Our Opinion: 2017

Le Pen sets out her ‘commitments’ as France prepares to vote

The French electorate goes to the ballot box this year to elect a president, parliament, and a section of the senate. Its decisions could have profound implications for the prospects for the Euro and the European Union.

The publication of the 144 commitments to the French people gives greater clarity about the platform Le Pen and her party will be running on. The tone has been softened compared in order to appeal to a wider spread of voters. However, the agenda remains populist, focusing on control of immigration, reducing the impacts of globalization, and placing the interests of the French people first. However, what will have captured investors’ attention is the anti-euro and EU stance. Frexit – a French exit from the euro – is now the official policy of Le Pen.

It is too early to draw firm conclusions about the likely outcome of the presidential race. However, it is a distinct possibility that Le Pen will make it to the second round of elections.

Le Pen’s commitments include:

  • “…restoration of a national currency,” which can only mean leaving 
the euro (few details on how this would work, or the time frame involved). Reform of the EU that would see a return of border control and supremacy of French law. If rejected, a referendum on continued EU membership would be held.
  • Leave the European banking union, and take away the independence of the Banque de Franc (BdF). Opposition to free trade deals such as CETA, TAFTA, and other deals that may be in the pipeline.
  • Plans to reduce immigration to 10,000 per year. This would involve pulling out of the Schengen agreement.
  • Measures to promote the interests of French workers and companies, including a tax on hiring foreign employees, awarding public sector contracts to domestic firms, tougher import standards and introduction of taxes, and restrictions on foreign direct investment.
  • Lower the retirement age to 60, financial support for the young, a lowering of the tax rates for the lower bands, lower payroll taxes and support for the 35-hour week (although some flexibility is acknowledged at the professional branch level). All of these proposals look to be unfunded.
  • Institutional reform that would cut the number of National Assembly deputies to 300 (from 577 currently) and senators to 200 (from 300). Introduce proportional representation with a 30% bonus for the largest party. This will likely require a referendum.
  • Increase defense spending to 3% GDP by the end of the parliament. Leave NATO. 
At face value, unfunded spending cuts, lower immigration, and policies to shelter French firms from foreign competition are likely to be negative for the trend rate of growth for the French economy. However, these issues pale into insignificance compared to the short-term impact that returning to a national currency and leaving the EU could have on the economy, markets, the future of the EU, and the single currency. 
How likely is Frexit? 
Frexit only becomes a consideration if Le Pen wins the presidential race. Yet, even under such an outcome, the chances of Frexit in the next couple of years is very low. Our strategic partner, UBS, places this probability in the 10–20% range.

Le Pen has been vocal about her intention to hold a referendum on membership of the euro and the EU. However, this may not be so simple. To hold a referendum would require the support of the prime minister and both houses of parliament (National Assembly and the Senate. Even if a referendum were somehow held, the French public would still have to vote in favor of leaving the euro or the EU – something that also seems unlikely given that opinion polls suggest support for the single currency among public opinion.

So, it would seem that by following the conventional paths, even if Le Pen were to become president, Frexit is a very unlikely outcome.

Irrespective of legal complexities around holding a referendum and the effective likelihood of a public vote to exit the euro, a Le Pen presidency would be perceived by investors as a crisis for the EU and the euro. A potential process of currency re-denomination would include tight capital and foreign-exchange controls, as well as trigger a banking sector crisis.

The long-term challenges to France’s credit quality remain in place and the rating would at best remain stable at mid AA levels over the next few years. The risk momentum will persist rather than ease in the run up to the elections, meaning that too much exposure to France is unwise in most investment portfolios.

13th February 2017