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Will French elections spark the next euro crisis?

Thomas Kohlmann
June 29, 2024

Far-right and far-left populist parties in France are making campaign promises that could cost billions. What happens to the euro if either of these parties get voted in?

Marine Le Pen, the leader of France's far-right National Rally (RN) party, walks in front of a gaint screen showing the face of Jordan Bardella, the RN president
Campaign promises made by the far right and far left mirror a broader 'radicalization of economic policy' in FranceImage: Julien de Rosa/AFP

The various campaign promises being made by France's far right and far left ahead of the two rounds of snap elections on June 30 and July 7 all have something in common: they will all be very, very expensive to carry out.

Whether they call for lowering the retirement age back to 60, raising the minimum wage or granting blanket tax exemptions to everyone under 30, each campaign promise is another potential multibillion-euro threat to France's already empty coffers.

But where will the money come from? Neither the far right nor the far left has an answer.

Friedrich Heinemann, a public finance expert at the German-based Leibniz Center for European Economic Research, said the promises being made by France's populists mirror a broader "radicalization of economic policy."

"Those are entirely unrealistic economic programs. They were written for nirvana but not for today's French economy," Heinemann told DW. 

Far right finds support among young voters in France

France's rotten state finances  

Europe's second-largest economy is already groaning under a mountain of debt equaling roughly 110% of GDP. Last year, France's trade deficit was running at about 5.5% of the country's overall economic output.

Both mean trouble when measured according to the EU's Maastricht Treaty, which only allows for a 3% trade deficit and a maximum sovereign debt of 60% of GDP.

Things could get worse. It's estimated the campaign promises being made by the far right and far left could add as much as €20 billion ($21.4 billion) annually in new spending to the budget.

Some experts have said this is a conservative estimate, and that the plans could be costlier still.

But what will the European Union do if a new populist government simply ignores the Maastricht criteria? "There's just no plan B for that," said Lorenzo Codogno, a London-based macroeconomic adviser for institutional investors and formerly with Italy's Finance Ministry.

The situation in Italy looks even worse than it does in France. In 2023, Rome ran a deficit of 7.4% and debt was a whopping 140% of GDP.

But unlike French President Emmanuel Macron, conservative Italian Prime Minister Giorgia Meloni's job is safe.

Euro may 'suffer' after French vote

Although he doesn't "see a scenario that will break the euro" in the wake of French election, Codogno said he does see one in which "all of Europe's institutions arrive at a stalemate and nothing gets done."

He said everything would then come to a grinding halt, sapping all political initiative.

Jean Luc Melenchon grimaces
Jean-Luc Melenchon, a figurehead of the left-wing alliance NUPES, wants to massively expand social spendingImage: Reynaud Julien/APS-Medias/ABACA/picture alliance

"That could be problematic if the US and China were to enter a trade war at a time of global geopolitical instability with two wars already raging near Europe's borders," said Codogno.

It could also impact the external value of the common EU currency. "One can justifiably claim that the euro would suffer, not just asset value, but the currency," he added.

No protections against populist economic policy

The strict parameters of the Maastricht criteria were eased during the COVID epidemic and have remained more flexible since. The eurozone's latest framework for steering economic policy only recently went into effect, on April 30.

There are still limits for debt and deficit, but the new framework gives nations far more wiggle room regarding how and when they get their financial house in order.

Still, Codogno fears that may not be enough for some countries. "France could become the first country to intentionally flout the new fiscal framework agreements," he said.

The blackmail potential posed by highly indebted states is real. To date, debt and deficit transgressions by individual states have suffered little consequence from the European Commission or the European Central Bank (ECB).

"That's exactly the problem the ECB has maneuvered itself into over the past few years by consistently saying ... we're here to help," said Heinemann of the Leibniz Center.

He said it was a blessing that the ECB could help countries in need during a crisis like the pandemic, "but the ECB simply cannot be the entity tasked with keeping euro-economies afloat at any cost — even when their problems were caused by irrational economic policies," he added. "That would give the wrong signal."

Who's controlling the controllers?

Heinemann is critical of the fact that the European Commission has also been far too lenient on debtor nations in the past.

He feels the key role that the European Commission plays in enforcing debt rules is one of the central design flaws of the entire eurozone system.

France set to vote in high-stakes legislative election

As a de facto government, the EU is ill-equipped to be "a neutral arbiter when it comes to member states taking on debt," he said.

"Because it is always in a situation in which it has to enter negotiations with a member state in order to arrive at a compromise."

Heinemann would like to see more oversight from the European Fiscal Board, which evaluates whether the European Commission accurately assesses member states' financial situations and whether it is correctly applying Stability and Growth Pact measures.

Regrettably, said Heinemann, the EFB has absolutely no political say.

Extorting cash transfers from northern EU member states

"But if the European Commission continues to operate so politically — that is, to continue to opt for political compromise rather than getting tough — then I see dark days when it comes to debt accumulation in the eurozone," he said.

The motive of those voting for populist parties in France underline Heinemann's point.

"Those voters are saying: We know the policies that we are voting for won't work. But by voting for them we can force cash transfers from northern Europe — and that is far better than having to deal with austerity measures here at home," he said.

That must be stopped, he warned. "Otherwise, we will have a massive problem when it comes to acceptance of the EU in northern Europe."

This article was originally written in German.