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2017-04-24 04:01:02
France Delivers Euro’s Latest Existential Question

LONDON — It has survived enough Greek tragedy to fill out an Aeschylus trilogy and sufficient brushes with Italian banks to make an opera. It has endured a global financial shock, years of regional economic stagnation and no end of cross-border political accusations.

Now, the euro, a perpetually maligned currency, has endured yet another test — this time from the presidential election in France.

Marine Le Pen, the leader of the right-wing National Front party, and one of two remaining candidates facing off on May 7, has long disdained the euro as a malevolent threat to prosperity. She has pledged to convert French debt into a new national currency, an event that could begin the euro’s downfall. She has vowed to renegotiate France’s relationship with the European Union, threatening to upend the project of European integration that has prevailed on the continent as an antidote to the brutalities of World War II.

As her prospects appeared to advance in recent weeks, that sowed unease in international markets, with investors demanding greater returns on French government debt, a sign that the odds of default — however minute — are multiplying. In recent weeks, investors had been aggressively purchasing options that offer protection against a precipitous plunge in the value of the euro.

The results of the first round provided relief to investors, after the strong showing of her centrist opponent, Emmanuel Macron. As the markets tempered their expectations for a victory by Ms. Le Pen, the euro was up 1.5 percent against the dollar.

Few give credence to the prospect that Ms. Le Pen could actually deliver on her radical promises. She remains a long shot in the polls. Even if she wins, beating Mr. Macron in the runoff, her party will almost certainly fall well short of claiming a majority in the French Parliament when legislative elections are held in June. She would be relegated to figurehead status, with governing handled by a prime minister selected by the party in command.

But the concerns that have rippled through markets attest to fundamental defects that have long compromised the euro. It is a structurally flawed currency, one adopted by 19 nations operating without a unified political organization. It suffers from a chronic shortage of faith in its ability to persevere along with an unrelenting surplus of threats to its existence.

Many argue that the euro was doomed from inception. It was conceived more as an idealistic reach for European cooperation than as a reasoned plan to manage a currency. The assumption was that shared money would spur the evolution of greater European political integration.

Instead, the euro has devolved into a major source of political acrimony across the continent.

In countries with their own money, bad economic times typically prompt governments to spend more to generate jobs and spur growth. Their currencies fall in value, making their goods cheaper on world markets and aiding exports.

But countries in the eurozone cannot fully avail themselves of these benefits. The currency comes with rules limiting the size of allowable budget deficits. Faced with hard times, governments using the euro have been forced to intensify the hurt on ordinary people by cutting pensions and other public outlays.

The Nobel laureate economist Joseph E. Stiglitz has indicted the euro as a leading source of economic inequality that has divided European nations into two stark classes — creditor and debtor.

As Cyprus, Greece, Italy, Portugal and Spain have slid into debt crises in recent years, they have accused Germany of self-serving inflexibility in demanding strict adherence to debt limits while refusing to transfer wealth to those in trouble. Germany and other northern countries have accused their southern brethren of failing to carry out reforms — such as making it easier to fire workers — that would make them more competitive.

The crises have time and again exposed the structural flaws of the eurozone and its tendency to generate more recrimination than action.

“You have a basic situation in the eurozone now where it’s like a half-built house,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. “As long as that persists, a large number of investors are going to have existential doubts about the euro.”

Now, the latest wave of anxiety is being set off by France, one of the euro’s charter members and a bedrock component of the European Union.

This is playing out against a backdrop of destabilizing events that once seemed impossible — the election of Donald Trump in the United States and the vote to abandon the European Union in Britain.

Though Ms. Le Pen has moderated her positions in recent weeks as her election has gained plausibility, her hostility for the European Union and the euro are well known.

“I want to destroy the E.U.,” she told the German newsmagazine Spiegel in a 2014 interview. “The E.U. is deeply harmful, it is an anti-democratic monster. I want to prevent it from becoming fatter, from continuing to breathe, from grabbing everything with its paws.”

In the same interview, she confirmed her desire to yank France free of the euro. “If we don’t all leave the euro behind, it will explode,” she said.

Ms. Le Pen has since muted talk of renouncing the euro in favor of adding a parallel currency, the franc. But the threatened act of redenominating French debt would almost certainly lead to a downgrade of France’s credit rating, bringing severe market consequences, said Mujtaba Rahman, the London-based managing director for Europe at the Eurasia Group, a risk consultancy.

He traced a potentially calamitous string of events that would play out after a victory by Ms. Le Pen. Even before parliamentary elections, she could appoint a temporary government while serving notice that France intended to renegotiate the terms of its membership with the European Union. She could seek to fire the country’s central bank governor and prepare to put in her own person to oversee the introduction of the franc.

“Her room for maneuver is greater than people believe,” Mr. Rahman said. “She will have interpreted her election as a massive mandate. It flows from ‘Brexit,’ it flows from Trump, and she’ll try to get as much of her agenda done while she is unrestrained.”

Even if she is stymied by political backlash, she could cause a volatile reaction in financial markets.

Around the globe, central banks, sovereign wealth funds and asset managers hold some 700 billion euro (about $750 billion) in French government debt. A Le Pen presidency could spook them into unloading some of it, increasing borrowing costs for the French government and the business world.

French banks could see consumers pull euros out of their accounts to be squirreled away elsewhere. If that became a full-blown bank run, the consequences could become global, given that France’s four largest banks are deeply intertwined in the international financial system.

Most analysts dismiss such talk as apocalyptic. The French parliament and constitution would severely constrain a President Le Pen. Investors would grasp this.

“The markets are not that stupid, and they will understand that there is a legislative election,” said Nicolas Véron, a senior fellow at Bruegel, an independent research institution in Brussels. “There would be market volatility, but not a meltdown.”

Those in control of money are implicitly saying that the odds of a meltdown remain low. Still, those odds are increasing, with fears of danger in France rippling out across the continent.

In the run-up to the first round, the costs of insuring against government default have grown in Italy as well as in France. With the market tenor shifting, bond yields dropped, reflecting improving sentiment about those countries.

But if Ms. Le Pen wins the presidency, the risks are likely to proliferate, increasing the costs of borrowing for businesses and households in Italy, Spain and Portugal, impeding job creation and economic activity, while perhaps forcing governments to cut services.

That could generate public anger, further stoking the fires of populism as Italy goes to the polls later this year or early next. That could enhance electoral prospects in Italy for the Five Star Movement, which favors dumping the euro.

A victory by Ms. Le Pen might change little directly, with her extreme inclinations contained by French political realities, while indirectly adding momentum to Europe’s crisis of confidence: It would inject greater dysfunction into European institutions, rendering them even less capable of alleviating economic troubles. And more strife has in recent times translated into more support for the populist movements seeking to dismantle these institutions.

“It would devastating for the eurozone and the E.U. if she won,” Mr. Kirkegaard said. “It would certainly paralyze the eurozone in terms of almost anything for at least five years.”