Macron’s France election gamble gives Europe Brexit nightmares again

Finance Minister Bruno Le Maire predicted a financial crisis if Marine Le Pen’s far-right party gets to implement its programme. Although he name-checked one of Cameron’s short-lived successors in warning of economic chaos, that strategy resembles what became know as Cameron’s own “Project Fear” during the Brexit campaign.

EU officials have spent much of the past decade dealing with the fallout from the UK vote. But a full-blown crisis in France could ultimately pose a more serious threat to the bloc, since it would strike at the heart of the euro area.

The dangers in France are the first topic of every conversation in Brussels at the moment, one diplomat said.

Those fears are also resonating in financial markets. The premium that investors are demanding to own 10-year French government bonds just posted the biggest weekly jump on record while French stocks have lost about US$210 billion in market capitalisation over the same period.

Britain’s vote to leave the EU caused financial tremors that lasted for years, with investors demanding a so-called Brexit premium to hold UK assets.

Macron’s campaign team does not believe that the lessons of Brexit apply to them, according to a person familiar with their discussions. They think instead that focusing on the economic risks of Le Pen’s project is the way to boost their support, the person said, arguing that the market sell-off is a clear demonstration of the risks.

“Politicians such as David Cameron in the UK might be able to tell a thing or two about how such gambles have a habit of blowing up in your face,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.

The ructions in the market are also stirring up unpleasant memories of the euro-area crisis which saw individual members like Ireland, Spain and, above all, Greece targeted by bond investors because of their unstable public finances.

Italy, the most indebted EU nation after Greece, could be the next country to come under scrutiny if investors start to cut back on their holdings of European government bonds. The risk premium on Italian debt has also jumped this week as a consequence of the problems in France.

One Italian official said policymakers in Rome are monitoring the situation with concern and that if the French sell-off continues it could test the European Central Bank’s willingness to step in. So far, ECB officials see no cause for alarm and haven’t discussed the possibility of using their crisis tools, according to people with knowledge of their thinking.

World leaders at the Group of Seven summit in Italy were also baffled by Macron’s decision, with diplomats questioning the logic of a path they described as unnecessarily risky.

France will come under further scrutiny next week as the political turmoil in the country is expected to be discussed at an EU leaders’ dinner on Monday, according to people familiar with the planning for that encounter. Fellow EU leaders will be seeking explanations from Macron on how he intends to restore control and also bring the budget deficit down.

The European Commission is expected to begin the process of officially censuring France over its budget deficit on Wednesday, a move that is likely to exacerbate tensions in the country, where Macron’s challengers on the right and left have both sought to tap into voters’ frustration with the EU.

Speaking to reporters just before he left the G7 on Friday, the French president described both sides’ economic pitches to voters as “incoherent.”

Le Pen’s team is yet to give the full details of its economic programme but it has said it would slash sales taxes on fuel and energy at a cost of about €20 billion (US$21 billion).

“Spending power is what is urgent at the moment,” Jordan Bardella, Le Pen’s potential candidate for prime minister, said in comments broadcast on BFMTV on Friday. “The measure will of course be compensated and we are looking at ways of making savings.”

Regular EU business is already being disrupted by the turmoil. Le Maire was supposed to meet with his German and Polish counterparts next week, but that is been cancelled at France’s request because Le Maire needs to focus on the domestic situation, European officials said. The French finance ministry did not immediately respond to a request for comment.

“Macron has been a driving force toward greater EU integration and so his weakness detracts from this agenda too,” Dowding said. “The reality is that Macron is currently very unpopular.”