France at the crossroads
“French elections
– ponder the
imponderable?”
17 February 2017
Ann-Katrin Petersen
Global Capital Markets & Thematic Research
France at the crossroads
Understand. Ponder the imponderable?
At the political crossroads: main candidates cover the whole spectrum from the extreme left to right
 Two months ahead of the French two-round presidential elections on April 23 and May 7, uncertainty as to which future path the second-largest
Eurozone economy is going to take remains high. The main candidates cover the whole spectrum from the extreme left to right wing. While,
according to latest opinion polls, the race to the Elysée palace seems to narrow down to far-right Marine le Pen (Front National – FN), conservative
François Fillon (Les Républicains) and social-liberal Emmanuel Macron (En Marche!), the possibility that leftist Benoît Hamon (Parti Socialiste)
might be able to create a united left platform, and thus capture the votes of the broader left, should remain on investors’ radar, too.
 Latest polls point to slim odds of the “black swan event” of Le Pen becoming President of France, whose manifesto is not only putting the future of
the European Union (EU) and Eurozone at stake, but can also be seen as contradicting the French ideals of “liberté, fraternité, egalité”. She is
expected to lose hands down in the second-round run-off. However, the Brexit vote and outcome of the US elections have shown that uncertainty
should be accounted for. Moreover, skepticism about political institutions has been on the rise not only, but particularly in France, where just one
quarter trusts the EU according to the latest Eurobarometer survey. Given that populist movements are gaining clout, market-friendly supply-side
reforms, as proposed by Fillon and Macron, will unavoidably need to underscore the tenets of a mixed economy model.
Ponder the imponderable: a “Frexit” is unlikely, but not impossible
 Given the French parliament’s power in legislative procedures, winning the presidential elections does not mean governing. Notably, the system of
France’s two-round parliamentary elections, which are to be held on 11 and 18 June, tends to be unfavourable both to smaller parties and those
without allies, such as the FN. Therefore, some of the candidates’ campaign ambitions will likely be watered down. A Le Pen presidency coupled
with a minority parliamentary position for the FN would lead to a “cohabitation” scenario that could result in paralysis in a number of policy areas.1
 Against this background and given her party’s sparse electoral base, Le Pen’s plan to hold a “Frexit” referendum faces major institutional hurdles,
as she would need the backing of both houses of parliament to initiate the required constitutional change.2 However, worryingly, governments have
not always followed these rules, as the example of Charles de Gaulle’s controversial French presidential election referendum in 1962 shows. In the
unlikely but not impossible event that France were to follow the UK example, this could ultimately result in a break-up of the Eurozone.
Economic situation: gradual progress on the reform front after years of “muddling through” but vulnerabilities remain
 Economic growth in France is set to continue at a moderate pace, primarily driven by domestic demand (2017f: +1.3 %). On the reform front,
progress has been achieved – e.g. to improve the functioning of the labour market, to foster competition in the services sectors, and to reduce the
regulatory burden of firms – but further action is warranted. Thus, the growth outlook is all the more dependent on the future government’s course.
 Above all, the current budgetary strategy does not guarantee a long-lasting correction of French public finances. With a ratio of 57 % of GDP,
expenditure remains the highest in the EU, reflecting an oversized public sector. Significant public debt to the tune of 97.5 % of GDP – coupled
with political risk – could hence be a source of vulnerability once the ECB’s3 policy stance normalizes. On a more positive note, the former lack of
reform has left some “low-hanging fruit”, e.g. via labour market reforms following the German model, that could be plucked to boost productivity.
In a situation of “cohabitation”, the president, who, broadly speaking, steers national security and foreign policy, has to choose a prime minister from the opposition. The latter oversees economic
and “day-to-day” policy. Hence, a renegotiation of Schengen cannot be excluded in case of a cohabit with a center-right PM. 2) Art. 89 states that, upon recommendation by the PM, a constitutional
change must first be approved by both houses of parliament. Then, a president can either put it to a referendum, or seek approval from a three-fifths majority in Congress, a combined sitting of both
houses. 3) ECB: European Central Bank. Sources: Eurostat, French Constitution, AllianzGI Gl. Capital Markets & Thematic Research.
