French Markets Surge After Euro Withstands Attack From the Right

French Markets Surge After Euro Withstands Attack From the Right

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The manic swings of the markets — first spooked by the possibility of a Le Pen presidency, then ecstatic over the apparent unraveling of that possibility — attest to the gnawing fear that the euro could still succumb to whatever blow history delivers next. The euro confronts a chronic shortage of faith in its ability to persevere, along with a surplus of threats to its existence.

In recent years, the euro has survived enough Greek tragedy to fill an Aeschylus trilogy and has had sufficient brushes with Italian banks for an opera. It has endured a global financial shock, years of regional economic stagnation and no end of cross-border political accusations.

As Ms. Le Pen appeared to see her electoral fortunes expand in recent months, the markets construed yet another direct threat to the euro’s sustainability.

Ms. Le Pen, the leader of the National Front party, has long disdained the euro as a malevolent threat to prosperity. She has pledged to convert French debt into a new national currency, an event that could begin the euro’s downfall. She has vowed to renegotiate France’s relationship with the European Union, threatening to upend the project of European integration that has prevailed on the Continent as an antidote to the brutalities of World War II.

Her strength in polls in recent weeks prompted investors to demand greater returns on French government debt, a sign that the odds of default — however minute — were multiplying. Investors had been aggressively purchasing options that offered protection against a precipitous plunge in the value of the euro.

Few gave credence to the prospect that Ms. Le Pen could actually deliver on her radical promises. Even if she were to shock pollsters and win, her party would almost certainly fall well short of claiming a majority in the French Parliament after legislative elections in June. She would be relegated to figurehead status, with governing handled by a prime minister selected by the party in command.

Still, concern in the markets underscored the fundamental defects that have long compromised the euro. It is a structurally flawed currency, one adopted by 19 nations known collectively as the eurozone, that are operating without a unified political organization.

Many argue that the euro was doomed from inception. It was conceived more as an idealistic reach for European cooperation than as a reasoned plan to manage a currency. The assumption was that shared money would spur greater European political integration.

Instead, the euro has devolved into a major source of political acrimony across the Continent.

In countries with their own money, bad economic times typically prompt governments to spend more to generate jobs and spur growth. Their currencies fall in value, making their goods cheaper on world markets and aiding exports.

But countries in the eurozone cannot fully avail themselves of those benefits. The currency comes with rules limiting the size of budget deficits. Faced with hard times, governments using the euro have been forced to intensify the hurt on ordinary people by cutting pensions and other public outlays.

The Nobel laureate economist Joseph E. Stiglitz has indicted the euro as a leading source of economic inequality that has divided European nations into two stark classes — creditor and debtor.

As Cyprus, Greece, Italy, Portugal and Spain have slid into debt crises in recent years, they have accused Germany of self-serving inflexibility in demanding strict adherence to debt limits while refusing to transfer wealth to those in trouble. Germany and other northern countries have accused their southern brethren of failing to carry out changes — like making it easier to fire workers — that would make them more competitive.

The crises have time and again exposed the structural flaws of the eurozone, and its tendency to generate more recrimination than action.

“You have a basic situation in the eurozone now where it’s like a half-built house,” said Jacob F. Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. “As long as that persists, a large number of investors are going to have existential doubts about the euro.”

The latest alarm was being set off by France, one of the euro’s charter members, and a pillar of the European Union. This was playing out against a backdrop of destabilizing events that once seemed impossible — the election of Donald J. Trump in the United States and the vote to abandon the European Union in Britain, also known as “Brexit.”

Though Ms. Le Pen had moderated her positions in recent weeks as her election has gained plausibility, her hostility for the European Union and the euro are well known.

“I want to destroy the E.U.,” she told the German newsmagazine Spiegel in a 2014 interview. “The E.U. is deeply harmful, it is an anti-democratic monster. I want to prevent it from becoming fatter, from continuing to breathe, from grabbing everything with its paws.”

In the same interview, she confirmed her desire to yank France free of the euro. “If we don’t all leave the euro behind, it will explode,” she said.

Ms. Le Pen has since muted talk of renouncing the euro in favor of adding a parallel currency, the franc. But the threatened act of redenominating French debt would almost certainly lead to a downgrade of France’s credit rating, bringing severe market consequences, said Mujtaba Rahman, managing director for Europe at the Eurasia Group, a risk consultancy based in London.

He traced a potentially calamitous string of events that could play out after a victory by Ms. Le Pen. Even before parliamentary elections, she could appoint a temporary government while serving notice that France intended to renegotiate the terms of its membership with the European Union.

“Her room for maneuver is greater than people believe,” Mr. Rahman said. “She will have interpreted her election as a massive mandate. It flows from ‘Brexit,’ it flows from Trump, and she’ll try to get as much of her agenda done while she is unrestrained.”

Even if she is stymied by political backlash, she could cause a volatile reaction in financial markets.

Around the globe, central banks, sovereign wealth funds and asset managers hold some 700 billion euros (about $750 billion) in French government debt. A Le Pen presidency could spook them into unloading some of it, increasing borrowing costs for the French government and the business world.

French banks could see consumers pull euros out of their accounts to be squirreled away elsewhere. If that became a full-blown bank run, the consequences could become global, given that France’s four largest banks are deeply intertwined in the international financial system.

Most analysts dismiss such talk as apocalyptic. The French Parliament and Constitution would severely constrain a President Le Pen. Investors would grasp that. Still, in the run-up to the first round, the costs of insuring against government default grew in Italy, as well as in France.

The fear was that if Ms. Le Pen were to win the presidency, the risks would proliferate. That would increase the costs of borrowing for businesses and households in Italy, Spain and Portugal, impeding job creation and economic activity, while perhaps forcing governments to cut services.

That could generate public anger, further stoking the fires of populism as Italy goes to the polls by early next year. That could enhance electoral prospects in Italy for the Five Star Movement, which favors dumping the euro.

In short, a victory by Ms. Le Pen would add momentum to Europe’s crisis of confidence. It would inject greater dysfunction into European institutions, rendering them even less capable of alleviating economic troubles. And more strife has in recent times translated into more support for the populist movements seeking to dismantle those institutions.

“It would devastating for the eurozone and the E.U. if she won,” Mr. Kirkegaard said. “It would certainly paralyze the eurozone in terms of almost anything for at least five years.”

But on Monday, as stock markets exulted and the euro climbed, that possibility had seemingly been rendered hypothetical.

The euro — perpetually afflicted by doubt — had dodged the latest immediate threat to its permanence.

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