The French presidential election vote on May 6 is important not only to France; on it rests the future of the euro. Spain, about which the markets have been agonizing for the last few weeks, is merely a sideshow; it has only moderate levels of international debt and could at a pinch be bailed out by its European partners if necessary.
France is however both considerably larger, and when looked at closely, in poorer shape. If it gets into trouble, it also leaves a rather small group of nations with the "duty" of supporting it. If Nicolas Sarkozy is re-elected, France will probably muddle through, but his opponents' policies are sufficiently bad that if one of them is elected the collapse of both French public finances and the euro system are very likely.
Historically, France has been even modestly committed to the free market only for brief periods. Even the US Declaration of Independence, with its ringing but philosophically notorious "life, liberty and the pursuit of happiness", was polluted by foolish French ideas.
John Locke, in his 1693 Essay on Human Understanding wrote "all mankind ... being equal and independent, no one ought to harm another in his life, health, liberty and possessions". He also wrote, very sensibly, "Government has no other end, but the preservation of property." The man may have chosen his political associations unwisely in the vile Earl of Shaftesbury and the quasi-treasonous embryonic Whigs, but he knew what to fight for.
"Pursuit of happiness" was an amendment to Locke injected by the young and radical Thomas Jefferson, heavily influenced by Jean-Jacques Rousseau's Contrat Social (1762). This fatal amendment removed the protection to property given in Locke's admirable formulation and led to innumerable encroachments on property rights in the centuries ahead.
Dislike for property rights was not universal among the Founding Fathers of the United States: James Madison's Bill of Rights, in the Fifth Amendment, prevents government from taking "life liberty or property, without due process of law". Eighty years later, the Radical Republicans' Fourteenth Amendment included the same protection.
Jean-Jacques Rousseau, in essence an extreme leftist (and a very unpleasant man), merely flawed the US constitutional system through his misguided ideas. In France, where intellectuals are taken altogether too seriously, his ideas were far more powerful than those of John Locke, and hence once the Ancien Regime was overthrown in 1789 the moderates such as Mirabeau and Lafayette were helpless against the Rousseauesque force of the Jacobins.
The result has been a political system in which, through two Empires, five Republics and a Directory, property rights have never been adequately safeguarded. Only under the two restored monarchies, of Louis XVIII/Charles X (1815-1830) and Louis-Philippe (1830-1848), were property rights largely secure. However, the sensible admonition of Louis-Philippe's minister, the benign Adolphe Thiers - "Enrichissez vous" - proved helpless against the forces of renewed revolution in 1848.
France's civilization is among the great glories of mankind, its scientific advances are immense and its cuisine is superb, but economically even these great virtues have failed to make the place truly prosperous.
The problem is the innate philosophical belief that free markets are an Anglo-Saxon abomination to be regarded with deep suspicion and circumvented wherever possible by government intervention. Government spending of 56% of gross domestic product (GDP) (compared to Spain's 45%) leaves little room for the private sector to flourish, while budget deficits every year since 1974 have caused France's public debt to soar to 89% of GDP in 2012, substantially larger in relation to GDP than Spain's.
The Ecole Nationale d'Administration has produced generations of superbly trained technocrats, far ahead of Britain's late-blooming business schools, but very few entrepreneurs. According to Angus Maddison's data, France's GDP per capita, 64% of Britain's in 1900 and 76% of Britain's in 1950, had risen to 113% of Britain's GDP by 1974, its last year of budget surplus (and the year the capable rule of Georges Pompidou ended).
That's not a surprise - Britain's economy in 1945-74 was very badly run while France's under the early Fifth Republic worked rather well. However, by 2010 France's GDP was only 96% of Britain's; in the 1974-2010 period it also sank from 81% to 72% of US GDP per capita. That's a fairly modest relative decline, but against two countries that were also sub-optimally managed during the period; it thus suggests that there are deep flaws in the French economic system.
Those flaws have been demonstrated by French politicians' reaction to the euro crisis. Even a nominally center-right government, when austerity measures became unavoidable late last year, proposed budget balancing measures of which in the first year 76% were represented by tax increases and 24% by spending cuts.