1)
2
France at the crossroads
Act. Politics remain a key Eurozone investment consideration.
Politics will likely remain a key Eurozone investment consideration
 Politics will likely remain a key investment consideration in the coming years. This does not just apply to France but the old continent as a
whole, where growing centrifugal political forces are shaking the very foundations of the European project. Undeniably, the debt crisis, the
tightening of the fiscal policy belts that came along with it and, more broadly, fear about what globalisation entails have left the population
disenchanted with the political mainstream.
 Populist political parties such as Marine Le Pen’s FN or Geert Wilders’ Partij voor de Vrijheid in the Netherlands, which take a swipe at
globalization, immigration and EU membership, are wielding increasing clout. Understanding the rationale of these political actors and
building corresponding base case and risk scenarios may therefore prove an important competitive advantage for active investors.
From a market perspective, the debate should not only be confined to “Le Pen or not Le Pen”
 Given that further labour market reforms should be the top priority to promote growth and jobs in France, the market debate should not only
be confined to “Le Pen or not Le Pen”.
1. Even if recent history tells us that investors would be wise to at least ponder the imponderable, i.e. a black swan type event of Le Pen
becoming President, a “Frexit” is highly questionable due to major institutional hurdles given both the specifics of the parliamentary
electoral system and the Constitution. On the economic policy front, a period of ”cohabitation” would likely result in paralysis in a number
of policy areas, i.e. continued “muddling through” at best.
2. In contrast, it is possible that a left platform under the auspices of Benoît Hamon also gains the majority of votes cast in the
parliamentary elections. However, the left election manifestos – such as revoking the previous reform on labour market flexibility –
suggest that it is highly doubtful whether this platform would implement the reforms necessary to boost French growth potential.
3. Instead, a future government which pursued not only comprehensive supply-side economic reforms, as proposed by Fillon and Macron,
but restored the pro-EU, Franco-German relationship, would generally be seen as a positive game-changer and lift market sentiment.
Macron’s lack of traditional political platform could turn out to be a challenge when going through legislative procedures, though.
What’s priced in?
 Political uncertainty commands a risk premium1. At present, the perception of risks and opportunities still seems to diverge by asset class.
- Bond markets: Risk premia have widened significantly, with the 10- and 30-year OAT-Bund-spreads hitting their highest levels since
September 2012. For bond markets, the tail-risk scenario would certainly be one of currency redenomination (”convertibility premium”).
- Equities: Meanwhile, equity volatility has remained rather muted. The fact that the CAC 40 is composed of a high share of multinational
companies likely plays a role. However, as elections in the Netherlands (15 March) – which could be seen as a bellwether of political
sentiment in the Hexagon – and the French Republic are looming, markets are likely to be increasingly susceptible to up/down volatility.
See Pástor and Veronesi (2011): “Political Uncertainty and Risk Premia”, downloadable at http://economics.mit.edu/files/7017. Sources: BofAML, Société Générale, AllianzGI Gl. Capital Markets &
Thematic Research.
1)
3
France at the crossroads
Europe is not running short of political risks as 2017 “election super cycle”
is looming – France now in the limelight
Eurozone
Refugee crisis. Terror fears. Growing antiestablishment and centrifugal political forces.
Netherlands
General elections (15 Mar 2017).
Islam critic PVV as strongest force
in parliament?
Germany
Political backlash against government’s refugee
policies. Rise of right-wing populist AfD.
General elections on 24 Sep 2017
Finland
FIXIT movement: Will the British
vote provide tailwind for a Finnish
referendum?
Hungary/Poland
Nationalist / Anti-EU governments
UK
Paralyzing political uncertainty after Brexit
“leap in the dark”. Will Supreme Court judgment
weaken govt.’s position on “hard” Brexit?
Another independence referendum for Scotland?
Continued conflict over Ukraine
France
Reform fatigue. Slowdown of fiscal
consolidation. Rise of Front National.
