Forget chaos in Washington – investors should worry about Le Pen

It isn't an American default that investors need to worry about, says Matthew Lynn. It's a French one.

What was the month's biggest political event? The markets were obsessing about the US government shutdown and a possible debt default. But while that is a remote possibility, in reality the president and Congress will tie up a deal at the eleventh hour. The real shock was closer to home and is potentially more worrying for the markets.

France's National Front leader, Marine Le Pen, is edging ever closer to real power. And with an economic programme that verges on bonkers, she poses a threat to what is the world's fourth-largest bond market, and home to some of its biggest banks. A Le Pen-triggered French default is a lot more likely than an American one.

The National Front has been growing in popularity for much of the last decade. In the last presidential election it won 17% of the vote. Rather like Ukip here, it has scooped up much of the disaffected conservative vote.

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But no one had to worry about them actually being in government any more than Nigel Farage moving into Downing Street that was too remote a possibility.

In France, this is starting to change, however. Last week, the party won a by-election in Brignoles in the south of the country in a run-off with the centre-right UMP candidate. True, there are by-election upsets in most countries. But it came off the back of a poll last week showing the National Front (NF) taking an overall lead.

The poll showed 24% of the French were planning to vote for NF at the next election, compared with 22% for the UMP, former president Nicolas Sarkozy's party, and only 19% for the Socialists, led by hapless president Franois Hollande. That is the first time the NF has topped the polls. It is now the most popular political party in France.

True, the National Front has moved on from its origins. Under its founder, Marine's father Jean-Marie Le Pen, it was on the anti-Semitic political fringe and a long way from the mainstream. But under its new leader, it has shifted towards a right-wing populism of the sort that attracts a following in most countries.

It campaigns against further large-scale immigration, but then so do most right-of-centre European parties now. The overt racism has been quietly dropped.

And yet the party's platform should terrify the markets. Le Pen wants to pull out of the euro, get the Bank of France to fund the government deficit directly, lower the retirement age, and put up trade barriers and tariffs to keep foreign goods out.

True, France might be better off outside the euro. It has lost competitiveness against Germany since it joined the single currency and now has a huge trade gap a worrying development for what has traditionally been a major manufacturing nation. But the rest of the programme is crazy 1930s-style economic nationalism.

Le Pen is an economic nationalist, with a platform owing as much to the far left as the far right. She wants to renegotiate French membership of the EU, threatening to leave if she does not get what she wants. And she wants the Bank of France to print the money to pay for France's vast deficit, as well as for expensive programmes, such as reducing the retirement age to 60. And she wants tariffs to force the French to buy French-made goods.

It is closest to the platform Tony Benn advocated for the Labour Party in the early 1980s and would be just as disastrous if implemented.

But just because it's crazy doesn't mean the French won't vote for it. They already elected Hollande with an unrealistic economic platform. The economy is weighed down by a huge state sector state spending accounts for 56% of GDP, one of the highest levels ever reached outside of eastern Europe under communism and is being tied into a currency union with a far more competitive Germany.

The result has been stagnation. France has only just emerged from its latest recession, and growth this year is only expected to be 0.1%. Unemployment is at a 14-year high and shows no sign of falling. Youth unemployment has risen from 18% in 2008 to 24% now. In 2008, 12.7% of people were below the poverty line, now it is 14% and rising.

The country is getting steadily poorer and people are angry about that. Committed to the euro, the mainstream parties can offer very little in the way of alternative solutions. It's hardly surprising then that people are turning to fringe parties, no matter how nutty.

The trouble is, France matters to the global markets. It has the fourth-largest bond market in the world, worth €1.1trn, a legacy of a government that has not balanced its books since 1974.

It ranks just behind the US, Japan and Italy but unlike Italy, its bonds are widely held internationally.BNP Paribas is one of the world largest banks, and Socit Gnrale is not far behind it.

A French withdrawal from the euro, plus a Bank of France that directly funded the deficit, would be an effective default on those debts, triggering huge losses throughout the global financial system.

Forget the chaos in Washington. Any whiff of Le Pen winning power in Paris would cause market chaos. And while actual victory may be some way off, she is getting close enough to make many investors very nervous.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.