France could trigger the next euro crisis

“Our Europe is mortal, it can die,” warned Emmanuel Macron in late April. Who knew that just a few weeks later France’s president would set about proving his point, by calling a snap election that threatens to plunge the entire EU into a potentially mortal crisis?

At present, global attention is focused on the immediate political dramas in France. The first round of voting will take place on June 30. The far-right Rassemblement National currently leads in the polls, with the New Popular Front, a coalition dominated by the far left, in second place.

At best, a parliament dominated by the political extremes would plunge France into a period of prolonged instability. At worst, it would lead to the adoption of spendthrift and nationalistic policies that would swiftly provoke an economic and social crisis in France.

A French meltdown would rapidly become the EU’s problem. There would be two main transmission mechanisms. The first is fiscal. The second is diplomatic.

France is in a financial mess. Public debt is 110 per cent of GDP and the current government ran a budget deficit of 5.5 per cent last year. Both the far right and the far left are committed to big spending increases and tax cuts that would inflate the debt and deficit, while violating EU rules.

Bruno Le Maire, France’s finance minister, has warned that victory for either of the extremes could lead to a debt crisis in France, and supervision of the country’s finances by the IMF or the European Commission. Le Maire has pointed to the reaction to the Truss government’s “mini” Budget in Britain, to underline how quickly markets can turn against a financially reckless government.

In reality, a French fiscal crisis could be worse than Britain’s tryst with Liz Truss. In the UK, there was a mechanism to sack Truss quickly and to restore rational government. That task would be much more difficult in France, where the far right and the far left have well-established leaderships and do not have more cautious, reality-based politicians on the sidelines.

The second major complication is that France is one of the 20 countries that use the European single currency.

What would happen if the risk premium on French bonds soared? The EU now has mechanisms to step in and intervene with bond purchases. But would Brussels or Berlin be willing to agree to such a move, if the crisis had been provoked by unfunded French spending pledges? The German government is currently struggling to find savings of billions of dollars in its own national budget. Why would it countenance a bailout for a spendthrift France?

The French far right and far left are also deeply Eurosceptic — and are already railing about diktats from Brussels and expressing hostility to Germany. The RN’s electoral platform talks of a “profound and irreconcilable divergence” between the world views of France and Germany. Jordan Bardella, who is likely to be the RN’s candidate for prime minister, recently threatened to cut France’s contribution to the EU budget by €2-€3bn a year.

During the Greek debt crisis, which lasted for the best part of a decade, defiance of the EU from Athens was ultimately overridden by the threat to expel Greece from the euro — a move that would have destroyed the value of Greek savings. But expelling France from the euro — or the EU itself — is all but inconceivable. The entire European project has been built around the Franco-German couple since the 1950s.

It is much more likely that France would stay in the EU and single currency, but act as a spoiler. That would wreck European cohesion and stability, at a time when the EU is struggling to pull together in the face of the threat from Russia.

Unless Macron resigns (which seems unlikely), he will continue to represent France at international summits and EU meetings. But, barring a last-minute swing in the polls, the French president is likely to emerge from these elections as a seriously diminished figure. Some of Macron’s European colleagues might quietly enjoy the spectacle of “Jupiter” being humbled. But the overall impact on Europe of a diminished and angry France would be grim.

The initial instincts of the RN would be to confront Brussels in the name of French sovereignty. But the far right’s leaders have shown some awareness in recent years that hardline Euroscepticism can scare and alienate the voters and the markets. After losing the 2017 presidential election, the RN quietly dropped its talk of leaving the euro.

An economic crisis — combined with a confrontation with Brussels and Berlin — might lead the RN to fall back on its nationalistic and confrontational instincts. Alternatively, the realities of governing might force it towards accommodation with the EU.

Those with long memories can point to the economic crisis in France in the early 1980s, when a Socialist government attempted to implement a radical, leftwing agenda. That crisis ultimately led to the rise of Jacques Delors, first as French finance minister and then as president of the European Commission. In Brussels, Delors pushed forward dramatic advances in European integration and the launch of the single currency.

History is unlikely to repeat itself in quite the same way. But decades of experience suggest that it is a mistake to bet against the EU’s ability to overcome mortal-looking threats. gideon.rachman@ft.com