What will happen if the extreme French parties triumph with pre-election gifts of billions of euros? Experts warn of the consequences of the erosion of the euro. The election promises of the extreme right and the extreme left in France have one thing in common, they are extremely expensive. Regardless of whether it is the return to retirement at 60, or whether it is an increase in the minimum wage, or a flat tax exemption under 30 years.

Since the state coffers in France are empty, the question arises where the money for the election gifts will be found. Neither side is giving answers. For the economist Friedrich Heinemann this reflects a “radicalization”, as he calls it, of the economic policy of the country’s extreme parties. “These are economic programs that are completely unrealistic. They were written entirely to be written, but not for the French economy as it is today,” says the public finance expert at the Leibniz Center for European Economic Research (ZEW) in an interview with DW.

Dead end scenario

Already now the economy of the 2nd largest country in the EU is groaning under the mountain of debt that amounts to 110% of GDP. Last year the fiscal deficit was 5.5%. According to the criteria of the Maastricht Treaty, a deficit of only 3% and a national debt of a maximum of 60% of GDP are allowed. And things could get even worse: According to estimates, the campaign gifts of the French left and the French right could burden the French budget with additional costs of up to 20 billion euros per year. And according to some experts, it could be even higher. But what will the EU do if a right-wing or left-wing government in Paris ignores the Maastricht criteria? “There’s just no plan B for this,” Lorenzo Contonio, who used to work in Italy’s finance ministry and is now a macro adviser to institutional investors in London, admits in an interview with DW.

In Italy, things look even worse when it comes to public finances. The deficit there was 7.4% in 2023 and public debt is around 140%. But unlike Macron in France, Prime Minister Georgia Meloni’s government has the situation under control. Even after the new elections in France, there is no “scenario of breaking up the eurozone”, emphasizes Lorenzo Contonio, who also teaches at the London School of Economics (LSE). “But I see a scenario in which all the European institutions will reach a kind of deadlock and in which basically nothing will work. Then everything will be blocked and there will be no more political initiatives. This could be problematic in a situation with trade wars between the US and China and a very volatile global geopolitical situation, in which two open conflicts are developing near the EU’s borders,” says Contonio. “This would also leave its mark outside the eurozone and the euro could become a soft currency. One can justifiably claim that the euro will struggle, not only in terms of its value as an asset, but also as a currency,” argues the Italian expert.

Extortion from over-indebted countries?

Of course, the strict Maastricht criteria were relaxed during the pandemic and have since become more flexible. The new framework for economic governance in the euro area came into force on 30 April 2024. Limits on deficits and public debt remain in place, but the new framework gives national governments more room to maneuver in how and when to implement order their finances. “This may still not be enough, Contonio fears. “France could be the first country to deliberately ignore the new fiscal framework agreements.” The potential for extortion by over-indebted countries is there: in the past, breaches of deficit or debt rules by individual countries have had no noticeable consequences on the part of the European Commission or the European Central Bank.

“This is exactly the problem that the ECB has increasingly been led into in recent years by saying that we are here to help,” Friedrich Heinemann emphasizes. “Certainly in a phase of acute crisis, such as during the pandemic, it has been a blessing to help countries in a difficult position. But the ECB should not be the authority that keeps governments liquid at all costs, even if the problems are caused by irrational economic policies”, emphasizes the public debt expert. “That would send the wrong message.”

Is the European Commission politicized?

Heinemann also criticizes the fact that the European Commission has often been too lenient towards “sinners” in the past. He sees the European Commission’s key role in enforcing debt rules as a central flaw in the construction of the eurozone. As the EU’s de facto government, it is ill-suited to be “a neutral arbiter of member states’ debt behaviour. Because it is simply always in a position to strike deals with member states and make compromises”. Heinemann would like to see the European Fiscal Council (ESC) gain more weight in monitoring debt rules. The Council assesses whether the European Commission correctly assesses the fiscal situation of the member states and correctly implements the Stability Pact. However, Heinemann laments the fact that the Fiscal Council has no political voice.

“But if the European Commission continues to play its role in such a politicized way, preferring to make political compromises rather than take tough action, then I see a bleak future for eurozone debt developments,” he says. Heinemann summarizes the motivations of voters in France who vote for a populist party as follows. “These voters are saying, we realize the policies we’re voting for aren’t really working, but we can use them to force transfers from virtuous northern Europe, and that’s far better than experiencing austerity here at home.” There must be an end to this, warns the public debt expert: “Otherwise we will have a huge problem for the acceptance of the EU in northern Europe.”

Editor: Irini Anastasopoulou