Why the French far-right’s plan to return to the franc is doomed to fail

The French far-right, led by Marine Le Pen’s National Rally party, advocates for France to exit the eurozone and reintroduce its national currency, the franc. They believe this move will allow France to regain economic sovereignty, shield its industry from foreign competition, and control monetary policy. However, this proposal seems unrealistic and potentially harmful, especially considering France’s recent trade deficit and inflation rates.

The Trade Deficit Problem

The Trade Deficit Problem in France during 2022 was more pronounced and complex than initially perceived. This period saw the French economy grappling with a substantial trade deficit in goods, which reached a historic €164 billion, about 7% of its GDP. This significant deficit was primarily driven by the escalating energy crisis. In particular, energy costs soared to €115 billion, up from €45 billion in 2021. This spike in energy costs accounted for a remarkable 86% of the year-on-year deterioration in the trade deficit. The surge in energy prices was largely due to global factors such as Russia’s invasion of Ukraine, persistent supply chain tensions, and the consequent inflationary pressures.

One of the most impactful aspects of this trade deficit was the enormous increase in energy imports. Gas imports, for example, increased by 248% to €59 billion, while crude oil imports rose by 99% to €33 billion, and petroleum products by 60% to €38 billion. These figures underscore the heavy reliance of France on energy imports and the vulnerability of its economy to global energy price fluctuations.

Despite these challenges, the French services sector exhibited robust performance, generating a surplus of €50 billion. This was driven by the accelerated recovery in sectors like tourism, which contributed an additional €14 billion, and the strong performance of transport companies and financial services. However, the services surplus was not sufficient to offset the goods trade deficit.

Looking at the broader picture, France’s main trading partners are within the European Union, with 55% of its exports destined for EU countries, illustrating a strong economic interdependence within the region. Despite the trade deficit, France remains the 6th largest exporter of goods and services globally, with 144,400 French companies actively exporting.

The situation is further complicated by the fact that the production capacity in the industry sector has been diminishing since the 2008 crisis. This has led to an increase in the import content of French growth, further widening the balance of goods deficit.

In response to these challenges, the French government has been focusing on strategies to improve its trade balance. This includes supporting the growth and internationalization of SMEs, maintaining the attractiveness of the French economy, and pursuing reindustrialization strategies, as highlighted in the France 2030 plan. These efforts aim not just to bolster foreign trade but also to enhance France’s global influence and economic resilience.

The Inflation Problem

In 2022, France faced a significant inflation problem, with consumer prices accelerating sharply throughout the year. The annual inflation rate reached 5.2%, a marked increase from the 1.6% in 2021 and 0.5% in 2020. This surge in inflation was driven predominantly by a sharp rise in energy prices, which increased by 23.1% on average, following a 10.5% rise in 2021. The energy sector was notably impacted, with petroleum product prices rising by 29.0%, diesel by 29.0%, petrol by 15.8%, and liquid fuels by an astonishing 66.0%. Gas prices also rose significantly, by 40.9%, and electricity prices increased by 7.4%.

The transport services sector also experienced price growth, with a 10.4% increase overall. This included significant hikes in airfares (22.9%) and rail transport (9.3%). Road transport prices rose by 8.4%, particularly in passenger transport by bus and coach, which saw a 10.9% increase.

Food prices also saw a notable acceleration in 2022, rising by 6.8% on average, compared to a mere 0.6% increase in 2021. Fresh food products experienced a 7.7% increase in prices, while other food products rose by 6.6%.

By December 2022, the Consumer Price Index (CPI) indicated a year-on-year increase of 5.9% in consumer prices, slightly down from 6.2% in the previous month. This decrease was attributed to a slowdown in energy prices and, to a lesser extent, service prices. Nonetheless, the Harmonised Index of Consumer Prices rose by 6.7% in December 2022, compared to 7.1% in November.

French Finance Minister Bruno Le Maire projected that inflation would continue to trend downwards over the course of 2023, although he anticipated that inflation would remain high until mid-year before starting to fall. The decline in energy prices in late 2022, owing to a drop in wholesale gas prices across Europe amid high temperatures, suggested a potential easing of inflationary pressures.

However, these inflationary trends have had a significant impact on consumer purchasing power and confidence. INSEE reported a slight drop in consumer confidence, reflecting rising concerns about unemployment, finances, and inflation. The reduction in purchasing power has also contributed to social tensions, as evidenced by the re-emergence of movements like the yellow vest anti-government protests.

In the context of this inflationary environment, a hypothetical reintroduction of the franc in place of the euro could exacerbate the situation. Such a move could lead to currency devaluation against the euro and other major currencies, making imports more expensive and further escalating inflation. This would erode the purchasing power of households and businesses, reducing their confidence and spending. Additionally, leaving the euro would mean losing the stability and credibility of the European Central Bank’s monetary policy, potentially increasing the risk of monetary financing of the public deficit and further fueling inflation.

Conclusion

The proposal by the French far-right to revert to the franc appears impractical and fraught with risks. It overlooks the complexities of France’s economic situation, particularly its trade deficit and inflation concerns. The move could lead to severe economic repercussions, including a trade and debt crisis and runaway inflation, impoverishing citizens and businesses. It could also isolate France from its European partners and the global economy, undermining its political and strategic interests. The euro, contrary to being a problem, acts as a shield against external shocks and a lever for France’s influence and prosperity.