Presidential elections (23 Apr / 7 May) and
parliamentary elections (11 / 18 June 2017)
Greece
Fragile government despite recent
cabinet reshuffle. Huge pending
reform agenda. Negotiations on
second ESM review yet to be
finalized. Unresolved fiscal
sustainability issue despite
prospective short-term relief
measures. IMF participation in third
programme still uncertain
Portugal
How stable is the minority government?
Repeated budget clash with Brussels likely
due to lacking budget discipline
Spain
New minority government tolerated by socialists
might prove unstable. Repeated budget clash with
Brussels likely due to lacking budget discipline.
Catalonia‘s independence aspirations
Italy
Referendum defeat, Italy to keep lame-duck
administration. Premature snap elections? New electoral
law key to political tail risk given rise of euro-sceptic M5S.
NPL / Bad bank problems. Fiscal consolidation fatigue.
EMU member state
EU, non-EMU member state
EU member state with an opt-out
4
Source: AllianzGI Global Economics & Strategy, AllianzGI Global Capital Markets & Thematic Research. As of 6 February 2017.
France at the crossroads
Economic policy uncertainty in France has increased considerably
ahead of the presidential elections
France: Index of economic policy uncertainty
Selected EU member countries: Index of economic policy
uncertainty, 3-month moving average
Past performance is no reliable indicator for future results. Sources: Datastream, “Measuring Economic Policy Uncertainty” by Scott R. Baker, Nicholas Bloom and Steven J. Davis at
www.PolicyUncertainty.com, AllianzGI Global Capital Markets & Thematic Research.
5
France at the crossroads
The political calendar remains busy: what to watch out for
2017
 17 February: Moody‘s to publish rating review for Spain, DBRS: Netherlands
 By 20 February: François Bayrou (Mouvement Démocrate) expected to announce if he is running as a French presidential candidate
 20-21 February: Eurogroup and ECOFIN meetings – further meetings: 20-21 March, 7-8 April, 22-23 May, 15-16 June
 22 February: Emmanuel Macron (En Marche!) expected to publish the first part of his manifesto (budget)
 24 February: Moody‘s and Fitch to publish rating review for Greece
 2 March: Macron expected to publish the second part of his manifesto (“contrat avec la nation”)
 3 March: Fitch to publish rating review for France, DBRS: Belgium and Ireland
 9 March: ECB Governing Council meeting – further meetings: 27 April, 8 June, 20 July, 7 September, 26 October, 14 December
 9-10 March: European Council meeting – further meetings: 22-23 June, 19-20 October, 14-15 December
 15 March: Dutch general elections – an important bellwether for France?
 16 March: Bank of England Monetary Policy Committee Decisions and Minutes – further meetings: 11 May, 15 June, 3 August, 14
September, 2 November, 14 December
 By 20 March: Constitutional Council announces official list of the French presidential candidates
 26 March: German state elections in Saarland – further state elections: Schleswig-Holstein (7 May), North Rhine-Westphalia (14 May)
 Before end of March: UK likely to trigger Article 50
 31 March: Moody‘s to publish rating review for the Netherlands, DBRS: France, S&P: Spain
 7 April: S&P to publish rating review for France, DBRS: Spain
 23 April and 7 May: French presidential elections (two rounds); 3 May: Final TV debate before second round
 11 May: New French president is officially proclaimed
 June 11 and 18: French parliamentary elections
 July: Greece to repay debt to the tune of ~$7.4bn
 31 July: EU sanctions against Russia will run out
 September: Possible referendum on Catalonia’s independence (announced by Catalonian government)
 24 September: German federal elections
Sources: Bank of England, DBRS, ECB, Eurogroup, EU Commission, Fitch, Moody’s, S&P, AllianzGI Capital Markets & Thematic Research. As of 13 February 2017.
6
France at the crossroads
Diverging perceptions of risk: spreads on French sovereign bonds have
widened significantly while equity volatility remains rather (too?) muted
OAT1-Bund spreads, in %-points: Significant re-pricing on
bond markets, spreads at highest level since September ’12
1)
CAC 40 vs. Euro Stoxx 50: Are French stock markets too
sanguine?
