21 March 2017

EurActiv: Study: Frexit chaos would be ‘worse than collapse of Lehman Brothers’

The political disarray in France’s mainstream parties is encouraging debate about Frexit. The possibility is alarming economists, who fear it would cause a “cardiac arrest” in global finance and make life harder for the poor.

[...] The main argument of the pro-Frexit campaigners is the reacquisition of sovereignty, which they believe has been undermined by the European construction.

Nostalgia

“The role of the president is to guarantee France’s independence,” said François Asselineau, a little-known candidate for the presidency. Often citing De Gaulle, he refers to himself as the real “Frexit candidate” and would also pull France out of NATO and the euro.

For him, Mélenchon and Le Pen may talk about leaving the EU but they don’t really intend to do it. “Marine Le Pen would do it after a referendum and for Mélenchon it is only a Plan B, in case Plan A doesn’t work. If I am elected I would invite all the other heads of state to Paris and I would invoke Article 50 immediately,” Asselineau said. As a net contributor to the EU, France would have nothing to lose by leaving, he believes. [...]

In a press conference on the currency earlier this month, Marine Le Pen made no mention of the possibility of a French exit from the EU but insisted instead on monetary independence. But even if she does not focus on Frexit herself, it is the National Front leader who gains the most from anti-EU themes, not only because she is the best-known of France’s anti-EU candidates, but also because of her strategy of permanent victimisation: Europe and the euro are always accused of being in the wrong, while France and the French citizens are the victims.

“Frexit would lead to a freezing of financial flows and bring the global financial system to a cardiac arrest. The failure of Lehman Brothers could look like a small shock in comparison, and even that had major real economic implications,” Grégory Clayes, a researcher at Bruegel, wrote in an article entitled Debunking 5 myths about Frexit.

The ECB has already shown, with Greece, that it will do whatever it can to keep the eurozone from breaking up. And remaining in the eurozone gives countries access to very low-interest rates, which reduces the cost of borrowing.

On the other hand, leaving the economic and monetary union would cause interest rates to skyrocket. In France, where national debt stands at 100% of GDP, or close to €2.2 trillion, this would be a serious blow. In the event of default, France would no longer be able to borrow on the financial markets.

Even the possibility of Frexit, if it is not properly organised, could push France to default: the increase in interest rates coupled with capital flight would tip some banks into insolvency before the state itself went bankrupt.

And while many economists agree that the return of a devalued franc would benefit French exports, they also believe any gains would be more than cancelled out by inflation on imports.

“A decision to leave the euro would do anything but serve the interests of the working classes, which the National Front has particularly targeted: it would even be extremely harmful,” the left-wing think tank Terra Nova wrote. It placed the cost of leaving the euro at between €1,500 and €1,800 per household per year.

Low-earning households and retired people would find it hardest to absorb this shock, according to experts, while “the most knowledgeable and best-advised” would be able to shelter their wealth.

So Frexit would have no great effect on the rich but could be extremely costly for the less well-off.

Full article on EurActiv

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