Europe is moving away from the centre, and movements in financial markets reflect this. In the past week, the chief economist of the European Central Bank (ECB), Philip Lane, has denied that the bank is worried about the French bond market. But he is worried, and he should be. Investors are concerned that the likely next French government, either extreme right or far left, will upset the peace where governments do what they are told by the owners of capital.
For Europe, Italy is a perennial source of financial instability but a crisis that begins in France is far more worrisome. France is different because France is the rock upon which so many of the European institutions rest. Those with long memories will remember the 1981 “franc fort” crisis, when an ambitious socialist government came to power under Francois Mitterrand. The electorate, battered by the late-1970s slump, voted for the socialists who claimed they were going to expand the budget deficit to ease the recession. The financial markets reacted to this by selling the French currency, the franc. As the currency fell, the Bank of France responded by increasing interest rates, squeezing the economy further.
The link between the German currency and the French currency, the financial foundation of the EU was threatened. Mitterrand was faced with a choice, France or Europe. He chose Europe, orchestrating a humiliating U-turn by introducing austerity rather than the promised expansionary budget. For French patriots this episode evidenced the fact that France is always subservient to Europe and French economic interests come second.
Such a view is baked into the Marine Le Pen approach to the EU. For her, the EU holds France back.
The French left share this view. Both the worker left and nationalist right see the world through a Marxist lens: if capital is worried, workers have to be doing better. Both see the economy as a fixed pie. If capitalists, the people who lend to governments, are doing well, the implication is that the workers, the citizens who work in that economy, must be doing poorly. Such a binary worldview is shared by financial markets, who see any increase in budget deficits and government debts as disastrous, always presaging default. The truth is that the economy and its relationship with money is far more complicated, adaptable and nuanced.
In contrast to Emmanuel Macron, who more or less tells pressed French workers to get on their bike, find a better job, work harder and man up, Le Pen’s real talent is empathy. She tells aggrieved workers that she feels their pain and will help them; precisely how is a matter of conjecture. When you look at her party’s plan, it is run through with fiscal populism. The pension age will be lowered once more for all French employees. She wants to raise public sector wages and exempt some wage increases from employer contributions, so it’s cheaper for employers to give higher take-home wages to workers. Le Pen wants to tax wealth and financial assets as well as top earners and, of course, she favours much tighter controls on immigration as well as protection for French industries. She also wants to cut energy bills for the average punter by up to 30 per cent.
It’s worth noting that National Rally’s populist right-wing views stand in contrast to the values espoused by the traditional conservative right-wing in Les Républicains, who want the usual centre-right cocktail of smaller government and across-the-board tax cuts.
Although the numbers are not exactly clear, the Le Pen programme will push up the deficit. A figure of about €100 billion per year was bandied about during her presidential election bid two years ago. In a €2,700 billion economy, that’s pretty modest. In addition, with a savings ratio of 17 per cent of GDP or close to €500 billion per year (one of the highest in the EU), France can easily afford to expand its budget deficit. But the markets don’t see things that way, and this is because most analysts in banks who rate economies like France don’t really understand the interaction between domestic savings and state spending.
The real problem for France is too much saving, not too much spending. But that’s for another day. For now, the accepted story is that France, under either a right-wing or left-wing government, might be headed towards default or debt problems. As a result, the interest rate on French government debt is rising, and so too are interest rates on other countries’ debt as they take their lead from France.
And this is where the ECB and Philip Lane come in. During the pandemic, the ECB changed its fundamental rules, allowing it to buy the bonds of other countries that found themselves in fiscal trouble as a result of lockdowns. For other countries, read Italy. Once the ECB had announced this commitment, it became a sort of buyer of last resort. This is why Covid saved the Italian bond market and explains, partially, why Giorgia Meloni, the allegedly anti-EU prime minister of Italy, is so well behaved at institutional meetings with the EU. She needs the money.
While the French and Italian right-wingers want a protective EU superstructure when it suits them, they are both on a financial collision course with the AfD, the German right-wingers, who insist on balanced budgets and no Central Bank bailouts for any country. For the German right, budgetary probity is paramount. In traditional German fashion, the AfD stands for smaller government, tax cuts and orthodox economics policies, the sort of policy mix the French and Italian right-wingers blame for their current predicament. The question is whether in the years ahead these fundamental differences over economics will damage an EU-wide right-wing alliance.
Political experience suggests that economics, although important, tends to be trumped by culture.
What binds all the right-wingers is philosophy. For them, Europe was, is and should be both white and culturally Christian. Immigration in general and Islam specifically are their enemies. They see a Europe of nations, and each nation derives its credibility from ethnicity. Europe of the nations is precisely what is on show in football this week. Watching the many ethnicities togging out for various teams at the Euros, it’s quite clear that exclusively “white and Christian” doesn’t reflect the reality of countries, at least in western Europe.
But why let the truth get in the way of a good story?
