FRENCH ELECTIONS:
WHAT TO EXPECT SHOULD LE PEN PREVAIL
Mark Burgess, CIO, EMEA and Global Head of Equities
 Should Marine Le Pen win the French presidential election, the immediate reaction of markets is likely to
be a spike in volatility for French assets due to the attendant uncertainty
 A Le Pen victory increases the likelihood of France’s withdrawal from the euro, so we would expect the
spread of French bond yields over German bunds to widen significantly.
 If the EU was to break up and individual countries return to their pre-euro currencies, the interconnected
EU banking system would come under significant pressure, with consequences for the financial sector
globally.
French elections in April and May will produce a new president, with recent polls suggesting National
Front’s Marine Le Pen as a serious contender. Will we see the wave of political regime change that carried
Britain’s Brexit vote and swept through to the U.S. election continue in France? If so, what impacts will a
Le Pen presidency bring for investors and for business and financial markets in Europe and more broadly?
Le Pen is the leader of the French national conservative party, the National Front (FN). Since 2011 she
has led a movement to ‘de-toxify’ the party, relaxing some of its more extreme positions and expelling
controversial members of the party, including her father in 2015. Le Pen’s election promises aim to treat
and ultimately cure France’s ailments of high unemployment, high debt and a lackluster economy with her
pro-nationalist and protectionist proposals. Should she be elected president, her success would depend on
the make-up of parliament and on having a cooperative prime minister. Regardless, a President Le Pen
would signal change with the potential to alter the face of the EU.
Le Pen’s key proposals include:
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Six months to renegotiate membership of the EU or potentially trigger ‘Frexit’
The return of the franc
‘Intelligent protectionism’ and trade tariffs
Lower taxes and better welfare
A harder line on immigration and stronger national preference
More security and defense spending
Positioned as more of a right centrist candidate, Le Pen’s rhetoric, which champions a traditional France,
may well win the allegiance of some of the wandering voters traditionally opposed to the FN. These voters
will expect Le Pen to stay true to her word and not revert to old-style FN policies. Others in the party may
need to follow her example while trying not to lose existing voters, in order to have any hope of gaining
enough seats in the parliamentary election in June.
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FRENCH ELECTIONS:
WHAT TO EXPECT SHOULD LE PEN PREVAIL
Reminiscent of the 2015 U.K. election, Le Pen’s key promise is likely to be a referendum on membership
of the European Union, along with a desire to reinstate the French franc. While her promises to renegotiate
a better deal with the EU may sound familiar, she is undoubtedly in a stronger negotiating position than the
U.K. was. France is a key member of the monetary union and Brussels will be all too aware of the danger
of a second exit.
The Franco-German axis, central to the European Union, has comprised just under one-third of the
population and almost half the GDP of the EU over the years. In recent years, however, the French
economic influence has faltered. The challenges that face the French economy include high and inefficient
public spending, low economic performance, an incomplete rebalancing process and the obvious need for
labor market reform. A national debt to GDP burden of 96% suggests France needs the EU, a point that
Baron David de Rothschild emphasized when he denounced a potential Frexit as a “catastrophe”. The
relationship should not be regarded as one-sided. The EU, for its part, clearly needs France for many
reasons – in particular, it is the largest producer of nuclear power in the Union (with a 51% share) and is
integral to upholding the single currency.
THE MOOD IN FRANCE
Mistrust of the eurozone has become heightened. The EU response to the global financial crisis focused
on austerity measures rather than boosting economic activity and this has led to many feeling that France
is being governed from afar. Many people feel that successive French governments have handed over the
reins to the European Central Bank and this has led to increased support (even to extremes) for anything
other than the status quo.
Figure 1: France’s growing mistrust for globalization and desire to leave the EU
If there was a referendum on your country’s membership of the EU, how would you vote?
