The odds of a “Frexit” vote just inched a little higher

published 9 January 2017

170109-lepen-b — Marine Le Pen's solution to the single currency problem could hasten a "Frexit"

One of the great mysteries of the crisis in the eurozone is why no country not even Greece took the step of leaving the single currency.

It's pretty clear that fear of the immediate disruption caused by a potentially massive devaluation, outweighs any concerns about policy-making under the European Union.

So if you're trying to make a sales pitch for leaving the EU, one of the main issues to deal with is this currency issue.

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Which is why what Marine Le Pen, of the Front National in France, said last week is so interesting...

How to leave the euro

Last week, Marine Le Pen was outlining her sales pitch for the French presidency. She wants to see full powers over immigration controls and economic policy returned to member states by the EU.

If not, she says, she'll hold a referendum on "Frexit".

The French like everyone else, it seems are itching for change. And as we saw last year, both Donald Trump and Brexit surprised everyone.

Of course, both the polls and commentators who claim to know a lot about the French electoral system are saying that Le Pen will definitely get beaten in the second round, no doubt about it. So she has to be in with a half-decent chance.

But there's that sticky old euro issue. People don't like the idea of that sort of change. Swapping back to an old currency is one thing but what happens to your mortgage? What happens to your savings? Will the banking system hold up to that kind of shock? Will it be worth a lot less than the euro was (probably, in the case of France)?

So here's the solutions, says Le Pen. It's not a complete replacement France should just wind back to the way things were just before the euro replaced the franc. Two currencies running parallel to one anothers within a flexible exchange rate system.

"The ECU existed alongside a national currency", Le Pen said. "A national currency co-existing with a common currency would not have any consequences for French daily life."

Et voil! Not only can you have your brioche, but you can mange it aussi.

There are of course a lot of problems with this idea. There's the idea that the EU would allow a parallel currency to exist. There's the idea that markets wouldn't be bothered if a Le Pen government decided to redenominate all French government debt into the newly-ressurected franc (particularly given that the French central bank would presumably be in control of printing these francs to order).

In short, you'd expect markets to pile on the new franc, driving it lower one way or another. As Patrick O'Donnell of Aberdeen Asset Management told Reuters: "This is an issue for France but if Le Pen were to win, then it's an issue for the concept of the euro zone as a whole. I think the markets would vote with their feet first of all and spreads would widen significantly."

So as economic policies go, it's not the most practical.

But the politics well, they're pretty smart.

Le Pen is one of the first leaders to have outlined exactly what she believes would happen in the event of a country leaving the euro. She's giving voters the sort of reassurance that might defuse the currency issue.

She's telling the French: "You can vote for independence. You can vote for taking back control. And all that'll happen is that your money will be worth the same as it is now, with just a little adjustment now and then, as and when it's helpful for the economy."

A weaker currency won't help France much but Italy would really benefit

The thing is, a return to a more flexible currency regime would not be the solution to France's problems, says Jennifer McKeown of Capital Economics. That's because France's biggest problem is not an overvalued currency but an overly rigid labour market.

Unemployment is 9.7%, compared with Germany on 4.1%. And Le Pen has no plans to change that she wants to stick with the 35-hour working week and she has no plans to tackle bloat in the public sector.

But of course, protecting employee rights (for those who have jobs, at least) isn't going to lose her many votes. And regardless of the realities, the idea that France could opt out of the euro without the new franc immediately tanking, will also assuage many potential nationalist voters' concerns.

I don't have any figures to back this up, but I suspect that the currency issue was the main thing that prevented the Greeks from voting out when push came to shove.

Swing voters would also no doubt be more comfortable with leaving the EU in both France and Italy if there seemed to be a genuine exit path that didn't lead to immediate short-term impoverishment.

It'd also be interesting to see how the EU reacted in that sort of situation. Britain is one thing we've always been part-timers and not "proper" Europeans as far as the EU is concerned.

But France? I mean, the EU was pretty much set up for the benefit of French farmers. And if France leaves with a plan that apparently deals with the currency issue, that's got to be a pretty appealing option for the Italians and the Greeks, for that matter, who are now less enamoured than ever with the euro, if the latest opinion polls are to be believed.

And in any case, as McKeown points out, a currency devaluation would be a lot more helpful for Italy than for France. So while Le Pen might not win, she's showing the way for populists in other countries.

A more softly, softly approach would make sense for the EU

The truth is that regardless of how you feel about the EU this could be a good thing. The EU is in danger of disintegrating because of its inflexibility. That inflexibility has been driven by a desire to push the constant integration side of the EU project. It's like the old Aesop's fable about the oak tree that won't bend in the wind, and gets knocked over.

But when you have major founding partners not just recent recruits such as Greece agitating for change, we might see a more flexible EU come into being. If that were to happen, Brexit and the like wouldn't be an issue.

If the EU would drop the "my way or the highway" act, and just put a bit more emphasis on the idea of a mutually respectful partnership of equals, then the long-term project would stand a lot more chance of coming to fruition. It's a shame they don't see that.

In any case, it all makes Britain's position oddly easier. The more we can point out that we're hardly the only troublemakers in the room, the tougher it is for the EU as an institution to try the bullying tactics.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.