Longer-term French government bonds are also known as OATs, Obligations Assimilables du Trésor.
Past performance is not a reliable indicator of future results. Sources: Datastream, AllianzGI Global Capital Markets & Thematic Research.
7
France at the crossroads
Against all odds: the “black swan” event of Marine Le Pen becoming
President of France
The race to the Elysée palace seems to narrow down to Marine le Pen, François Fillon and Emmanuel Macron
Latest polls show far-right Le Pen winning the first round of voting on
23 May, ahead of conservative Fillon and social-liberal Macron...
Hamon
Macron
14-17%
...while both Fillon and Macron are expected to get a landslide victory
in the second round of voting on 7 May
...unless Hamon is able
to unite the left parties...
xxx
xxx
Macron vs.
Fillon
52-54%
vs.
46-48%
Le Pen vs.
Macron
34-37.5%
vs.
62.5-66%
Le Pen vs.
Fillon
40-44%
vs.
56-60%
20.5-23.5%
Fillon
17-21%
Le Pen
24-26%
Latest polls suggest that Le Pen would lose hands down in the second-round run-off. However, recent history has clearly shown that
uncertainty must be accounted for. A recent Ifop survey1 displays that 81 % of Le Pen supporters are sure of actually voting Le Pen in the
first run-off – and at least 70 % in the case of Fillon – whereas only 36 % are sure by this time to really cast their ballot for newcomer
Macron. Even in case of a victory Le Pen would need a parliamentary majority to execute full powers, though. This is unlikely as the French
electoral system has been tailored to give a clear and stable majority in parliament. Specifically, the two-round system tends to be
unfavourable to smaller parties and those without allies, such as the FN. Currently, it has only 2 out of 577 seats in the National Assembly.
Even if only fourth according to polls, the chance that Hamon captures the votes of the broader left should remain on investors’ radar, too.
1)
As of 13 February 2017, downloadable at http://cdn-new-parismatch.ladmedia.fr/var/ifop/13-02-2017.pdf. Sources: BVA, Elabe, Harris, Ifop Fiducial, OpinionWay, AllianzGI Global Capital Markets &
Thematic Research. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future results. Latest polls as of early-mid February 2017. Outcomes also
depend on whether centrist François Bayrou will run as a candidate (to be announced by 20 February).
8
France at the crossroads
France at the political crossroads? Main presidential candidates cover
the whole spectrum from the extreme left to the extreme right wing
Condensed summary of main reform aspects
extreme right-wing
extreme left-wing
Mélenchon (La France Insoumise)
Hamon (Parti Socialiste)
Macron (En Marche!)
Fillon (Républicains)
Le Pen (Front National)
abolish
maintain 35h week legally, but open
to negotiations at industry level
35h week
32h
32h (voluntarily, not mandatory)
flexibilise; adjustable working time
which is negotiated at company
level
Labour
regulation
revoke previous reform on labour
market flexibility
revoke previous reform
loosen
loosen
revoke previous reform
Pension age
(currently 63)
lower to 60
flexibilise, retirement system "à la
carte"
increase to 65 by 2022
lower to 60
Corporate tax /
labour cost
CICE1 conditional on achievement
of specific objectives such as job
creation
Revenue / VAT
very progressive tax rate, maximum universal income of EUR 750 per
income of 400,000 per year
month, more tax brackets
lower social contributions paid by
cut corporate tax to 25% over time, reduced corporate tax for medium
converting CICE into permanent
reduce labour costs via lower social
size companies; tax for hiring
payroll tax breaks for low-wage
contributions + lower labour tax
foreign workers
workers; cut corporate tax to 25%
2 %-points VAT hike to 22% in Q4
2017
proportional presentation at
parliament incl. 30% seat bonus for
election winner; reduce number of
MPs
Constitutional
reform
Vision on
Europe
Immigration
policies
reduce level of income tax for
lowest bands
EU-sceptic, but not outright antiEurozone; re-nogiation of all
European Treaties and possibly
withdrawal
pro EU, contemplating debt relief
pro EU; refocus Europe on its
pro EU; in favour of a budget for
for periphery countries, European
strategic priorities such as security,
the euro area, which is to be
defence cooperation and possibly
immigration, energy; renegotiate
approved by a euro area parliament
a fiscal union
Schengen
referendum on EU membership,
adopt a new currency, primacy of
national over European laws
parliament-set quotas; access to
annual net migration cap of 10,000;
social benefits requiring 2 years of
no tolerance for illegal immigation
regular residence in France
At present, the market debate seems to be focused on a victory of far-right Le Pen on the one side, with related uncertainty as to the future
of Europe, and the market-friendly policies of Fillon / Macron on the other. The possibility of Hamon creating a united left platform should
remain on investors’ radar as well. Winning the presidential elections does not mean governing, though. Given the parliament’s power in
legislative procedures, the candidates’ campaign ambitions should be taken with a pinch of salt.
