Our Opinion: 2017

Le Pen and Macron in French run off


Opinion polls have consistently shown that Macron will hold a sizable lead over Le Pen in a, now confirmed, second round run-off between the two.

Previously in French elections, the two-round electoral system has seen the anti-Front Nationale (FN) vote consolidate behind one candidate which has prevented them from gaining office. The most recent example of this was seen in the regional elections of December 2015. Back then, despite FN leading in the first round in six of the 12 regions, they didn’t win any in the second ballot. A repeat of this is likely on 7th May, with the anti-FN pro-European voters seeing Macron as an acceptable candidate to support. Thus, Emmanuel Macron is most likely to be the next president of France.

Of course, there is a sizable chance that Le Pen could turnaround her deficit in the polls.

A Macron Presidency is likely to implement his economic programme, focussed on labour reforms, taxation, and the public sector, enabling the economy to continue on its current growth path. A Le Pen presidency, is likely to deliver a very different outcome. The protectionist, anti-EU program is likely to hit the economy in a negative way. Moreover, it is likely to be felt relatively swiftly, especially if borrowing costs were to rise in response to market concerns about Frexit.

As for Frexit, clearly this will only be a consideration if Le Pen becomes president. But even then, the probability of such an outcome is low. First, there is no guarantee that Le Pen will hold a referendum; she has stated she will look to renegotiate with the EU at first. If an amicable compromise cannot be reached she would then look to hold a referendum. Second, the political and constitutional hurdles against holding a referendum on euro membership are extremely high and would require the support of parliament which Le Pen is unlikely to have. However, it is not inconceivable that if a French president wanted to hold a referendum on the subject without the support of parliament they could. So, third, even if a plebiscite were to be held, public support for the single currency remains high (estimated at 60-70% by opinion polls) so the French public are unlikely to support such a motion.

Weighing all of this up leads us to conclude that if Le Pen were to become president, the risks of Frexit are low.

Once the 7th May result is known attention will soon turn toward the assembly elections that take place on 11th and 18th June. The outcome of these elections is key for either candidate as they will need the support of parliament to implement their economic program. Polling data for these elections is currently scarce, but it seems unlikely that either candidate’s party will gain a majority of seats, which would mean that the president would be in what the French call “cohabitation” with the Assembly. This is perhaps more relevant for Le Pen, especially if she does wish to pursue a referendum on the Euro, as it will likely prove to be a significant hurdle for her.

As for Macron, given his centrist position and his background in the previous government it is likely that he could achieve cross party support for a significant part of his agenda. A grand coalition arrangement is not inconceivable.

Investors should be alert to risks that some of his ambitions are frustrated by the Assembly, as has been the case for presidents in the past.

Economic data in the Eurozone has been solid so far this year. Real activity data is pointing to growth somewhat above potential. Emmanuel Macron facing Marine Le Pen in the second round of the French presidential election should be welcomed by the Eurozone equity markets in general and the French market in particular, given the lowered chance of Le Pen winning the presidency. The prospect of a Macron presidency should provide market support because of his pro- growth economic program, focusing on labour market reforms, lowering corporate taxes, and gradually reducing the government budget deficit.

A Le Pen victory would likely rattle European equity markets, given her attitude toward EU membership. Regardless of the legal complexities involved in holding a referendum and the small likelihood of the public voting to exit the Eurozone, investors will probably worry that a Le Pen presidency would trigger an existential crisis for the EU and the euro.

23rd April 2017