By Francesco Canepa and Leigh Thomas
FRANKFURT/PARIS (Reuters) – “Because it is France,” is how Jean-Claude Juncker, then president of the European Commission, explained Brussels’ decision in 2016 to give space to the European Union’s major founding member in terms of bloc budget rules .
That patience continued even as the EU endured a sovereign debt crisis that nearly sank the euro and forced smaller, more indebted countries such as Greece and Portugal to take deep austerity measures.
But any pandering to French exceptionalism could end if snap elections in France produce a Eurosceptic, far-right government in Paris that could strain ties with other European capitals and test the foundations of the euro project set.
Marine Le Pen’s National Rally (RN) insists this will not blow up France’s budget. But questions remain about how it would finance costly spending plans within the eurozone’s newly introduced fiscal rules and whether the European Central Bank could step in to help if financial markets turn against France.
“If a country can simply ignore the rules and be helped by the central bank, you get a lot of doubts about the future value of the euro and the future cohesion of the euro,” said Holger Schmieding, economist at Berenberg.
Such concerns are not on the official agenda of Thursday’s EU summit. But with the RN leading the polls in the two-round vote starting June 30, they will undoubtedly be on the minds of President Emmanuel Macron’s fellow leaders.
Senior German government sources said they were dismayed by Macron’s surprise decision to call elections that could lead to an RN-led government. People compared it to former British Prime Minister David Cameron’s ill-fated gamble on an ‘in-out’ Brexit referendum.
In Italy, with an even bigger debt pile than France, any hint of schadenfreude over France’s misfortunes is offset by fears that a French crisis could spread across the Alps, says Francesco Galietti of Rome-based political risk consultant Policy Sonar.
Otmar Issing, the ECB’s first chief economist and one of the architects of the euro, likened the debt burden of Italy and France to “a sword of Damocles hanging over the monetary union”, which will inevitably fall unless the problem is addressed.
“You can pull the hair that holds it, but it can’t stay there forever,” he said in an interview.
Even Greece is not giving France any slack, with central bank governor Yannis Stournaras stressing that all member states must respect EU rules.
NO more pampering
Opinion polls indicate that the RN will become the largest party, with or without a clear majority, which will pursue a difficult ‘coexistence’ with Macron until the 2027 presidential elections.
The credibility of France’s fiscal policy is already at stake as the International Monetary Fund questions how it will reduce its budget deficit from around 5.1% this year and its credit rating has been downgraded by two agencies.
In reality, France’s budget sins long predated Macron. The country has had budget deficits greater than the EU-mandated 3% for most of the 25 years since these rules came into force.
Brigitte Granville, an economist at Queen Mary University of London and author of the book ‘What is France?’, said the rejection in the 1990s of German proposals for a more complete political union reflected a desire to retain sovereignty over maintain finances.
She expected that the RN, which had long ago dropped calls for a single currency that would be widely accepted by French voters, would moderate its plans just enough to satisfy Brussels if it came to power come.
“They have no choice unless they want to leave the euro,” Granville said in an interview.
RN’s statements to this effect have reassured investors, who demanded a premium of just 70 basis points to own 10-year French bonds over their safer German counterparts – a far cry from highs of 190 points for France and almost 560 points for Italy during the 2011 debt crisis.
ECB chief economist Philip Lane told Reuters that moves in the French bond market did not appear “disorderly”, meaning they do not meet any of the conditions for central bank intervention.
WARNING STORIES
Observers point to cautionary tales ranging from Greece, where a left-wing government was brought to its knees by financial and political pressure, to Britain, where Prime Minister Liz Truss was forced to resign after unveiling a budget that unnerved investors.
Most analysts emphasize that the ECB has the tools to counter the contagion of a French crisis by buying bonds from other countries that respect the EU’s fiscal framework, meaning Paris could find itself isolated in times of need.
“There is obviously a possibility that Frankfurt would intervene if the problems with France had some kind of external negative impact on other countries, such as Italy,” said former ECB policymaker Ewald Nowotny.
An EU official cited Rome as a model for Paris after Prime Minister Giorgia Meloni toned down her anti-EU rhetoric when she was elected in 2022.
This, together with its support for the EU’s position on conflicts in Ukraine and Gaza, has helped Italy keep the Commission and financial markets on side despite repeatedly raising deficit forecasts.
Jeromin Zettelmeyer, director of economic think tank Bruegel in Brussels, said RN’s rhetoric so far did not suggest it was seeking a major confrontation with the Commission that could trigger a financial crisis.
However, he said if its officials were to lead key ministries, they could hinder the EU’s moves to reform energy markets, promote the green transition and boost the bloc’s competitiveness by reforming capital markets.
“If the far right is elected, it would be bad news for EU integration as they would control government positions involved in most dimensions of EU policymaking,” he said.
“The question is whether that is reversible or existential.”
