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The European Union is set for a major currency upheaval

Marine Le Pen attends the two-day FN political rally to launch the presidential campaign in Lyon, France Feb. 5, 2017. In January, Ms. Le Pen’s party set out its policy to restore the French franc.

Robert Pratta/REUTERS

Kicking and screaming, the European Union is finally being forced down the road of currency reform. By the end of this year, the European Commission and the European Central Bank will have initiated a project, public or disguised, to partly dismantle the currency union. How do we know this? Because the political impetus that led to the creation of the euro is beginning to unravel.

Never mind Greece's virtual insolvency or the ever-present risk of an Italian banking collapse. The French presidential election is the seismic tremor that tells us how establishment consensus over the virtues of the currency union is being undermined.

Marine Le Pen, the anti-immigrant National Front candidate, is the battering ram. Previously, her tirades against Brussels's strictures on deficits and public spending used to skirt around the difficult problem of what to do about the euro. However, in January, her party set out its policy to restore the French franc. She would convert 80 per cent of France's €2.1-trillion ($2.9-trillion) national debt into new francs on a one-to-one basis, thus restoring France's economic sovereignty and competitiveness at a stroke. The debt markets are not very keen, French government debt yields jumped higher and S&P described the strategy as potentially the greatest sovereign default the world has ever known.

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Nonetheless, Madame Le Pen's nationalist, statist and anti-immigrant rhetoric goes down well with urban blue collars and in disgruntled rural communities. She is the favourite to win the first round of the presidential election in May, but the polls (and the conventional wisdom) suggest that in the final vote, Socialists and supporters of the establishment right wing Les Républicains party will combine forces to keep out the National Front; this has been the norm since 2002 when Ms. Le Pen's father, Jean-Marie, beat the Socialists in the first round but failed to survive in the runoff.

But now it's different. François Fillon, the candidate for Les Républicains, was briefly the favourite to win but is now a busted flush, accused of putting his wife and children on the state payroll during his tenure as Prime Minister. That leaves Emmanuel Macron, the independent candidate, to quietly undermine the single currency's foundations. A former economy minister in President François Hollande's administration, he has set up his own party, En Marche, positioning himself with studied political vagueness midway between the Socialists and Mr. Fillon. More interesting than his pronouncements on the need for budget savings is his recent statement about the euro: He reckons it won't survive 10 years if Germany and France fail to agree structural reforms.

Put this into perspective: The two candidates likely to face each other in the final round of France's presidential election both think the euro has failed.

Mr. Macron's prescription is reform, not the restoration of the franc. His analysis concurs with the euro's main critics: It has failed because Europe's economies have not converged and it has benefited German exporters at the expense of weaker euro-zone economies. However, Mr. Macron's solution is not to dismantle the union, but fiscal convergence: a combined euro-zone budget with economic transfers from strong to weak member states. In other words, something more like the U.S.- or Canadian-dollar zones.

There is not a cat in hell's chance of Chancellor Angela Merkel supporting such a convergence project. The protests against bailouts during the last Greek fiscal crisis have now tripled in volume. Ms. Merkel's government is in full political retreat: Threatened with a right-wing resurgence, she has reversed pedal sharply on accepting migrants and she knows there is no political appetite in Germany for a transfer union in which German taxpayers pay for the so-called "Club Med" of indebted Southern Europeans.

Of course, the upstart French presidential candidate must know that Germany cannot deliver a transfer union. What matters politically is not Mr. Macron's proposal but his very public acknowledgment that the euro is failing.

Criticism of the euro for its economic failings is so widespread that we tend to forget why it came into existence.

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It was always a political project, an idea born in France and ultimately imposed on Berlin in a quid pro quo after the fall of the Berlin Wall. Paris feared a surge of German economic power after reunification and the single currency was seen as a means of keeping Germany under French political control. The euro is above all a political project, intended to push the core EU states into more convergence

We are now in new territory: The country that was the political seedbed for a united Europe is now preparing for an election in which the leading candidates are calling for an end to the euro or unachievable reform. Even if the moderate candidate wins, the currency union is set for major upheaval.

Carl Mortished is a Canadian financial journalist based in London.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More


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