Greg Ip 

PARIS -- In France as in most of the West, politics has long been dominated by a left wing and a right wing party. This year an earthquake is in the making: If current polls are borne out, neither the left-wing Socialists nor right-wing Republicans will make it past the first round of the presidential election in April.

Instead, two parties that have never held power will proceed to May's runoff. And both agree their contest isn't over traditional issues of right and left, such as taxes and spending. Marine Le Pen, leader of the National Front, says it's between "globalists and patriots" or, as supporters of Emmanuel Macron, l eader of the upstart En Marche! ("Forward!") put it, "open and closed."

That makes the French election the starkest and most consequential contest yet in the world's ideological divide between nationalism and globalism.

The nationalists who led the British vote to leave the European Union and put Donald Trump in the White House operate within established conservative parties and thus co-exist uneasily with traditional free traders. The National Front arose outside the mainstream and espouses a more uncompromising, coherent rejection of economic, geopolitical and cultural integration. Ms. Le Pen wants to take France out of the EU and the euro, which could precipitate the collapse of both.

France makes a singularly appropriate battlefield over nationalism. The modern nation state can be traced to the Peace of Westphalia in 1648 when France, putting national interest ahead of religion, sided with Germany's protestant princes to contain the power of the Catholic Holy Roman Empire. Three centuries later it switched places, choosing, with Germany, to subordinate sovereignty to an ever closer European Union.

Jean-Marie Le Pen led the National Front from its creation in the 1970s as an authoritarian reaction to waning French colonial power, but his xenophobia and anti-Semitism repelled mainstream voters. His daughter Marine has sought to expunge those elements and now focuses on European integration as the source of France's ills.

French unemployment, at 10%, is more than double Germany's. The National Front zeroes in on the euro's role. Between the euro's creation in 1999 and 2011, French labor costs rose three times as quickly as Germany's thanks to the latter's labor market reforms and export-friendly tax changes. With an independent currency, France might devalue to eliminate its cost disadvantage. In the euro, it couldn't. This transformed a French trade surplus equal to 3% of GDP in 1998 to a deficit of 2% in 2016.

"The euro has not only killed one of the engines of the French economy...it caused our economy to bleed one million industrial jobs," says Mikael Sala, an economic adviser to Ms. Le Pen. The euro, he says, is a "political experiment" that forces the wages, corporate taxes and welfare policies of member states to converge. "Our welfare state may be costly but it's part of our identity."

The National Front yearns for a return to the state-directed capitalism, or dirigisme, of the 1960s. It would require life insurers to devote 2% of their assets to French venture capital, let the French central bank print money to finance government deficits, favor French firms in government purchasing, require "Made in France" labels and impose "smart protectionism" against cheap imports. All of that is illegal within the EU.

Analysts predict a Le Pen victory would tank stocks and cause interest rates to rise as investors, fearing redenomination, flee. Mr. Sala disagrees, and predicts a free-floating franc may depreciate only 5% to 10% depreciation by a free-floating franc is "reasonable." Still, he doesn't rule out capital controls to deter capital flight.

History and theory suggest that this won't restore France's industrial glory. Like Mr. Trump's, Ms. Le Pen's plan to bring back factory jobs is fighting the march of automation and shifting consumption. The competitive benefit of devaluation is eventually neutralized by inflation.

"Suppose France gets out of the euro," says Philippe Martin, an economist at Sciences Po university advising Mr. Macron. "Do you think for one second Italy and Spain will remain? Of course not. So we devalue by 20% and they will devalue by 30% or 40%. In the end it won't have any effect on long-term growth or productivity and will deter investment. France's structural problems -- education, training, rigidities of the labor market -- have nothing to do with the euro."

And then there are the transition risks. "After the financial crisis of 2009 and the eurozone crisis of 2010, a third financial crisis of our own (French) making would be a disaster," says Mr. Martin.

With support for the conservative candidate François Fillon, a former prime minister, undermined by scandal, establishment hopes are riding on Mr. Macron, a former economy minister who quit the socialist government last year. He would seek to deepen eurozone integration and press Germany to adopt fiscal policies that reduce its trade surplus, while liberalizing French labor markets to bolster competitiveness.

It won't be easy. Germany has rebuffed calls to bend its fiscal policies to its neighbors' needs, and French legislators watered down labor market revisions once championed by Mr. Macron.

Polls suggest Ms. Le Pen will lose -- but with the biggest vote share since the party's founding. If the globalist Mr. Macron fails to revive France, the nationalists will be ready to pounce again.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

March 29, 2017 13:31 ET (17:31 GMT)

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