France's potential role in triggering next Euro crisis

The Financial Times highlights the grave implications of the recent political shift, warning that a parliament dominated by extremes could destabilize France and provoke an economic and social crisis that would reverberate throughout the EU.

Emmanuel Macron's recent warnings about the mortality of Europe seem prescient as France faces a critical juncture with its upcoming snap election, threatening repercussions that could extend beyond its borders and imperil the European Union. Currently, all eyes are on the unfolding political drama in France, where the far-right Rassemblement National leads in polls for the June 30th elections, closely followed by the left-wing New Popular Front coalition.

The prospect of a parliament dominated by extreme ideologies raises concerns of prolonged instability or, at worst, the implementation of financially imprudent and nationalist policies that could swiftly escalate into economic and social crises within France. Such a meltdown in France would not remain isolated but would quickly become the EU's predicament due to two primary transmission mechanisms: fiscal challenges and diplomatic strains.

According to a recent analysis in The Financial Times, France's economic predicament is dire, with a public debt accounting for 110% of GDP and a significant budget deficit of 5.5% last year. Both the far-right and far-left factions advocate expansive spending and tax cuts, actions that would exacerbate debt and deficit levels, potentially breaching EU fiscal regulations. Bruno Le Maire, France's finance minister, has warned of a looming debt crisis should either extreme faction come to power, necessitating external oversight akin to that experienced by Britain's fiscal manoeuvres under Liz Truss, which swiftly lost market confidence.

Unlike Britain's mechanism for rapid political correction, France lacks similar safeguards against imprudent fiscal policies. Complicating matters further, France is a member of the Eurozone, raising concerns over the repercussions if risk premiums on French bonds were to soar. While the EU possesses mechanisms for intervention, including bond purchases, the willingness of Brussels and Berlin to support such measures in response to France's fiscal recklessness remains uncertain. Germany, for instance, currently grapples with its own budgetary challenges and may be reluctant to bail out a financially undisciplined France.

Moreover, both the French far-right and far-left harbour Eurosceptic sentiments, criticizing Brussels' directives and expressing hostility towards Germany. The potential for internal EU discord would further strain cohesion at a time when the union faces external threats, particularly from Russia. Expelling France from the Eurozone or EU, akin to actions taken during Greece's debt crisis, appears improbable given the centrality of the Franco-German alliance to European integration since the 1950s.

The likely scenario instead involves France remaining within the EU and Eurozone but adopting a disruptive role, challenging EU policies and cohesion. This outcome could severely impact European stability and diminish France's international stature, notwithstanding Macron's continued presence in global diplomatic forums.

Looking ahead, the Rassemblement National's initial inclination may be to assert French sovereignty aggressively. However, historical precedent suggests that economic realities could temper their confrontational stance, steering them towards a more pragmatic approach in governance. The historical context of France's economic crises, such as in the 1980s under Socialist leadership, underscores the potential for transformative outcomes, albeit within the framework of European integration.

While parallels to past crises exist, the EU has consistently demonstrated resilience in overcoming existential challenges. Despite the current uncertainties surrounding France's political future, betting against the EU's capacity to navigate such storms may prove shortsighted.