Daily Management Review

Will forecasts of French economic collapse come true?


National Front’s programme calls to leave the Eurozone and abandon the euro, as well as to return to national currency, the French franc, pegged to the euro. At that, the government is supposed to be able to conduct a competitive devaluation, which would facilitate orderly and smooth transition to the new currency.

Blandine Le Cain
Blandine Le Cain
However, there is a problem. Analysts believe that this will not work, since there is no soft and organized way to get out of the Eurozone. It is simply impossible as this will be the biggest event in history and will have a domino effect across the Eurozone. Undoubtedly, the euro will suffer from such a risk, so pegging the new currency to the euro and subsequent events may be a mistake. Both currencies may face collapse, said experts.

Risks are obvious even now. Spread between yields on French and German bonds reached its highest level since 2012, despite the massive program of quantitative easing pursued by the European Central Bank. ECB bought French bonds worth over 255 billion euros.

Illusion of a possible orderly exit from the Eurozone ignores the fact that the French financial system, which has assets three times bigger than GDP of France, will be severely damaged by consequences of leaving. The country’s financial system is already suffering from weak performance of net income and bad loans, which reached 160 billion euros. Experts point out that it might even collapse, if total volume of bad debts and losses in portfolio of banks "eat" their capital base. This will inevitably lead to control over capital flows, just like in Greece, and monitoring of withdrawals from bank accounts, as enterprises will lose support of the ECB.

For France, exit from the Eurozone would also mean collapse of the country's pension and social systems that are funded by sovereign bonds. This will annihilate savings of millions of people in the country, and will also give rise to a wave of bankruptcies of small French companies. Furthermore, experts remind that over 40% of France's national debt is owned by French investors, retirees and organizations that will suffer losses due to default.

Therefore, there is no chance for an organized and neat exit from the Eurozone, analysts say.

Projections and Reality

However, some experts believe that not all predictions will come true, and even those projections, which seemed to be based on indisputable facts, often turn out to be meaningless in reality – enough to mention Brexit and Trump’s victory in US elections.

Many predictions on the British referendum’s results argued that the country would enter into a recession already in 2017 against a background of uncertainty associated with Brexit. Yet, optimistic economic data shows that these forecasts have not come true. At the same time, independent Office for Budget Responsibility forecast that the budget deficit will be reduced from 55.5 billion pounds in 2016-2017 financial year to £ 21.4 billion in 2018-2019, after which it will become profitable.

Before the referendum, however, projections of Brexit’s negative consequences prompted to think that the British would vote to remain in the EU. Two days before the referendum, the Betfair betting exchange assessed probability of Brexit opponents’ victory at 75%. This was stated despite the fact that numerous public opinion polls fixed prevalence of Euroscepticism. Eventually, as we know, EU opponents won with solid 52%.

At the moment, there is still uncertainty about effects of the UK leaving the European union. However, as experts note, disaster and collapse of the economy, which were predicted by many analysts before the referendum, did not happen. The country's economy is still afloat, and it is likely that the financial system will cope better than expected.

As for elections in the US, there was a huge number of forecasts and surveys. Hillary Clinton won all the debates. Analysts, experts, and even the market favored the candidate of the Democratic Party. Nevertheless, everyone knows the result: the presidential election was won by Donald Trump, which, in turn, led to panic in the markets and consternation of many political leaders around the world.

These two events give grounds to assert that predictions are not always accurate, and no one should completely rely on them. The same goes for forecasts for the French elections. It is possible to make forecasts, taking into account all factors, but whatever forecasts are, the reality may be a great surprise.

source: cnbc.com