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Feb 20, 2017 | 09:30 GMT

10 mins read

A Vote That Will Resonate Beyond France

A Vote That Will Resonate Beyond France
(JEAN-PHILIPPE KSIAZEK/AFP/Getty Images)
Forecast Highlights

  • A low-growth economy, social tensions and popular discontent with traditional political parties will influence presidential and parliamentary elections in France between April and June.
  • A government led by the moderates would seek to further deregulate the French economy and modify labor legislation, but progress on those areas would probably be modest.
  • Even if an extremist party fails to win the presidency in 2017, the rise of far-right and far-left forces in France will continue to threaten the continuity of the eurozone.

The eurozone could soon face a test of survival. The currency union's fate could hinge on the results of the presidential election in France, the eurozone's second-largest economy. French voters head to the polls in the two-round presidential election on April 23 and May 7, and a victory by National Front candidate Marine Le Pen would almost certainly bring about the end of the eurozone. Legislative elections will follow on June 11 and June 18. Inroads made in both elections by political forces that resist globalization and want to stop the process of European integration will have far-reaching effects on France and the eurozone.

France's economy will be a centerpiece election issue. The once-solid growth rate of its gross domestic product, which averaged 2.2 percent annually from 1995 to 2004, slowed to an anemic 0.7 percent from 2005 to 2014. There was some improvement in 2016, but its 1.2 percent growth still lagged the 1.7 percent eurozone average, and things do not look much better for 2017, with a projected growth rate of 1.6 percent. Unemployment among active job seekers in France has surpassed 9 percent every year since 2009, exceeding the EU average for the past three years. About one in every four jobs in France is provided by the public sector, leading to high taxes and public debt levels. Furthermore, France's complex labor regulations and generous employment benefits often inhibit job creation.

French economic prospects look dim. Being a eurozone member puts France in an economic straitjacket, preventing Paris from manipulating its currency to boost competitiveness. Its share of world exports has contracted since the start of the century. The European Commission recently warned that private consumption, one of the main drivers of the French economy, will probably fall as its citizens' purchasing power is eaten away by higher global fuel prices.

Social tensions will also influence political developments in France. Migrants, who represent about 10 percent of the country's population, are a source of frequent political and social friction. Over time, immigrant enclaves, consisting primarily of people from Muslim countries in North Africa, have formed in France's cities. These areas are often the epicenter of riots and crime — sometimes sources of radicalization.

Many French people feel that the migrant influx threatens their national identity, traditions and even their security. The fact that some perpetrators of recent terrorist attacks in France and Belgium were French nationals of Arab descent has inflamed social tensions. This is why millions of voters support politicians who promise to restrict immigration. Critics in migrant communities, on the other hand, point to French social and political systems that make it difficult for second- and even third-generation immigrants to integrate into French society.

Low economic growth and simmering social tensions feed a growing discontent with traditional political parties whose continued hold on power is a function of France's electoral system. In that system, both the president and members of parliament are appointed after two rounds of voting that ultimately narrow the choices to two candidates. The system was designed to prevent candidates from extremist parties, which have existed in France for decades, from winning the presidency or significant numbers of parliamentary seats. During the past decade, two political forces, the conservatives and the Socialists, have dominated French politics. But at a time when social discontent is high, outsiders are threatening the status quo.

Introducing the Candidates

Migration and security will be important topics during the presidential campaign, but there is little difference in the proposals the candidates offer. Most of the contenders are promising to increase spending on security and national defense, enhance the powers of security forces and introduce more restrictive immigration laws. The main ideological differences among the candidates show up in their economic proposals. Centrist and center-right candidates will focus on the need to deregulate and liberalize the French economy, while nationalist and left-wing candidates will propose an increase in protectionism and public spending.

Current polls project that nationalist candidate Marine Le Pen of the National Front party would capture about a quarter of the vote in the first round of the presidential election. The National Front's main proposal is to hold a referendum on France's exit from the eurozone. According to Le Pen, a return to the franc would enable France to regain competitiveness and increase its exports. She also plans to introduce a 3 percent tariff on imports and impose a 10 percent tax on the salaries of all foreign workers, including citizens of other EU states. These proposals go against the principles of the European Union's single market, an area where people, goods, services and capital move freely.

Centrist candidate Emmanuel Macron, who is polling at about 20 percent, is pushing a business-friendly agenda. He has promised to reduce regulation in the French economy and liberalize labor rules, including a pledge to eliminate France's 35-hour workweek for young workers. He has also proposed decreasing work-related taxes and raising the retirement age. Although Macron served as minister for economy and finance under outgoing President Francois Hollande, he presents himself as an outsider to mainstream politics.

