Brave new 2017? Be careful what you wish for

France and its presidential candidates offer a glimpse of what might befall the euro zone

“The failure to heed the lesson that muddling through doesn’t work is the reason why centrists have lost everywhere in recent years.”

“The failure to heed the lesson that muddling through doesn’t work is the reason why centrists have lost everywhere in recent years.”

 

As a purely intellectual exercise, it is worth looking at the upsides of 2017, since we are all well aware of things that could wrong.

The single biggest upside – and not a particularly improbable one either – would be a victory for Emmanuel Macron in the French presidential elections. For the first time, an opinion poll has put the former economy minister, who is running as an independent, ahead of François Fillon, a former prime minister who is the official candidate of the centre-right Republican party.

By French standards they are both radical economic reformers, though they differ in their radicalism.

Fillon is the more extreme. He wants to get rid of the 35-hour week, increase the pension age and slash public sector employment by more than half a million. If he wins and manages to implement his agenda, France would go through a period of extreme liberal deregulation.

Politically, Fillon is in the tradition of French souverainisme: a doctrine that opposes a federal version of European integration and sees the nation state as the main political anchor in the continent’s politics. It is perhaps no accident that Fillon enjoys excellent relations with Russian president Vladimir Putin.

Macron also wants economic reforms beyond anything the French establishment, especially the Socialist party, would likely ever agree to. But he is the opposite of a souverainiste: he wants a fiscal and political union for the euro zone because he recognises that the only nation state that benefits from the current political arrangements in Europe is Germany, not France.

In that sense, Macron is the polar opposite of Marine Le Pen, leader of the right-wing National Front. While Mr Macron wants to make the euro zone work, Ms Le Pen wants to destroy it.

Grand designs

It is less clear what implications a Fillon victory would have. Like other Republican politicians, he has no grand designs for Europe or for the euro zone. Unlike his predecessors, his economic radicalism might end up producing economic convergence with Germany.

I would not advise anyone to take this course since Germany is unique in its economic and social structures. It has a much stronger manufacturing sector than France. But I am ready to concede that a strategy of economic convergence is, in theory at least, a viable “third way”.

So, we have three politicians with three clearly delineated strategies. There are other candidates. The Socialists will determine their official contestant in a primary this month. But let us assume that the presidential election will be a race between Messrs Fillon and Macron and Ms Le Pen, who happen to be the three strongest performers in current opinion polls.

While the relative attractions of Macron or Fillon are easy to see, what would be the economic impact of a Le Pen victory?

There are many good reasons to detest her and her party, but liberals should not repeat the mistake they made during Britain’s EU referendum campaign and the US presidential election, when they predicted economic meltdowns that did not happen. In fact, both the Brexit vote and the victory of Donald Trump were followed by an increase in stock prices.

There were good reasons to oppose Brexit and Trump, but the economic arguments mounted against them were at best exaggerated and narrow-minded.

I would look at a hypothetical Le Pen victory in a similar way. Her presidency would kill the European dream. It would destroy the euro. But I cannot exclude the possibility that it might be good for the French economy, or that it might produce a stock market boom.

A euro without fiscal transfers is economically equivalent to the gold standard in the early 1930s. The earlier countries came off the gold standard, the earlier their recoveries started.

Viable options

In this narrow sense, Le Pen and Macron constitute two opposed but viable options, both economically preferable to an unsustainable status quo. And Fillon represents a more realistic version of the status quo than anything that has been tried before.

Each position, while internally consistent, is also risky. It is far from clear whether Macron could persuade Germany to agree to a fiscal union. But if any outsider can, it must be the French president.

It is far from clear that Fillon would be supported by an equally reformist parliamentary majority. Nor is it clear that Le Pen could manage a viable economic policy outside the euro zone. From an investor’s perspective, each of those candidates holds the potential of an upside risk.

The 1930s taught us that the unsustainable always ends and that muddling through never works, although it always looks attractive to the economically illiterate at the time. The failure to heed this lesson is the reason why centrists have lost everywhere in recent years.

The events of 2016 are consistent with that observation. The upside potential for 2017 consists of the possibility that a morally corrupt liberalism might give way to something more sustainable. But be careful what you wish for. The economically optimal outcome might be loathsome for other reasons.

Copyright The Financial Times Limited 2017

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