French Candidates Whisper 'Frexit,' but Le Divorce Would Be Chaotic

By Stephen Fidler Features Dow Jones Newswires

If you thought Brexit had a complicated plotline, you should see the screenplay for Frexit. Two leading candidates in the French presidential election, the first round of which will be held on Sunday, have talked of leaving the European Union.

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Marine Le Pen, the right-wing National Front candidate, and Jean-Luc Mélenchon from the left have both proposed returning responsibilities to Paris from the EU power centers of Brussels and Frankfurt. Their proposals could, via different routes, take France out of the euro and, like Britain, out of the EU.

Their political opponents have attacked their ideas. In a presidential debate last month, center-right candidate François Fillon called leaving the euro a recipe for economic and social chaos that would "ruin borrowers and savers."

Ms. Le Pen retorted: "That's what's called 'Project Fear' that was used before Brexit and before Donald Trump's election." The British economy was still doing well after voters decided last June to exit from the EU, and the U.K. unemployment rate is half of France's, she said.

But the political obstacles to exiting are far more complicated for France than for Britain. And the potential financial and economic repercussions for France are way more formidable.

The big difference is the euro. For any eurozone country, leaving the euro is "very complicated, challenging and disruptive," said Nicolas Véron, a senior fellow at Bruegel, a Brussels think tank. "Compared to Brexit, it's in an entirely different league."

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The politics of embarking on Brexit were simple. Once a referendum was called, it needed just more than 50% of Britons to vote for it.

For France, the route is convoluted. A pro-Frexit presidential candidate would need to emerge victorious after two rounds of voting. Then, after parliamentary elections in June, he or she would require support from the new National Assembly -- highly unlikely, especially for Ms. Le Pen.

Ms. Le Pen has become less dogmatic over the euro. She has pledged negotiations to return sovereignty to France. After six months of talks, she has said, she would put the outcome of the talks to a referendum. If she meets her goals, she would recommend staying in the EU under the new conditions. If not, she would call for a vote to leave. If people vote to stay nonetheless, she would quit.

The probability of this sequence of events resulting in Frexit is "certainly less than 1%," said Mr. Véron.

Even if those obstacles could be surmounted, it is highly unlikely the next president would take the country out of the euro. Even the left-wing Greek Prime Minister Alexis Tsipras retreated from the threat, despite an unrelenting recession that slashed economic output and against the urging of some prominent colleagues.

A government wanting to leave the euro would confront a legal vacuum. There is a process to leave the EU that the U.K. has invoked, but no legal path foreseen out of the euro. It's almost impossible to conceive that a government leaving the EU to reclaim sovereignty would choose to stay inside the currency, given that it would lose any say over its management.

Economically, it would be more challenging for France than for the U.K. A higher proportion of French exports go to the rest of the bloc than do Britain's and a reemergence of customs barriers would likely require re-establishing hundreds of border posts, gumming up trade and industrial supply lines. (The U.K. has no land border, except with Ireland.)

Moreover, a French exit from the euro would call into question the existence of the common currency and the uncertainty would severely damage its main export markets.

The financial consequences are the most daunting. A return to the French franc would instantly create potentially gigantic currency mismatches on the balance sheets of French banks and companies, creating a host of potential defaults.

French bank assets would significantly be in French francs, which would likely be devalued substantially after Frexit, but many of their liabilities would still be in euros or other foreign currencies that wouldn't weaken. And while loan contracts in French law would presumably be redenominated in French francs, those written in the law of other jurisdictions wouldn't.

According to Eurostat, the EU's statistics agency, France is the fourth biggest net debtor in the EU, after Spain, Ireland and Italy, with financial liabilities abroad exceeding financial assets abroad by EUR358.1 billion ($383.9 billion).

At the micro level, millions of individual loan contracts in non-French law would likely be defaulted on or at least become the subject of litigation. With this going on, many people would pull their deposits from French banks.

It's hard to see an outcome that wouldn't create chaos.

As a result, leaving the euro would be tantamount to "political suicide" for any leader, Mr. Véron said.

Investors may worry about Ms. Le Pen's or Mr. Mélenchon's economic policies, but Frexit seems a remote prospect indeed.

--Will Horobin in Paris contributed to this article.

Write to Stephen Fidler at stephen.fidler@wsj.com

(END) Dow Jones Newswires

April 20, 2017 15:57 ET (19:57 GMT)