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France, Portugal and the death of the Euro

FRANCE, PORTUGAL AND THE DEATH OF THE EUROWith a high public debt and deficit in France, how can right-wing and left-wing populists fulfill their promises without destabilizing the Euro?

The campaign promises of the French right and left are very expensive, with retirement at age 60, increase in the minimum wage, tax exemption for young people. The costs to the now empty public coffers could reach several billion euros. Where will this money come from?

For Friedrich Heinemann, Leibniz Center for European Economic Research (ZEW), the promises reflect the radicalization of politics. “These are completely unrealistic economic programs. They are not for the French economy as it is today”, says the expert, in an interview to Deutsche Welle. The EU's second largest economy has debts of 110% of GDP and the budget deficit in 2023 was 5.5%, far from the ceiling defined in the Maastricht Treaty, of 60% and 3%. And it will get worse: The electoral promises of the left and right could generate additional expenses of 20MME per year to the public coffers. What will the EU do if a right-wing or left-wing government in Paris ignores its rules?

“There is no plan B”, says Lorenzo Codogno, former boss at the Ministry of Finance, professor at the London School of Economics. Italy's situation is worse, the deficit in 2023 was 7.4% of GDP and public debt is around 140% of GDP, but Giorgia Meloni's government is solid. Lorenzo does not foresee the fall of the euro, but the blockade, which would make political initiatives unfeasible. EU institutions will be left in an impasse, where little works.

The US-China trade war and unstable geopolitics, with two conflicts on the EU's borders, pose problems. He sees the euro damaged, perhaps a weak currency. France will be the first country to ignore tax rules, says Lorenzo. Previously, violations of deficit/debt rules did not have major consequences for the European Central Bank. This is the problem that the ECB created by saying we are here to help.

For Heinemann, the Commission was submissive to indebted States, a structural flaw of the eurozone. The Commission is not suitable as a judge of the debt of its member countries, as it is always making deals. Ideally, the European Fiscal Council would monitor debts and assess whether the Commission is implementing the stability pact well. “If the Commission continues to politicize, preferring agreements to rigidity, the future of the Euro will be uncertain,” he says.

I wrote earlier, all that brings uncertainty and the interest rates raises. Ten out of the EU-27 are not in Euro and will progress. Portugal, depending on the consumption level of garments, shoes and auto-parts, will have a huge increase in unemployment. I hope I am wrong.

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