

Market Analysis
In 2016, Jean-Claude Juncker, then President of the European Commission, justified Brussels' leniency towards France regarding EU budget rules with the simple explanation, "Because it's France." This leniency persisted even as the EU faced a sovereign debt crisis that nearly collapsed the euro and forced smaller, more indebted countries like Greece and Portugal to implement severe austerity measures.
However, this tolerance for French exceptionalism may end if France's snap election results in a eurosceptic, far-right government. Such an outcome could strain relationships with other European nations and challenge the euro's stability.
Marine Le Pen's National Rally (RN) claims it would not disrupt the French budget, yet doubts remain about how it would finance its expensive spending plans within the eurozone's new budget rules and whether the European Central Bank (ECB) would intervene if financial markets react negatively to France.
"If a country can just ignore the rules and be helped by the central bank, you'll get a lot of doubts about the future value of the euro and the future cohesion of the euro," said Holger Schmieding, an economist at Berenberg.
Although concerns about France are not officially on the agenda for Thursday's EU summit, the RN's lead in the polls for the two-round vote starting June 30 is undoubtedly on the minds of President Emmanuel Macron's fellow leaders.
Senior German government sources expressed dismay over Macron's unexpected decision to call elections, which could potentially bring an RN-led government to power. One source likened it to former UK Prime Minister David Cameron's risky Brexit referendum.
In Italy, despite its own significant debt, there is a mix of Schadenfreude and fear that a French crisis could have repercussions across the Alps, according to Francesco Galietti of the political risk consultancy Policy Sonar.
Otmar Issing, the ECB's first chief economist and an architect of the euro, described the debts of Italy and France as "a sword of Damocles hanging over the monetary union" that must be addressed before it falls.
Greece is also insisting on adherence to EU rules, with central bank governor Yannis Stournaras emphasizing that all member states must comply.
Polling suggests that the RN could become the largest party, potentially leading to a challenging "cohabitation" with Macron until the 2027 presidential election.
France's fiscal credibility is already under scrutiny, with the International Monetary Fund questioning how it plans to reduce a budget deficit of around 5.1% this year and its credit rating downgraded by two agencies.
France's fiscal issues predate Macron, with budget deficits exceeding the EU-mandated 3% for most of the 25 years since those rules were established. Brigitte Granville, an economist at Queen Mary University in London and author of "What Ails France?" noted that France's rejection of German proposals for more political union in the 1990s was driven by a desire to maintain financial sovereignty.
Granville expects the RN, which has moved away from calls to leave the euro, to moderate its plans enough to satisfy Brussels if it gains power. "They don't have a choice unless they want to leave the euro," she said.
Investor concerns have eased, with the premium on 10-year French bonds over German bonds at just 70 basis points, compared to peaks of 190 points for France and nearly 560 points for Italy during the 2011 debt crisis. ECB chief economist Philip Lane told Reuters that the movements in the French bond market did not appear "disorderly," which is a condition for ECB intervention.
Analysts point to cautionary examples like Greece, where a left-wing government was pressured into submission, and the UK, where Prime Minister Liz Truss had to resign after unveiling a budget that rattled investors.
The ECB has tools to prevent contagion from a French crisis by buying bonds from other compliant countries, potentially isolating Paris in times of need. Ewald Nowotny, a former ECB policymaker, suggested that the ECB might intervene if French problems had negative spillover effects on other countries.
An EU official cited Italian Prime Minister Giorgia Meloni's moderation of her anti-EU rhetoric as a model for France. This approach has helped Italy stay on good terms with the Commission and financial markets despite its high deficit forecasts.
Jeromin Zettelmeyer, director of the Bruegel economics think tank, noted that RN's rhetoric so far does not indicate a desire for major conflict with the Commission that could trigger a financial crisis. However, he warned that if RN officials held key government positions, they could hinder EU initiatives on energy market reform, the green transition, and capital market competitiveness.
"If the far-right gets elected, that is bad news for EU integration because they would control the government positions involved in most dimensions of EU policy-making," Zettelmeyer said. "The question is whether that is reversible or existential."
Paraphrasing text from "Reuters" all rights reserved by the original author.