Marine Le Pen’s reckless game with the French economy

The power probably feels good. And it may help her win the presidency eventually. Even so, there is a catch to Marine Le Pen’s decision to bring down Michel Barnier’s government in France, potentially as soon as tomorrow afternoon. If the government goes, the eurozone ay well go down with it. The financial plans of Le Pen’s National Rally’s (NR) party are completely reckless. And even if the chaos that will follow the vote does help win the Élysée Palace for Le Pen, she will inherit a ruined economy – for which she will only have herself to blame. 

Barnier may have been able to negotiate his way through Brexit, but finding a French budget that everyone can agree to for next year has proved beyond even his skill set. His caretaker administration looks certain to fall tomorrow after Le Pen’s National Rally decided not to support his plans. What happens next, no one really knows. Another caretaker government could be formed, the country could remain leaderless for months or President Macron could resign, triggering a presidential election. We will find out soon enough.

For the markets, however, the important point is this. France desperately needs to slim down its bloated state. The deficit is running at 6 per cent of GDP, even with no crisis to deal with, and with the economy stagnating the final figure may be even higher. Its total debts are now 112 per cent of GDP, and are the third highest in the world – in terms of the amount owed – behind only the far larger Japanese and American economies. It is unsustainable.

Barnier’s plans were not even especially radical, involving only a reduction in the rate of growth of state spending – instead of actual cuts – along with huge new taxes on companies and the ‘rich’. Yet even that was too much for Le Pen. Her party demanded bigger increases in pensions, and more subsidies for electricity, even though those are the kind of policies France has to change if it has any chance of growing again, or restoring financial stability. 

In reality, the NR’s only answer to excessive spending is to spend even more. If France refuses to pass a budget, bond yields will soar, and the French banks, the largest and most significant in the eurozone, will crash. More seriously, the threat of a looming French bailout could drag down the entire eurozone, which is already on the edge of a fresh recession. Perhaps Le Pen’s tactics will win her the presidency eventually. But these are scorched earth tactics. She will inherit an economy in tatters which she will be responsible for fixing – and it will be entirely her own fault.