As will be well known to readers of this column, while spending cuts, especially in a bloated public sector such as France's, can be economically stimulative, tax increases, by sucking money from the productive, inevitably deepen recessions. Naturally therefore, France's tax-centered austerity has resulted in a sharp decline in already anemic economic growth, with The Economist panel's growth forecast for 2012 declining from 1.1% to 0.1% since October, with growth forecast to continue below 1% in 2013.
Meanwhile, the budget deficit continues to overshoot forecasts. To a lesser degree (so far), France has chosen the tax-raising-in-a-recession solution of Herbert Hoover in 1932, and it appears likely to be equally successful.
If Nicolas Sarkozy wins the presidency on May 6, France will doubtless continue to muddle through. Sarkozy is committed to the European stabilization plan he has worked out with German Chancellor Angela Merkel, and while trader attention remains on Spain, France's deficits should continue to be financeable.
However, Sarkozy's chance of winning is reckoned at below 50% (after securing only 27.07% of the vote in Sunday's first round of the election he will face Socialist Francois Hollande (29.56%) in the decisive second round on May 6.)
All but one of the other candidates offered dangers in their own way. Francois Bayrou, the moderate, has described the EU as "the most beautiful construction of all humanity", a view extreme even by europhile standards. He would presumably have undertaken whatever austerity measures were necessary to keep France in the euro, and might even have cut public spending a little.
Marine LePen (17.9% in Sunday's vote), opposed free trade, opposed Sarkozy's pension reform (which raised the retirement age from 60 to 62) and wanted to allow the government to borrow at zero interest from the Banque de France (given the existence of the euro, what would happen when the Banque de France ran out of money is unclear). She's also anathema to the EU political class, and their hostility to her would itself endanger market perceptions of French credit.
Jean-Luc Melanchon (11% in Sunday's voting) is a leftist of truly spectacular intensity, who favors a Hugo Chavez-style "citizens revolution". He also favors capping annual earnings at 350,000 euros (US$460,000). Needless to say, a French debt default would be inevitable with him in charge, and the wholesale revision of European arrangements which he favors would doubtless destroy the euro.
Finally Francois Hollande, the most likely successor to Sarkozy, favors a 75% top rate of income tax, the reversal of Sarkozy's pension reforms, and a substantial increase in public spending. He also enthuses his followers by calling for the "Spirit of '81", referring to the first election of Francois Mitterrand.
The policy of Mitterrand's first two years, socialism in a fairly pure form, resulted in three devaluations of the franc and a sharp increase in unemployment. It also led to bank nationalization, after which Guy de Rothschild uttered the immortal line: "To be a Jew under Petain [the French Vichy Republic wartime leader] was bad enough, but to be a banker under Mitterrand, c'est insupportable."
If markets had full confidence in French credit, a Hollande victory would doubtless be manageable. However they don't, and nor should they. A run on French government debt would be inevitable and would be accompanied by further attacks on Italian and Spanish debt.
At that point, the destruction of the euro would appear certain - there is simply not enough of a base of soundly run countries to bail out France, Italy and Spain simultaneously. Once the euro had disappeared (or had become a "strong currency" bloc led by Germany) French debt default would not be inevitable - the country would simply suffer a moderate collapse in the currency, as it did initially under Mitterrand.
Italy in that event would probably be closest to default because the Mario Monti government, imposed by the EU, would collapse and the Italian unions would then force policy leftwards. Spain, on the other hand, might well survive, since its current government is competent, its public debt is moderate and its problem is mainly one of the latter stages of a property collapse, concentrated in the banking sector.
Thus the good news for the rest of us is that a Hollande victory would not inevitably cause the collapse of the entire global banking system through an outright French default. And a break-up of the euro, which once again allowed the sillier European countries to be foolish in their own way, without bailouts, might well be a good thing in the long run. However, it will do nothing for the living standards of France itself.
All depends on France. But if French political developments cause the collapse of the euro and a major global recession, we will be able to blame the misguided 18th century philosophers whose teachings prevented France from ever truly adopting a free market economy.
The solution is to ignore intellectuals. As Keynes said "Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back." The Anglo-Saxon tradition of distrusting theoretical constructs is nowhere more valuable than here.
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