The final game for the Eurozone begins

The early elections for the French parliament could have a significant impact on the euro zone. President Emmanuel Macron surprisingly announced an early election for the Assemblée nationale following the defeat of his party and the clear victory of the right-wing Rassemblement national in the European elections. The possible result, namely a new prime minister from the very right or very left political camp, would probably put the painstakingly stabilized monetary union under great pressure again.

The euro countries are burdened by a high debt burden

In order to keep an incomplete monetary union like the Eurozone functioning, where there is a common monetary policy but no common fiscal policy, the members need a strong political will to cooperate due to their different national cultures and interests. This has mostly been the case in recent years – and yet the European Central Bank (ECB) had to step in as a cleaner to calm the debt crisis in 2012. However, the will to cooperate is likely to decrease in the coming years due to the strengthening of the political fringes in Europe.

Parties on the right (and left) fringe are generally even more opposed to the fiscal policy guidelines agreed in the Maastricht Treaty than their counterparts in the center. They would often prefer a Europe of fatherlands to an increasingly closely knit EU with a central government in Brussels. They see the value of the EU primarily in free trade and want to retain full national freedom of action in budgetary policy. However, a common currency such as the euro is hardly compatible with this.

The strengthening of the political fringes in France, Italy and several other Eurozone countries is also happening at a time when national debt is already very high and compliance with the Maastricht criteria is a long way off for many members. This is why the EU Commission has recently even initiated excessive deficit procedures against France, Italy and other Eurozone members, and the International Monetary Fund (IMF) has already warned of a structural weakness in public finances in the Hexagone.

Three safety nets for the euro zone

This is a very weak basis for the election promises made so far by the extreme right and left in France, such as the reversal of Macron’s pension reform. According to the think tank Institut Montaigne, the promises would cost both political sides a good 100 billion euros in additional spending. The financial markets are following this development closely, which is why the risk premiums for French government bonds have recently risen significantly and there has been a setback on the French stock market.

There are now three safety nets to ensure the cohesion of the Eurozone. Firstly, ideally all members should adhere to the contractually agreed budget criteria. However, this has proven to be illusory from the start. Secondly, rescue packages were created during the sovereign debt crisis and the period afterward. All member states are responsible for these. However, only those with a reasonably solid budget policy are credible, such as Germany, the Netherlands and Austria.

Thirdly, the ECB now has several government bond purchase programs in place to protect indebted countries from pressure from the financial markets to pursue sustainable budgetary policies. However, it should not be taken for granted that the ECB will once again come to the aid of a government that is politically very far to the right. The central bank could also attach strict economic conditions to aid – which would probably be met with great indignation in France or Italy.

The ECB needs political backing

The rescue packages and the ECB purchasing programs also ultimately require the political support of the economically solid member states. But even in these, the forces on the right-wing political fringe have grown significantly. Their representatives are much less willing to support economically less solid euro countries, which are mostly located in the south of the monetary union.

However, if the willingness to cooperate in the euro area decreases among both the recipient and donor countries, the end game for preserving the euro could begin. Although all those involved are certainly aware of the political importance and the advantages of a common currency, the outcome of the game is uncertain.