Source: HSBC France Outlook 2017: still unexpected uncertainties? January 2017
In previous elections, FN support has been highly correlated to unemployment, indicating it was the
marginalized population that voted to see change. Since the 2014 vote, Marine Le Pen has garnered
further support through a combination of the spread of populism; fear of terrorism and not least the
frustration that people have had with President François Hollande’s broken promises. There is also a
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FRENCH ELECTIONS:
WHAT TO EXPECT SHOULD LE PEN PREVAIL
general feeling of mistrust towards international issues, which has been growing as people around the
world shy away from globalization. France in particular seems to feel this more strongly than other
European countries and concern around immigration has been heightened with recent terrorist attacks,
making the FN seem like a more appealing option with its promises around protectionism.
Youth unemployment remains a key issue, with latest reports putting the figure at 26.2% as at the end of
2016 — near to the all-time high for France. This is one of the key issues Le Pen must tackle. Although the
FN manifesto does not focus exclusively on this issue, the hope is that by effectively fining companies
through additional tax for hiring non-French employees, this will naturally lead to greater numbers of
French youth being hired.
Figure 2: Unemployment data
France labor
Last
Previous
Highest
Lowest
Unemployment Rate (%)
10.00
9.90
10.70
7.20
Long-term Unemployment Rate (%)
4.20
4.30
5.00
2.40
Youth Unemployment Rate (%)
26.20
25.90
26.30
14.50
Job Vacancies (Thousand)
215.60
245.50
363.80
121.10
Population (Million)
66.63
66.38
66.63
45.46
Source: Trading Economics as at January 2017
This is only part of the issue. As the former prime minister, Manuel Valls, acknowledged, France’s labor
laws make it easier to employ temporary staff. The lack of available permanent positions for the young
leads to a whole host of issues, including an inability to rent or buy homes, as well as a reduction in
consumption, causing the French economy to suffer. With an ageing population, the importance of getting
the young into the workforce is ever more pressing.
WHAT HURDLES WOULD LE PEN FACE?
The parliamentary elections are held a month after the presidential vote, and the results will determine how
much (or how little) power Le Pen would have. An elected president does not have full control unless a
majority parliament (289 seats) is secured – which is close to impossible for any of the candidates. Given
that an FN-majority parliament is unlikely, a coalition government would have to be formed and the prime
minister would be elected from the majority party in parliament. Under a coalition, President Le Pen would
have a number of limitations on her power, as detailed in Figure 3 below.
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FRENCH ELECTIONS:
WHAT TO EXPECT SHOULD LE PEN PREVAIL
Figure 3: Powers and limitations of a president in a coalition government
Powers granted
Limitations
Appoints PM
PM must come from the majority party
Choose defense and foreign affairs department
No choice of other cabinet members
Can dissolve parliament
Only parliament can dismiss the PM
Signs laws and decrees
Laws cannot be implemented without agreement of PM/parliament
Can trigger Article 16 to give president full powers
(e.g. de Gaulle)
Approval of article 16 needs to be justified
Source: Infosource from Credit Suisse – Europe Economic Research ‘A brand new era’ as at January 2017
Le Pen harbors plans to renegotiate terms with the EU (including a return of complete power over
immigration controls and economic policy to France) and to hold a referendum if she doesn’t get a better
deal for France. In order to call a referendum Article 89 must be used, which requires approval of 3/5ths of
parliament or the prime minister. As such, either the make-up of parliament or who Le Pen appoints as
prime minister becomes vital. There may be a chance that a strong-willed prime minister could put a
wrench in the works and block a referendum on EU membership. But it’s hard to envisage a government
standing in the way of those who voted for Le Pen, in full knowledge that a referendum would be imminent
with her victory.
And what if Le Pen gets her referendum? While recent polls have indicated an increased likelihood for
French voters to choose Frexit, there is an understandable reluctance to leave the single currency due to
fears of a devalued currency and the impact on individuals’ savings and mortgages. Le Pen has
responded to this concern by stating that “a European ‘currency snake’ is reasonable. A national currency
coexisting with a common European currency [the ECU] will have no impact on daily life.” 1 This may be
somewhat optimistic. France leaving the euro will have a significant knock-on effect on the wider economic
currency union. We saw sterling plummet following the U.K. Brexit vote, which helped to manage the
significant current account deficit by increasing the appeal of U.K. investments. In France, it is primarily the
structural issues in the labor market that need to be addressed, and these issues won’t be helped by
devaluation of the currency.
