will mean a 10-15% fall in GDP, the loss of millions of jobs and and cutting French people’s incomes by a quarter. On the financial side, it will lead to France defaulting on its sovereign debt, which has not happened since the Directoire cancelled two-thirds of the public debt in 1797.
The strategy of leaving the euro zone is made even more absurd by the fact that it is now performing notably better, with a growth rate exceeding that of the USA and the UK in 2016 and showing a sizeable fall in unemployment, deficits and and public debts. France’s recovery cannot be disassociated from the consolidation of the euro and the wide European market.
(Column pubished in Le Figaro, 27th February 2017)