February 12, 2017
Ireland's financial destiny is in the hands of angry French voters - this is what we must do if the euro breaks upPosted in Irish Independent · 333 comments ·
This time last year, only a few of us were suggesting that Brexit was likely. The mainstream view was that it couldn’t possibly happen. But it did. And so too did Trump. When this column argued in June that “we should prepare for President Trump”, one or two local talk shows chuckled and sneered at the mere suggestion that such a creature could inhabit the White House. But he is there.
In December, the Italian electorate revolted against its government – again the view of ‘sensible’ people was that bolshie Italians would see reason. But they didn’t.
Back home, this time last year, it was widely considered Fine Gael had done enough to return more muscularly to power. Instead, badly mauled, Fine Gael limped over the line, propped up by Independents.
Are all these phenomena in very different countries – miles away from each other with profoundly different electoral systems and deeply contrasting social models – in any way related?
Do ideas – as much as people, goods and capital – move freely across borders? Does the election of a new leader with radical views in one country embolden the electorate in another country? Does the rise of a different sort of politician in one country give the electorate of another country the ‘permission’ to vote for a radical politician even if conditions on the ground or solutions offered are not quite the same?
The next stop on this political whirlwind will be the Netherlands next month; and the big one, of course, is France. In less than 70 days, France goes to the polls and only an idiot would rule out Marine Le Pen’s chances.
It was the great French romantic poet and novelist Victor Hugo who declared: “You can resist an invading army; you cannot resist an idea whose time has come.”
Do you get the feeling that we are living through epochal change, where one great idea is about to be replaced by another? Are we experiencing the irresistible force of an idea whose time has come?
The big idea whose time has come is nationalism and a desire to insulate a population that is threatened by globalisation. The big idea is not fixed or immutable, but rather is a scorecard of legitimate grievances that working people feel. This means immigration to some, job insecurity to others. It means cultural dilution to some and capacity pressure on the welfare state to others. It means a fall in living standards to some and a rise in inequality to others. Although it’s unlikely to be a universal panacea, electorates are looking for the state to protect them from these forces, which are generally being blamed on globalisation.
People want to be protected by a strong sovereign state from the threats that they feel are now ubiquitous, so protectionism replaces free trade, localism replaces globalism, borders replace openness, and nationalism and the heartland replace multinational and one-world solutions.
Ms Le Pen represents the alternative and she is a powerful political force, articulate, reasonable and highly electable. She wants France to leave the euro the day after she gets elected, she wants to tell the EU Commission to back off and she wants to kick-start French industry by allowing the French government to explicitly buy French manufacturing goods and to subsidise French industry. Both EU competition law and EU state-aid provisions prohibit such policies.
For Ms Le Pen, it is up to the EU to change, not France.
For Ireland, the most immediate consequence of a Le Pen victory would be the euro. She believes – and rightly so – that the euro has been a disaster for France and a boon for Germany. If she sticks to her commitment to print French Francs, the euro is over. The euro without France is not the euro because it ceases even to satisfy the basic pretence that it is a pan-European currency. Without France, there is no political point to the euro because remember, the currency was conceived as the monetary facilitator of political integration.
A decade ago, the elites of southern European countries calculated that if the prize was European political integration (the big idea at the time), that the price of German economic and monetary domination would have been worth it. If France now heads off on a nationalistic path, the whole EU integration plan is in tatters. Remember, this could all come to pass before June.
What happens then?
The first thing to happen in the case of a Le Pen victory is that money will flood out of all non-German members of the euro. Italy will face a massive bond crisis, presaging default fears. Greece will be gone. Spain and Portugal will experience similar bond crises, and so too will Ireland.
The reason for this is that a bond is a 10- or 20-year IOU. For Ireland, the bond states that the Irish State will pay the investor back a certain amount in euro. But if the euro itself is breaking up from the centre, why would anyone bet on an English-speaking periphery country where ties to the UK and the US – two countries where the administrations are implacably opposed to the EU – are extremely strong?
The ECB will try to keep the entire enterprise together by buying all the bonds that scared investors are dumping. But liquidity in the non-German eurozone will dry up. There will be a run, not on the banks, but on the remaining countries of the euro. This flight of capital will be most violent in southern Europe, but it will be dramatic here too. In this case, there are two options.
The first is a lurch towards a deeper political union in the remaining euro countries around Germany. This will be done in an effort to staunch the financial haemorrhaging by stating clearly that Germany will backstop a smaller European Union of countries like the Netherlands, Belgium and Austria, without France.
Is Anglo/American Atlantic Ireland a likely candidate for that Teutonic League? Not really. And anyway, why would Germany bother with this when, after all, it is really interested in a single market of 350 million to sell its goods. German voters didn’t abandon the Deutsche Mark for the promise of some shrunken political union. Meanwhile, the Latin countries will protest their faith in the euro, but no one will believe them or at least no one will risk money and bet on them remaining within the euro.
The second option is that central banks get busy printing new currencies, just in case. With France already out of the euro and Britain out of the EU, the question would be, who’s next? What do we do in this case? Well, we’d certainly need to have new Punts printed.
You may think this scenario fanciful. I wish it was and ultimately it will be if Ms Le Pen doesn’t win.
But look at the odds. Today, Paddy Power is offering 9/4 on Ms Le Pen. Neither Brexit nor Donald Trump had such short odds this far out from polling day.
Granted, it might not happen, but it could easily. Ireland’s monetary future and our financial security is now down to the whims of angry French voters. Surely we should be prepared or have a plan, don’t you think?
Maybe we should start by letting them win at the Aviva in two weeks’ time.