Note: Incomplete summary. 1) CICE: “Crédit d'impôt pour la compétitivité et l'emploi“; came into force in 2013 to enhance the competitiveness of businesses by reducing the labour tax wedge. Since
2017, it amounts to 7 % of payroll, excl. salaries above 2.5 times the minimum wage. Sources: BofAML, French government, J.P. Morgan, AllianzGI Global Capital Markets & Thematic Research.
9
France at the crossroads
While internal security has become a source of public concern,
the French still worry most about their economic situation
Eurobarometer1 for France (06/2009-05/2016) on “What are the two most important issues you are facing at the moment?”
While internal security (e.g. terrorism, crime) has become a source of public concern and immigration matters, the French still worry
most about the economic situation of their households, and their purchasing power (rising inflation), in particular.
1)
Since 1973, the EU Commission has been monitoring the evolution of public opinion in the member states. Each survey consists of approx. 1000 face-to-face interviews per country. Reports are
published twice yearly. Sources: EU Commission (latest data available: May 2016), AllianzGI Global Capital Markets & Thematic Research. Past performance is not a reliable indicator of future results.
10
France at the crossroads
Skepticism about political institutions has been on the rise not only,
but particularly in France, where just one quarter trusts the EU
Eurobarometer1: “How much trust do you have in the
European Union?”, % of “tend to trust it”
Eurobarometer: “Tend to trust” vs. “tend not to trust” for
selected countries, autumn 2016 (%), change since 2006 (ppts)
EU average
36%
France
26%
Skepticism about political institutions has been on the rise since the financial and European debt crisis. In France, according to the latest
Eurobarometer survey published in December 2016, the positive image of the EU has lost ground by 14 %-points since the end of 2006.
Only 26 % of the French vs. 36 % of Europeans trust the EU while 65 % (54 %) “tend not to trust” Brussels. Additionally, the proportion of
the French who trust their national parliament (19 % vs. 32 %) and national government (17 % vs. 31 %) is exceptionally low.
1)
The Standard Eurobarometer was established in 1974. Each survey consists of approximately 1000 face-to-face interviews per country. Reports are published twice yearly. Latest data as of
December 2016 (Autumn Survey). Sources: European Commission, GESIS – Leibniz Institute for the Social Sciences, AllianzGI Global Capital Markets & Thematic Research.
11
France at the crossroads
Political discontent: satisfaction about the EU is associated with a
country’s economic situation
Change in the unemployment rate (2008-2016) vs. sentiment towards the EU for selected member countries
60
Poland
40
Net EU Favourability (%)
Hungary
Italy
20
Sweden
Spain
0
Net balance
unfavourable to EU
Netherlands
Germany
UK
-20
France
-40
Unemployment higher than 2008 average
Greece
-60
-5
0
5
10
15
20
Unemployment Change (pp)
Sources: Eurostat, Minack Advisors, Pew Research Center, AllianzGI Global Capital Markets & Thematic Research. Net EU favourability data as of June 2016. Past performance is not a reliable
indicator of future results.