WHAT CAN WE EXPECT FROM MARKETS?
Financial markets have already priced in some uncertainty in France, as shown in Figure 4 below. French
government bonds have been somewhat skittish since Trump won the election in the US as they preempted the risk of a Le Pen victory.
1
Marine Le Pen, 4 January 2017
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FRENCH ELECTIONS:
WHAT TO EXPECT SHOULD LE PEN PREVAIL
Figure 4: 10 year oat/bund spreads (bps) – markets pricing in more uncertainty in France
80
70
Trump's election
Spread (bps)
60
50
40
30
20
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
10yr French Gov't spread to 10yr
Bund
Source: Bloomberg, Columbia Threadneedle Investments, as at 13 February 2017.
The immediate reaction of markets is likely to be a spike in volatility for French assets due to the
uncertainty of what is to come. As a Le Pen presidency is perceived to increase the likelihood of France’s
withdrawal from the euro, in the event she wins the election, we would expect the spread of French bond
yields over German bunds to widen significantly. As a benchmark, that spread reached around 150bps at
the height of the eurozone crisis in 2011-12 and it’s quite possible that it would approach that level once
again. Similarly, other peripheral and semi-core bond spreads would widen, consistent with an increase in
break-up risk.
On the equity side, the European market could see a drop of as much as 10% immediately triggered by
uncertainty about what this could mean for the EU, along with a potential wider hit to global markets.
Companies with good fundamentals in sectors less impacted by geopolitical events should be fairly
resilient. Returning to the euro-denominated debt issue, the largest hit will likely be European banks which
could move down by 20-30%, having lowered 20% in response to Brexit. Brexit is an arguably insignificant
event in comparison to the break-up of the EU as with countries returning to their pre-euro currencies there
will be a significant mismatch in assets and liabilities for banks still denominated in euros.
European banks have been at the precipice of a crisis for many years now, not least when Greece was
reaching the stage of falling out of the European Union. In the medium-term, with the state that the Italian
banking system is currently in, its banking sector is unlikely to be able to withstand the fallout of a euro
collapse. And it is not just those countries that are heavily indebted that will be affected, but also the likes
of Germany (with its holdings of French and Italian debt). According to the European Law Journal
“…private sector financial lenders would immediately increase their pressure (‘spreads’) on Member States
that have not yet left the euro, thus causing the incalculable costs of a domino effect that eventually would
also threaten the economy of the trade surplus countries because they would lose substantial parts of their
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FRENCH ELECTIONS:
WHAT TO EXPECT SHOULD LE PEN PREVAIL
export markets.” 2 The interconnected EU banking system would be at risk, with consequences for the
financial sector globally.
The hurdles to Frexit would remain high and a more considered reaction may follow, even under a Le Pen
administration. In this scenario, some premium and curve steepness should probably remain, reflective of
a more inflationary, less fiscally conservative policy mix. Likewise, French inflation-linked bonds, currently
implying breakeven inflation rates of around 1.31% over 10 years, would perform strongly.
Looking further out to the medium term, if there was to be a break-up of the euro, this would cause a newly
established franc to come under pressure as investors attempted to hedge risk by selling the currency. The
traditional interventions to counteract a plummeting franc would include increasing interest rates in France
and selling euro asset reserves to buy French bonds to help strengthen the currency. Such measures
come with their challenges for a government trying to prevent damage to the economy and without a
substantial euro-denominated reserve pool. As for other newly-resurging European currencies of old, the
Deutsche mark would strengthen while the Italian lira would fall. There may in fact be a silver lining for Italy
and Greece, in the form of the much longed-for depreciation in their currencies. The renationalization of
monetary policy would allow countries to devalue their currency, but would also magnify the issue of
repaying the euro-denominated debt.
The first round of the presidential election will be held on April 23, following which — should no candidate
win a majority — a run-off election between the top two candidates will be held on May 7. In a world that
feels increasingly unpredictable, all eyes will be on France.
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