By Keith Weiner
The Mathematics of Frexitology
This was also a holiday-shorted week. As we write this, the big news comes from the election in France. The leading candidate is a banker named Emmanuel Macron, with about 24% of the vote in a 4-candidate race. The anti-euro Marine Le Pen came in second with just over 21%. From the sharp rally in the euro, which was up about 2% at one point, we assume that observers believe the odds of France leaving the euro have just gone down.
The political program of Emmanuel Macron: ”Hamon is lost – Fillon is burned – It’s either me, or the blonde of the FN” – “Obviously, if you look at it like that…” A concise summary of how one becomes president in France these days – provided the polls are not in error. It wouldn’t be the first time – don’t forget the “Bradley Effect”, which is probably even stronger in Le Pen’s case than it was in Trump’s. [PT]
Of course, France (and the other European countries) faces a false alternative (well they ought to consider Keith’s gold bonds proposal, but that is not on the table). Staying with the euro means ongoing wealth destruction, and a downward slope that leads to nowhere good. However, that raises the question. What would happen if they were to try to leave?
We believe that no matter which theory prevails, and what measures are taken by les dirigistes (central planners), all roads lead to an accelerated default of trillions in bad credit. To understand why, consider the balance sheets of the banks and other financial intermediaries in France.
Suppose the new French franc goes down relative to the euro (we won’t address here whether it is likely to go up or down). This means that any French entity who had borrowed from a bank in Germany or Italy or Spain now sees its liabilities spike up relative to its assets which are now re-denominated in francs. It would not take that much leverage or a very large decline in the franc to cause some major bankruptcies. The initial round of bankruptcies could cascade causing yet other bankruptcies in a highly interconnected financial system.
The sum of all fears. In reality, it is not so easy for a French president to arrange for France to leave the euro zone or the EU, unless he or she is supported by a significant majority of representatives in parliament. Without such a majority, a French president cannot even call for a referendum if the outcome could potentially result in a change to the constitution. France’s EU membership is indeed enshrined in the French constitution. We conclude it would be virtually impossible for Marine Le Pen to exit the EU or the euro, and we would suggest she is actually aware of that fact. Exiting the euro would be such a huge pain in practice, she probably doesn’t really want to do it anyway… (as an aside: she is a dirigiste as well). …read more
Source:: Acting Man
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