12
France at the crossroads
Economic situation: gradual progress on economic and policy fronts after years
of “muddling through” – growth outlook highly dependent on future government
Economic outlook: moderate pace of recovery, mainly driven
by domestic demand, while net exports remain a drag
Fiscal sustainability: decreasing budget deficit yet not
enough to sustainably reduce France’s debt-to-GDP ratio
Labour market:1 unemployment declining for the first time
since 2010, but still exceptionally high among the youth
Private sector: deleveraging, improving corporate profitability,
but combination of high private and public debt is a risk factor2
1)
Supported by policy measures to encourage job creation by reducing the labour tax wedge (such as the Tax Credit for Competitiveness and Employment (CICE), the Responsibility and Solidarity Pact,
and the Hiring Subsidy) and sustained economic activity, employment is expected to continue to grow stronger than the labour force. Last but not least, the emergency plan for employment announced
in January 2016 has further decreased the unemployment rate, by shifting a part of the labour force into training. 2) Annual data; latest data available: 2015. Past performance is not a reliable indicator of 13
future results. Sources : Datastream, EU Commission, Eurostat, AllianzGI Global Capital Markets & Thematic Research.
France at the crossroads
Economic situation in a nutshell: moderate cyclical recovery
under way, but longer-run growth potential remains lacklustre
Key economic indicators1
*
Net exports weighed on French GDP growth in 2016, which declined slightly to 1.2% (2015: +1.3%). Looking forward, the recovery of
exports is expected to rebalance GDP growth away from private consumption in 2017. The latter is set to decelerate as the tailwinds
from lower oil prices fade out. Yet, supported by policy measures, employment is expected to continue growing at a sustained pace.
Longer-term, while reform progress has been achieved, e.g. to foster competition in the services sectors, further action is warranted
to boost France’s lacklustre growth potential. As an example, favourable demographics remain a comparative advantage, but labour
force participation is fairly low at 54.7 %.2 The growth outlook is hence all the more dependent on the future government’s course.
1)
Notes: Real GDP: q3 2016 data for Germany, Italy, Spain, Netherlands, Belgium, Finland, Greece, Portugal. Industrial production: Dec. 2016 data for Germany, France, Portugal. Unemployment:
Ireland: Jan. 2017 data; Greece: Nov. 2016. 2) vs. 60.2 % in Germany, 58% in Spain and 63.4% in the Netherlands, as projected by the International Labour Organization (ILO) for 2017. Past
performance is not a reliable indicator of future results. Sources: Datastream, EU Commission, ILO, AllianzGI Global Capital Markets & Thematic Research. As of 13 February 2017.
14
France at the crossroads
Fiscal sustainability in a nutshell: low interest burden, but debt reduction
remains a drawn-out process given only modest consolidation efforts
Key fiscal sustainability indicators1
French 2016e
primary balance
(% of GDP)
-1.5%
Implicit
intereste rate
2.0%
Current debtto-GDP ratio
97.5%
Primary balance necessary to stabilize debtto-GDP ratio given nominal GDP growth
2.0%
3.0%
4.0%
5.0%
0.0%
-1.0%
-2.0%
-3.0%
Will France get down from the debt peak? Despite the government’s relatively low interest burden of less than 2 % of GDP and
around 3.5 % of public expenditure, debt reduction remains a drawn-out process as efforts to strengthen the budgetary strategy have
remained modest. Recall that France is still subject to the EDP2. In order to merely stabilize the debt ratio at its current level of 97.5 %
of GDP, France would need to achieve a balanced primary budget – provided that nominal GDP growth came in at 2 %. However, the
EU Commission expects Paris to report a primary balance of -1.1 % of GDP in 2017 and -1.3 % in 2018. Significant public debt in
France, coupled with heightened political risks, could be a source of vulnerability once the ECB’s monetary policy stance normalizes.
