Once upon a franc

Several candidates for the French presidency want currency sovereignty restored. Asset management veterans share their memories of the time of the French franc with InvestmentEurope.

The euro is dead, long live the franc! At least four candidates running for the French presidency are campaigning for a return to the former currency.

The two rounds of the election will be held on 23 April and 7 May 2017 respectively, and France’s seat within the eurozone has been one of the core topics – mostly because far-right and far-left candidates alike have threatened to leave it.

France’s withdrawal from the euro would cost at least €30bn more per year in French government debt interest, said Banque de France’s governor François Villeroy de Galhau.

Paris-based think tank Institut Montaigne has developed three scenarios taking the idea into account. Its median forecast suggests that France’s GDP would fall by 2.3% in a year and by 9% over 15 years, meaning a €180bn long term loss for the country and some 500,000 job losses.

Also, the new franc would depreciate by some 15%-20% of its value.

Convictions AM’s chairman Nicolas Duban was head of Fixed Income and deputy managing director at BFT Gestion when France switched from the French franc to the euro.

He explains the situation at that time was different to today.

“A treaty had been signed, a clear strategy and calendar were set. Some doubts had been raised around countries like Italy as to whether they would adopt the euro. However, because of the strong Franco-German relationship, we knew France would obviously drop the franc.

“The French franc/euro peg had been an unknown for some time but we focused much on spreads between European govies to assess the consequences of a move from a local to a single currency. The move raised a number of material issues but in the end, all was planned and predictable,” Duban remembers.

He adds that today “we find ourselves with no reverse plans deliberately, because the move to the euro was not supposed to be reversed one day.” Duban suspects central banks have outlined plans since the 2011 Grexit episode and kept them private, not for political reasons but for an inexorable reason which could be the end of the eurozone.

“If Greece exits the eurozone, the situation remains manageable albeit difficult but if France abandons the euro, what will be left of the eurozone? Not much,” he argues.

A relief Duban highlights from the franc-euro switch has been the removal of the depreciation threat over French short interest rates as they used to rise sharply on each depreciation threat.

For Didier Le Menestrel, chairman and CEO of La Financière de l’Echiquier (LFDE), which he co-founded in 1991, a turning point in the move from the franc to the euro was an announcement made in 1996 by former French president Jacques Chirac.

“His speech was understood by markets as a signal that France was entering the path to the euro. Following Chirac’s win in the French presidential election of 1995, the ‘Franc Fort’ policy was being tested by the markets.

“Locally there was hope Chirac would eventually take away the pressure from French interest rates after the Banque de France raised them quite sharply in previous years. Hence there was hope France could keep the franc,” he says.

Le Menestrel underlines that in the mid-1990s interest rates had been raised to follow the German Bundesbank’s rate hike after reunification, and a peg was being established around the Deutsche mark.

Also, the euro was still somewhat virtual and the European monetary system still under monitoring with the implementation of the ECU.

“I thought being sovereign on our currency was an edge but when markets cleared all doubts over Chirac’s motivation to bring France into the euro, they were raised immediately and French rates started to slowly converge with German rates in 1996 and stayed low until 2008-2009,” he points out.

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

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