Republican Party candidate Francois Fillon has put deregulation, and especially labor reform, at the center of his economic agenda. He has promised to scrap the 35-hour workweek, reduce the number of workers in the public sector, raise the retirement age, cap unemployment benefits and cut public spending (except for areas such as defense). A recent scandal affecting Fillon and his family has damaged his popularity.

The field is trailed by Socialist Party candidate Benoit Hamon (polling at about 15 percent), who has promised to introduce a universal income of 750 euros (about $800) per month and reduce working hours, and Jean-Luc Melenchon (just over 10 percent), who wants to repeal the labor legislation introduced by the outgoing administration and raise wages in the public and private sectors. Hamon has expressed interest in a joint candidacy with Melenchon, believing that their electoral programs have some similarities. Melenchon, however, remains skeptical.

French candidates also have different views on foreign policy. Le Pen has been extremely critical of the European Union and would like to see France leave the bloc to restore full national sovereignty. Fillon supports France's EU membership but has said Paris should repatriate some powers from the central institutions in Brussels. Macron holds a more federalist view of the European Union and has supported plans such as the introduction of a common budget for the eurozone. On trade, Le Pen, Hamon and Melenchon are critical of free trade agreements, while Macron has defended the EU free trade agreement with Canada. Fillon has remained vague on the issue.

Russia is an equally divisive topic. The National Front is ideologically close to the Kremlin and has demanded that the European Union lift sanctions on Moscow. Fillon has warned against isolating Russia and also favors lifting the sanctions. Macron, however, has accused Russia of interfering with his campaign by hacking his website and planting false stories about him in the Russian media. He is in favor of keeping sanctions against Moscow in place. The EU sanctions on Russia are set to expire on July 31, right after the French elections. Extending them would require a unanimous vote by the bloc's 28 members. Italy, Austria and Hungary have all spoken against sanctions in the past, and without French support, Germany will have a hard time persuading the rest of the European Union to support an extension.

The Scenarios

Polls suggest that the National Front could reach the second round of the presidential election, where any rival would defeat it. But France's borrowing costs have slightly risen in recent weeks, showing that financial markets are not fully reassured by the polls. A victory by the National Front would probably set in motion a series of events that could result in the dissolution of the eurozone. The mere announcement of a referendum on France's eurozone membership would create panic across the currency area and force savers and governments to start taking pre-emptive measures, such as transferring money to safer banks in Northern Europe. Even if it failed to honor the promise of putting eurozone membership to a referendum, a government led by the National Front would likely introduce protectionist measures that would disrupt the European Union's free movement of goods, services, capital and people.

A victory by moderates would also create domestic and foreign challenges for the new French government. Many of the economic liberalization measures proposed by Macron and Fillon likely would lead to protests and strikes, forcing them to tone down their policies or abandon them altogether. Social and political pressure forced Hollande and his predecessor, Nicolas Sarkozy, to abandon many of their electoral promises. They ended up focusing their terms on a handful of key reforms (pensions in Sarkozy's case and the labor market in Hollande's case).

A moderate French government would probably selectively challenge the European Union. A big part of the fight would focus on fiscal policies. Though most candidates have promised to keep France's deficit under control, they have also promised to demand more flexibility from Brussels in the enforcement of deficit limits in the European Union. The European Union recently warned that France's deficit is on course to reach 3.1 percent of GDP in 2018, exceeding the EU limit of 3 percent. No matter who wins the election, this will probably be a source of friction between Paris and Brussels.

France will continue to be interested in greater military and security cooperation in the European Union, especially after the Brexit deprives the bloc of one of its military stalwarts. The moderates are also interested in protecting France's political and economic alliance with Germany. But the nature of this alliance will depend on the party that wins the election. A conservative government would push for a repatriation of some powers from Brussels, while a centrist or center-left government would demand more risk-sharing mechanisms and more EU investment in member states. Both kinds of EU reform open the door to disagreements with Germany.

In the coming years, France's moderates will continue to face competition from populist and nationalist forces from the right and the left. Just as the National Front is likely to reach the second round of this year's presidential election, a far-left party could do the same in a future contest. Although diverging on many issues, they hold similar ideas when it comes to promoting protectionist measures and opposing globalization and the European Union. With French economic growth expected to remain modest, parties on both extremes will continue to flirt with access to power. This will present one of the most significant existential threats to the eurozone in its current form.

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