With European solidarity impaled on the coronavirus epidemic, talk of Frexit is surfacing again. But how could Frexit be organized? Like Britain, France would activate Article 50 of the Lisbon Treaty to begin the process of leaving the European Union. But how does one leave the single currency? Brussels, which existentially regulates for everything, does not say and the 3,000-page Lisbon Treaty is silent on the subject. So how could France move to ‘Eurexit’ and what would be the financial consequences?
A starting point could involve reverse engineering the Lisbon Treaty’s monetary articles to begin negotiations with Brussels on exiting the euro. While the 144-article long Title VIII of the Treaty devoted to monetary policy makes no reference to a state being able to leave the single currency, it does contain five substantial articles setting out: ‘Transitional Provisions’ for member states to join the single currency.
Article 139 in effect sets out the rights of those member states which do not yet meet the euro membership criteria, but who aspire to. Deemed ‘Member states with a derogation’, the article details those aspects of the single currency that do not apply to them and their central banks ranging from budget deficits to issue of the euro currency itself. Such states in effect have an opt-out of monetary union constraints.
Article 140 lays down the criteria for monetary convergence leading finally to the fixing of the conversion rate of the member state’s national currency to the euro. At the euro’s launch on January 1, 2002 the French franc’s rate was set at 6.55 francs, a rate deemed excessive ever since. France, whose legalistic culture forms the bedrock of Brussels constitutionalism and modus operandi, would have little problem reverse engineering the Lisbon Treaty to negotiate a soft ‘Eurexit’ over the statutory two-year Article 50 period.
But even after 63 years, France is the member state with the most heightened sense of national sovereignty. You could easily imagine negotiations with Brussels degenerating into a hard ‘Eurexit’. After all, when France left another international organization in 1966 — Nato — it was a hard Frexit with little negotiation, as I wrote in The Spectator in 2018.
So what would be the consequence of France quitting the euro quickly? When Marine Le Pen’s 2017 presidential policy was exactly that, a well-respected French think tank, the Institut Montaigne, produced a research paper entitled: ‘Leaving the euro and restoring a national currency, the franc’. Its findings are worth revisiting as the EU hits another financial and monetary crisis and French sympathy for EU and euro membership brings the Frexit debate to the surface once more.
First, it should be pointed out that like Britain, France’s metropolitan elite and academic world are predominantly pro-EU and the Institut Montaigne makes little effort to hide its point of view. Second, the research note was conducted on the premise that leaving the euro would be carried out by France’s far-right leader Marine Le Pen; a politician never having held governmental office, distrusted by France’s industrial and financial elites and whose defense of her euro-exit policies in the presidential campaign were blatantly weak. How different the analysis might be today if Eurexit were the policy of Emmanuel Macron. To that context must also be added the fact that the Montaigne research note bases its methodology on that of British think tanks’ assessment of Brexit, which they freely admit were negative, or very negative.
With that context in mind, the 2017 report’s predictions are not that gloomy. Their scenario is for a 15 percent depreciation of the new currency, the franc. The best case scenario is for a 0.6 percent decline in GDP in the first year (2.3 percent median; 3.2 percent worst case) and over the medium term a three percent decline (nine percent worst case).
Unsurprisingly the model — aping those for Brexit — suggests a lower exchange rate with, as a consequence, higher inflation, but it makes no allowance for an improvement in France’s exports. Divergence from Brexit scenarios is on capital flight resulting from the devaluation from euro to franc. Here the report immediately jumps to a worst case scenario by comparing the situation with Greece in 2015: the Greek government’s exchange controls, domestic bank closures for three weeks and the ability of citizens to withdraw €60 ($65) per day maximum. Comparing the sixth largest world economy with Greece is unconvincing.
So would an exit from the euro be so unmanageable for France? The European Union talks a great deal about the single currency; in reality the euro is a common currency, member states having retained their 19 functioning central banks and treasuries. With the euro approaching another existential crisis over debt mutualization the option of regaining national monetary sovereignty becomes all the more attractive. Indeed, France could find the decision taken for her were the euro to collapse.
This article was originally published on The Spectator’s UK website.