THE PANIC OF ELITES IN EUROPE

France has turned even more viscerally eurosceptic than Britain over recent months, profoundly altering the political geography of Europe and making it impossible to judge how Paris might respond to Brexit, the referendum on which is two weeks away (6/23).

An intractable economic crisis has been eating away at the legitimacy of the French governing elites for much of this decade. This has now combined with a collapse in the credibility of the government, and mounting anger over immigration.  Remind you of what’s happening in the US?

A pan-European survey by the Pew Research Center released today found that 61% of French voters have an “unfavorable” view of the European Union, compared to 48% in the UK.

A clear majority is opposed to “ever closer union” and wants powers returned to the French parliament, a finding that sits badly with the insistence by President Francois Hollande that “more Europe” is the answer to the EU’s woes.

“It is a protest against the elites,” said Professor Brigitte Granville, a French economist at Queen Mary University of London. “There are 5000 people in charge of everything in France. They are all linked by school and marriage, and they are tight.”

Prof. Granville said the mechanisms of monetary union have upset the Franco-German strategic marriage, wounding the French psyche.

“The EU was sold to the French people as a `partnership’ of equals with Germany. But it has been very clear since 2010 that this is not the case. Everybody could see that Germany decided everything in Greece,” she said.

The death of the Monnet dream in the EU’s anchor state poses an existential threat to the European project and is running in parallel to what is happening in Britain.

Greece is the most eurosceptic country, followed by France.
The UK is comparable to Germany Credit: Pew

The Front National’s Marine Le Pen is leading the polls for the presidential elections in 2017 with vows to restore the French franc and smash the EU edifice. While it has long been assumed that she could never win an outright majority, nobody is quite so sure after the anti-incumbent upset in Austria last month.

“The Front National is making hay from the Brexit debate,” said Giles Merritt, head of the Friends of Europe think tank in Brussels.

“The EU policy elites are in panic. If the British vote to leave the shock will be so ghastly that they will finally wake up and realize that they can no longer ignore demands for democratic reform,” he said.

“They may have to dissolve the EU as it is and try to reinvent it, both in order to bring the Brits back and because they fear that the whole political order will be swept away unless they do,” he said.

The refugee crisis has exposed the failings of the EU construct,
a magnet without a solution Credit: Pew

Mr. Merritt said it is an error to suppose that the EU would carry on as a monolithic bloc able to dictate terms after a Brexit vote. “The British would have pricked the bubble. The Germans are deeply alarmed at how suddenly the mood is shifting everywhere,” he said.

The Pew survey shows that dissatisfaction with the EU has risen to 49% in Spain and 48% in Germany, two countries normally seen as pro-European. This is roughly the same as in Britain, though different in character and less intense.

France has always had a eurosceptic core and rejected the European constitution in 2005 by a large margin, but this mood is increasingly tied to the rise of the Front National.

Ms. Le Pen won 55% of those classed as “workers” in the latest local elections, eating away at the Left flank of the ruling Socialists with a tooth-and-claw defense of the French welfare state and a declaration of war against globalization. Her industrial strategy has strong echoes of Mussolini.

“Le Pen has attracted all the people who feel left out, the discontented from both Left and Right, and it is spreading to the middle class,” said Prof Granville.

“We are in a very dangerous phase. The French elites are extremely scared of what could happen in France if there is a Brexit,” she said.

The revolt comes as Paris battles a wave of protest against labor reform, a push that has come close to rupturing the Socialist Party. The measures were rammed through by decree to avoid a vote.

Scenes of guerrilla warfare with police on French streets have been a public relations disaster on the eve of the Euro 2016 soccer championship. The industrial clashes have mostly subsided but all-night talks to resolve the rail strike failed to break the deadlock. Rail workers are demanding a maximum 32-hour week.

Eric Dor from the IESEG School of Management in Lille says powerful vested interests have made France almost unreformable. “There is no fundamental consensus on what needs to be done. It is clash between two conceptions of society and that is why it has turned so violent,” he said.

Mr. Dor said the labor reforms have been watered down and are a far cry from the Hartz IV laws in Germany in 2004, which made it easier to fire workers and screw down wages. The key bone of contention is a plan for company-level wage bargaining, now standard practice in vibrant economies.

Prof. Granville said the French establishment has never come to terms with the meaning of monetary union. “Either we stay in the euro or we don’t. If we want to stay – and the euro is a religion for these people – we have to reduce labor costs, but they won’t do it. We still have tax laws that predate the French Revolution,” she said.

France’s social model is funded by punitively high taxes on labor. The unintended effect is to create a destructive ‘tax wedge’ that makes it too costly to hire new workers. It protects incumbents but penalizes outsiders, leading to a blighted banlieue culture of mass youth unemployment.

There are 360 separate taxes, with 470 tax loopholes. The labor code has tripled to 3,000 pages since 1985. The unions command only 7% membership but have a legal lockhold on companies with over 50 employees. “It is an inferno that sadly lacks the poetry of Dante,” said Prof Granville.

Failure to reform has come together in a toxic cocktail with the destructive effects of monetary union. The damage has been less dramatic than in Greece, Portugal, Spain, and Italy, but the insidious effects are powerful.

France’s has lost 20% in unit labor cost competitiveness against Germany but is stuck in the same exchange regime. The result is a hollowing out of French manufacturing and a loss of 60,000 industrial jobs a year.

The eurozone’s monetary squeeze and premature fiscal tightening from 2011 to 2014 stopped recovery in its tracks and led to a deep double-dip recession. This mix of austerity was self-defeating, pushing French public debt to 100% of GDP.

It led to a deflation-trap that made it even harder to claw back lost ground. The saga is much like France’s slow torture under the Gold Standard – and Pierre Laval’s infamous deflation decrees – in the 1930s. That episode ended in the election of the Front Populaire and near civil war.

Mr. Hollande is ensnared by his own campaign rhetoric four years ago, when he sold 1970s nostalgia and pledged plans to raise public spending. “Finance is my enemy,” he said.

He failed to grasp the nettle of reform in the first months of his presidency. His credibility is now so low – with 84% expressing a “total lack of confidence” in the latest TNS-Sofres poll – that France is effectively stuck in limbo.

Public spending is 57% of GDP, a Nordic level without Danish or Swedish levels of labor flexibility. Unemployment is still 10.2% even at this late stage of the global cycle, and has never returned to its pre-Lehman levels.

Time is running out for the defenders of the French status quo. It is hard to see how the existing order could survive the double-punch of a Brexit vote and a fresh global downturn in quick succession.

Ambrose Evans-Pritchard is the International Business Editor of the London Telegraph.

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