A French departure from the European Union following the upcoming presidential election would not be analogous with Brexit, says Natixis Asset Management.
Two of the four leading candidates in the French presidential election, Marine Le Pen and Jean-Luc Mélenchon, intend to renegotiate the relationship between France and the European Union (EU) and leave the EU should those negotiations break down, Natixis chief economist Phillippe Waechter said.
Currency would play a key role in this departure, Mr Waechter said, and while both candidates have different propositions on how this issue should be handled, the outcome would be very similar.
“In Le Pen’s opinion, a national French currency is the key to ensuring independence for the country. Meanwhile, under Mélenchon, the euro would become a common currency and no longer a single currency, which would imply the creation of a new currency for France,” he said.
“As the other members of the eurozone would probably not be favourable to this new framework for the euro, this would be tantamount to France leaving the eurozone and creating a French currency.”
Mr Waechter said the change in currency is a key point of difference between a potential ‘Frexit’ situation, in which France departed the EU, and the UK’s Brexit.
“Many talk about continuity in the UK after the June 23 referendum, and see the absence of a doomsday scenario as proof that a withdrawal from the European institutions is perfectly innocuous,” he said.
“The point is that France’s potential withdrawal from the European institutions and the creation of a new currency go well beyond Brexit.”
While France would endure many of the same macroeconomic shocks as the UK, Mr Waechter said the country would also be subject to a number of microeconomic shocks that would undermine confidence in the currency, and spending programs proposed by both euro-sceptic candidates would likely increase inflation and reduce purchasing power.
“This twofold dimension – both macroeconomic and microeconomic – makes the return to a French national currency the fundamental difference to the Brexit scenario,” Mr Waechter said.
“The state would need to put in a long period of exemplary behavior to foster French confidence in the currency and make it credible … yet this looks unlikely if the state directly helps itself in the coffers of the central bank, and submits to no rules.”
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