What happens if? This is a question that must be posed before the French presidential elections! What if it were Marine Le Pen of the Front National to become the next French president? With her strongly nationalistic program, this right-wing politician poses the greatest threat to Europe. The list of her election promises is clearly defined: putting a stop to mass immigration, the expulsion of foreigners who became criminal, assuming a protectionist course in order to boost the French economy (France first), the withdrawal from Schengen, the introduction of the French franc as a national currency, and a referendum on the European Union membership. Le Pen’s role models are, thus, evident: the United Kingdom and the USA.
What happens if? One can only surmise over the effects on financial markets. One possible scenario, for which investors should be definitely prepared, is the introduction of the franc following France’s withdrawal from the Eurozone, which in turn could mean the end of the euro altogether. The sole announcement of the referendum on the EU membership would already muddle the European political landscape considerably. A “yes” to Frexit would probably be tantamount to the beginning of an end of the European Union.
As a consequence, the flight into the Swiss franc and the US dollar would be enormous, whilst the parity of the euro to the Swiss franc would constitute merely an intermediate stop!
How could investors prepare for such a horror scenario? Those domiciled in Switzerland should increase their Swiss franc holdings at the expense of the euro, whereas the European investors should increase their foreign currency positions in US dollars and Swiss francs. And what would happen to interest rates if “the worst” were to happen?
Because the debts of the European countries are denominated in euro, a return to the original national currencies would bring about a massive increase of that debt. France, for example, would have to settle its euro liabilities with its national currency – the French franc. Only at what conversion rate?! And what would happen to the securities held by the European Central Bank? For a considerable length of time the ECB has been buying European government bonds at a rate of 60 billion euro per month. For ECB there is no exit option, as it is the sole buyer on the market. Under such circumstances the consequence would be a massive rise in interest rates.
Well, as stated before, one can only make conjectures about likely scenarios, as has been done about the election of Trump or a “yes” to Brexit. In the meantime, Donald Trump rules in the White House, whilst the UK prepares for a hard Brexit.
Last but not least:
„The foundation of a healthy organisation is a large wastepaper bin“
Kurt Tucholsky
Your Wealth at a Glance.