1)
Notes: All figures refer to general govt. data. Debt-to-GDP data for Italy, Spain and Ireland is not seasonally adjusted. Greece: govt. deficit and expenditure data as of q2 2015. 2) EDP: Excessive
15
Deficit Procedure. Past performance is not a reliable indicator of future results. Sources: Datastream, EU Commission, AllianzGI Global Capital Markets & Thematic Research. As of 13 February 2017.
France at the crossroads
Significant public debt could be a source of vulnerability once monetary
policy normalizes
Monthly net purchases under the ongoing PSPP*, book value
in EUR million: significant market support
Eurosystem currently owns at least EUR 255bn of French
debt under the ongoing PSPP*
Holdings as at 31
January '17, book
value in EUR bn
Weighted average
remaining maturity
in years
DE
321.7
8.2
FR
255.1
7.7
IT
221.9
8.9
ES
159.1
9.1
NL
71.8
8.0
BE
44.3
10.1
AT
35.2
9.3
PT
25.3
9.4
FI
22.1
7.4
IE
19.1
9.1
SK
8.5
7.9
SL
5.1
8.9
148.4
7.3
6.6
−
1344.2
8.3
Issuer
Supranationals
Rest
Total (incl. Supras)
France is currently benefiting from around EUR 11-12bn of monthly debt purchases by the Eurosystem. In the absence of this
considerable buying flow that is offering significant market support, yields on French sovereign bonds would likely spike. Coupled
with heightened political risks, France’s mountain of public debt could be a source of vulnerability once monetary policy normalizes.
*) PSPP: Public Sector Purchase Programme. Past performance is not a reliable indicator of future results. Sources: Datastream, ECB, UBS, AllianzGI Global Capital Markets & Thematic
Research. Data on PSPP as of 6 February 2017.
16
France at the crossroads
Target2 imbalances are back on the rise – but rather due to
technical factors and QE than to financial stress
Renewed increases seem to be linked to ECB’s QE3
Target2 balances, in EUR bn
QE
Surplus
countries1
 The imbalance of NCBs’4 Target2 positions increased sharply during
the sovereign crisis, reflecting two factors: #1 Intra-euro area
trading imbalances resulted in capital flows from deficit toward
surplus countries. #2 Investors/banks in “core” countries became
unwilling to recycle these trade-related inflows back toward deficit
countries (i.e. by purchasing their assets), while investments were
moved out of the periphery overall.
 After ECB President Draghi’s “whatever it takes”-speech in 2012,
confidence gradually returned, reigniting capital flows to the
periphery; Target2 imbalances narrowed. Since mid-2014, though,
imbalances have soared again. While this was initially related to the
Greek crisis, it now appears linked to QE. This is supported by the
fact that current account data do not indicate any stress.
Deficit countries2
 Theoretically, QE can widen Target2 positions if it involves crossborder purchases of assets. While more than 70% of QE purchases
has been in sovereign bonds, i.e. subject to the capital key, the seller
of an Italian bond to the Bank of Italy could be an investor located in
Germany or even outside of the euro area who settles transactions
through a bank in Germany. In this case, the reserves created by the
Bank of Italy to buy the bond are credited to the reserve account of a
German bank at the Bundesbank. The latter receives a claim on the
Bank of Italy in Target2. As banks have their reserve accounts at the
NCBs, and not at the ECB, the same happens with purchases the
ECB makes itself, which account for around one tenth of QE. In this
fashion, cross-border QE purchases can result in Target2
imbalances.
Germany, Netherlands, Luxembourg, Finland. 2) France, Italy, Spain, Belgium, Austria, Ireland, Greece, Portugal. 3) QE: quantitative easing, the ECB’s extended asset purchasing programme (launched
17
in March 2015). 4) NCB: National Central Bank. Past performance is no reliable indicator for future results. Sources: Datastream, J.P. Morgan, AllianzGI Global Capital Markets & Thematic Research.
