An extremist backlash in France could eventually bust Europe’s economies

France is in a state of shock, its democracy defiled by barbaric, bloodthirsty terrorists. Journalists and the policemen protecting them have been murdered. A new form of terrorism has reached the West, with quasi-military operatives hunting down their targets.

In the short term, the public, in France and abroad, will want to know that the authorities are in control. They will want to see the perpetrators punished mercilessly and measures put in place to prevent more attacks. They will want to mourn the fallen and express their disgust at those who butcher the innocent and wage war on freedom.

A further question in the weeks ahead will be whether the atrocities will have an impact on the economy and thus inflict a second round of damage on France. They are certainly likely to crush consumer confidence and may impact retail and tourism, at least until tensions begin to abate.

But even 9/11, a truly enormous event which shut the US stock market and much of the country for days, only reduced GDP for around a quarter. The lost growth was quickly recovered, despite the carnage, the personal suffering and the destruction. Its real macroeconomic impact was indirect and longer term and was triggered by the way the US and the world reacted.

The same could end up being true in France if the attacks were to decisively shift public opinion towards extremist political forces.

Marine Le Pen’s National Front and its nasty brand of demagogic populism are already polling terrifyingly well, attracting voters from the “far right” and “far left”. Her party dislikes the rich, big business, foreigners and much else besides.

She objects to all forms of globalisation, including free trade and immigration, and has toned down the fascist rhetoric, making her party more palatable to disillusioned centrists. The regional elections in March will give us an early clue to any shift in opinion. What is certain is that unless the mainstream political establishment finds a way of regaining the initiative on law and order as well as the economy, it is no longer inconceivable – though still unlikely – that she could one day win an election. This would be catastrophic, not just for the business community and for investors, but also for everybody else in France, in Europe and around the world.

A National Front victory would signal the final demise of the EU and euro: she has pledged to exit both, with the unravelling guaranteed to happen in the worst, most irrational way possible. It ought of course to be possible for clever politicians to negotiate the dismantling of the disastrous single currency in a sensible way and to replace the dirigiste, increasingly centralised EU by a pure trading block – but Le Pen’s brand of aggressive, protectionist, anti-market poujadisme would merely precipitate a monumental and entirely destructive crisis in international relations.

Her vision is the very opposite of the free-trading, decentralised Europe that British Eurorealists have long advocated. Under Le Pen’s world view, free trade and economic integration would come to an abrupt halt; the shock would be similar to the return of trade barriers that followed the Great Depression and helped to prolong and worsen it. The National Front would undoubtedly repeat the errors of the US Smoot-Hawley tariffs of 1930. A Le Pen victory would thus be bound to trigger a collapse in economic output across Europe, a banking crisis and a meltdown in the financial markets.

France’s tragedy is that it is an economic basket case, the result of decades of failed statist policies from all parties; many of its voters are thus more likely to listen to extremists’ siren voices. The economy probably grew by 0.4pc last year; expansion this year will be anaemic at best. The most recent manufacturing and services purchasing managers’ index climbed to an eight-month high of 49.7 in December – but even then the private sector economy was still shrinking slightly.

Remarkably, public sector spending is continuing to rise as a share of French GDP, a process which goes against what is happening elsewhere and which dooms the economy to permanent under-performance. State expenditure reached the equivalent of 57.3pc of GDP last year, the highest in at least 15 years, according to the OECD, and is set to dip only trivially to 56.8pc of GDP this year and 56.6pc next year.

A cripplingly high proportion of France’s resources are being allocated centrally, with political priorities and vote-buying rather than market-determined consumer preferences determining how money is spent. Bad projects prosper and good ones wither, reducing productivity and growth and destroying jobs, especially in a globalised economy.

While the supply-side reforms being pushed by Emmanuel Macron, the economy minister, will help, as will the end of the 75pc top rate of income tax, none of the changes go anything like far enough. They certainly won’t be enough to reverse the explosion in joblessness that has done so much to boost le Pen’s popularity. Unemployment in the French mainland jumped another 27,400 to 3.49m in November, up by 5.8pc over one year, a catastrophic performance.

The combination of economic stagnation, unbearably high unemployment, elevated levels of crime and disorder, a political establishment that is widely viewed as economically incompetent, immense social problems in the banlieues and a radicalised, badly integrated immigrant youth have all helped fuel Le Pen’s rise. Let us hope that the mainstream can regain the political initiative and begin to tackle France’s problems before it is too late.

Sainsbury’s woes

All in all, Sainsbury’s results were actually slightly better than expected. True, the firm had a terrible Christmas, its worst in a decade. It is also under-performing digitally, which is worrying. But its footfall held up before Christmas and it is doing well in clothing and convenience. All of Britain’s Big Four retailers are likely to have suffered like-for-like sales declines, exacerbated by deflation in grocery prices and consumers that buy lower volumes whenever they enter a store.

The real problem for Sainsbury’s is that it could be hit badly over the next 18 months if Tesco pulls off a turnaround plan. There is only one solution: Mike Coupe will have to work twice as hard just to stay still.

allister.heath@telegraph.co.uk