Our Opinion: 2016

Uncertainty high in France

Sunday’s final round of the Republican Presidential primary may be decisive for France and Europe in 2017. The winner – either Alain Juppé or François Fillon – would be a major opponent of Front National’s Marine Le Pen next year. Investors are well advised to follow the French presidential election closely. An unlikely win by Le Pen would almost surely lead to a Trump-like or Brexit-like moment in Europe and could unsettle the EU. For now, she’s unlikely to gather the critical parliamentary mass next year that could force a referendum on the EU or the Euro.

Under France’s two-round voting system, the first round will be held on 23 April 2017. And in the second or runoff round on 7 May, voters will decide which of the two final candidates will be president.

The Socialists are suffering from historically low approval ratings, partly due to the relatively high unemployment rate and stagnating living standards. Indeed, the approval ratings for Alain Juppé, François Fillon and Marine Le Pen in the first round of the presidential election are about three times higher than President François Hollande’s, while Prime Minister Manuel Valls scores only somewhat better than Hollande. In the meantime, the Republican Party’s candidate will be determined in the primary runoff between Juppé and Fillon on Sunday. Whilst Fillon is likely to win, the race may be closer than people think.

Le Pen from the Front National is widely expected to make it to the second round of the presidential election on 7 May. She would then face a candidate from the left (Socialist Party) or the right (the Republicans). But the outsider and independent candidate Emmanuel Macron, whose manifesto is due out soon, should not be discounted.

France’s political environment is similar to the US’s and marked by the “left behind” demographic – i.e. struggling middle and working classes in a globalized world. This is illustrated by the growing popularity of Front National, which builds its strength in regions with higher-than-average unemployment. France has also suffered from terrorist attacks, while ethnic tensions and increased immigration from the refugee crisis have enflamed social grievances. Nonetheless, inequality in France is lower than in the US.

The key concern for investors is Le Pen’s wish to hold a referendum to exit the EU. Beyond that, the leader of the populist right wing party Front National has been relatively quiet on concrete election strategy.

The numerous tough reforms proposed by the other candidates will make it easy for an experienced populist like Le Pen to attack them and gather more votes. Although the other declared mainstream candidates currently enjoy a comfortable lead over her, it is expected to narrow after she becomes more active.

The race between her and the other candidates will tighten. But even if she becomes President, it is unlikely that she will be in a position to launch a referendum on the EU or the Euro in the forthcoming legislative term; it’s unlikely that Front National would reach the necessary critical mass in the National Assembly in 2017. It would need to at least double its representation on the national level from its strong results in last December’s regional elections (just weeks after the Paris attacks and during the height of the refugee crisis). A Le Pen presidency would certainly unsettle the EU even without such a referendum.

Emmanuel Macron is the former Minister of Economy, Industry and Digital Affairs. He announced his candidacy on 16 November as an independent. His profile differs substantially from the other main candidates. Although having worked as minister, he has never been elected. He presents himself as the candidate of change with his main target group being the youth. Jobs and education for the young are his key policy positions, which should help him as a centrist in the race against Le Pen.

France’s economic growth rate this year is set to be 1.3% – its highest since the euro crisis. Key drivers are a recovery in household consumption and a revival in corporate investments. However, for French standards, economic growth at 1.3% is low. The construction and export sectors are dragging down growth.

Given the expectation of a Republican-dominated parliament next year, a Republican president would likely be the best outcome for the economy. However, uncertainty is high and the elections are still a long way off.

24th November 2016