1)
TACK
(xièxiè)
SPASIBA
THANK YOU
CHOKRANE
VIELEN DANK
GRACIAS
BEDANKT
OBRIGADO
TAK
DANK U WEL
HVALA
GRAZIE 谢谢
MERCI ARIGATÔ
ขอบคุณครับ
18
Appendix
19
France at the crossroads
Systemic risk as perceived by markets is hovering above its pre-crisis
average but seems to be well contained
CISS: ECB Composite indicator of Systemic Stress in the euro area* and subcomponents
*) The Composite Indicator of Systemic Stress (CISS) comprises 15 mostly market-based financial stress measures equally split into five categories, namely the financial intermediaries sector,
money markets, equity markets, bond markets and foreign exchange markets. Relatively more weight is put on situations in which stress prevails in several market segments at the same time which,
in turn, captures the idea that systemic risk/stress is high if financial instability is spread widely across the whole financial system.
Past performance is no reliable indicator for future results. Sources: ECB, Datastream, AllianzGI Global Economics & Strategy.
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France at the crossroads
Institutional architecture: strengthened considerably, but still lacking consistency
as national sovereignty and common solidarity can be at odds with one another
What has been done to improve the euro area’s resilience to crises?
Reduction of
government debt
Coordination of
economic policy
Financial market stabilisation
New fiscal monitoring
New economic governance
Financial market reforms
•
Strengthening of the Stability and
Growth Pact (by Six Pack / Two
Pack rules)
•
Europe 2020: joint growth
strategy
•
•
Euro Plus Pact
Fiscal Compact: structural deficit
must not exceed 0.5% of GDP
(“debt brake”)
•
Macroeconomic surveillance:
early recognition and adjustment
of excessive imbalances
•
•
European Semester: coordination
of economic and fiscal policy
•
European System of Financial
Supervision (EBA, ESRB, ESMA,
EIOPA)*, comprising micro- and
macroprudential supervision
Stricter regulation (Basel III)
European banking union
• Oversight (SSM), resolution
(SRM), harmonized deposit
guarantee schemes
Capital markets union (by 2019)**
Financial assistance mechanisms
•
Permanent support mechanism: European Stability Mechanism (ESM) with maximum lending capacity of about EUR 500bn +
EUR 200bn in EFSF financial assistance***
•
Temporary support mechanisms (until July 2013): European Financial Stability Facility (EFSF), European Financial
Stabilisation Mechanism (EFSM)
*) EBA = European Banking Authority, ESMA = European Securities and Markets Authority, EIOPA = European Insurance and Occupational Pensions Authority, ESRB = European Systemic Risk Board
**) The capital markets union (CMU) aims at deepening the Single Market for capital; to encompass all 28 EU member states; EU COM launched action plan to establish building blocks of an integrated
EU capital market by 2019. ***) As the financial assistance already granted to Ireland, Portugal and Greece is not deducted from the ESM’s lending capacity, an overall EFSF and ESM lending ceiling of 21
EUR 700bn applies during the transitional period in which the EFSF and the ESM exist in parallel. Sources: Federal Ministry of Finance, Allianz GI Capital Markets & Thematic Research.
France at the crossroads
Quo vadis, Europe, given increasing centrifugal forces?
At the 25th anniversary of Maastricht, Europe finds itself at
political crossroads: four major scenarios are imaginable
“Muddling
through”, with
the status quo
continuing
A “coalition of the
willing”, resulting in a
core and/or multispeed Europe
An “ever closer union”1, i.e.
more integration, combined with
greater democratic
accountability and legitimacy
Strengthening subsidiarity is key to regain support for the
integration process
More integration desirable / feasible:
•
•
•
Defense, asylum policy, internal security
Single market / capital markets union
Climate policy
Reinvigorate principle of subsidiarity
Falling back into
nationalism and a
further disintegration
of the EU and
subsequently the
Eurozone
National responsibilities:
Fiscal
policy
+
Labour
market
policy
+
Social
policy
as suggested in “The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union”, see https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf, which lays
down a roadmap to deepen the Economic and Monetary Union in two stages as of July 2015 (“deepening by doing”) and complete it by 2025 (“completing EMU”) at the latest. Sources: German
Council of Economic Experts, EU, AllianzGI Global Capital Markets & Thematic Research.
1)
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