New currency in France – Uncertainties and Instability

Here is my weekly column for Forbes in France. My column is available here in French

Europe is a key factor in the presidential campaign, even though this theme gained minimal coverage during the two televised debates. Europe is a key differentiating factor for the four candidates who are leading in the polls, and so it must be the main decisive factor in the elector’s choice between the candidates. 

The aim for two of them, Emmanuel Macron and François Fillon, is to intensify existing institutions although the exact ways to achieve this are not the same for them both. But neither wants to leave the Eurozone.
However, for the two other candidates in the top 4, Marine Le Pen and Jean-Luc Mélenchon, Europe marks a clear area of watershed as regards’ France’s position on the European institutions. They both intend to start negotiations with Europe to change the relationship and give France back its decision-making power. In the event of the likely breakdown of these talks (the remaining European Member States would not necessarily want to change the existing framework), both intend to take France out of Europe, backed by a referendum.

In both cases, currency would be at the very crux of the new framework that France would need to set up.
In Le Pen’s opinion, a national French currency is the key to ensuring independence for the country. Meanwhile, under Mélenchon, the euro would become a common currency and no longer a single currency, which would imply the creation of a new currency for France. As the other members of the Eurozone would probably not be favorable to this new framework for the euro, this would be tantamount to France leaving the Eurozone and creating a French currency.

Looking beyond these factors, neither program explicitly outlines the currency framework the candidates would set up. What we do know is that in both scenarios, the central bank would lose its independence and would be used as an instrument to finance state spending. In other words, the state would have the wherewithal to create its own currency to finance its own spending: economic history tells us that this type of situation triggers inflation and fuels macroeconomic, financial and monetary instability. French savers would be directly hit.

This monetary question is the key to the difference between the French situation and the UK’s situation with Brexit. Many talk about continuity in the UK after the June 23 referendum, and see the absence of a doomsday scenario as proof that a withdrawal from the European institutions is perfectly innocuous. This view is very extreme as Brexit was only effective after the UK notified the European Union it was triggering article 50 of the Treaty of Lisbon on March 29. But this is not our point here. The point is that France’s potential withdrawal from the European institutions and the creation of a new currency go well beyond Brexit.

Brexit will sever the special ties that bind the UK to the remaining 27. This may or may not hamper UK external trade and affect the country’s position in the international balance of power. It will be a macroeconomic shock that will have negative effects on economic momentum in the country as the rules of the game will change to the detriment of the UK.
However, this overall shock will not be directly felt by the man or woman on the street in Liverpool or ManchesterThe economic situation may be less buoyant for them, but they will not change their behavior, they will not have any immediate concerns on the value of their savings and their confidence in the 10-pound notes in their pockets will not be shaken.
In other words, the average British citizen and the average UK company will continue on as before the referendum. Consumers will see slightly higher inflation and exporters will have greater difficulties in selling their products. However, nothing will create uncertainty that directly affects consumer or business behavior. Slightly higher inflation will be seen as part of the macroeconomic shock, but for the average UK citizen, the money in his or her pocket will remain the same, even if it loses a little value.
So the shock in this case is macroeconomic, not microeconomic.

In the event of a return to a national currency in France, the overall dynamics would be very different. There would be a macroeconomic shock that would be similar to the Brexit effect, as French companies would have greater difficulties in selling their products internationally as relationships with partners shift. But the key point is that every single person in France would be affected by the change in currency. They would have new notes in their pockets and they would need to believe that those notes carry value. Where would confidence in this new currency naturally come from, especially as the two candidates’ spending programs include monetary financing by the Bank of France, which would send inflation up and push purchasing power down. The French man or woman in the street in Lille or Perpignan would also have worries about safeguarding their savings. Neither of the two programs has given further details on the monetary framework they would implement, so there is no reason to think that the various economic players would be reassured as to what would happen in the aftermath and bestow great value on the new currency.

And would each French household want to keep its savings in the new currency or opt to move its savings to a stable-looking currency outside France, in a very commonplace move for individual investors? We have seen examples of this many times in the past (see my column in Forbes from February 16, available here in English ). This is why we should expect capital control to be the first measure taken in the event of the election of either Le Pen or Mélenchon. This is unlikely to contribute to confidence in the new currency.
In the event that France opts for a new national currency, we would not only witness a macroeconomic shock due to the shift in relationships with our main trade partners, we would also see a microeconomic shock from the change in currency and the ensuing uncertainties.

This twofold dimension – both macroeconomic and microeconomic – makes the return to a French national currency the fundamental difference to the Brexit scenario. The state would need to put in a long period of exemplary behavior to foster French confidence in the currency and make it credible…yet this looks unlikely if the state directly helps itself in the coffers of the central bank, and submits to no rules.
So taking France out of the Eurozone is not at all comparable to Brexit. It is a much more complex process that would affect behavior across the board, creating deep uncertainty and a severe risk of instability that would affect macroeconomic momentum in the long term. All of this would push back the economy’s return to growth to a much later date. 

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