INFOCUS
M A R K E T S N A PS H OT
APRIL 2017
French presidential
elections: the real
test for the euro
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FRENCH PRESIDENTIAL ELECTIONS: THE REAL TEST FOR THE EURO
In this edition of Infocus, Francesco Castellani Tarabini of EFG in
Lugano, examines the possible scenarios arising from the forthcoming
French Presidential elections.
On May 7th, the result of what appears to be the
“strangest” election of the French Fifth Republic will be
announced. For the first time in over sixty years the two
candidates at the runoff following the first round on April
23rd are unlikely to come from the two main parties (the
Socialist Party, PS, and the Republic Party, UMP). Polls
suggest that the candidate from the far-right nationalist
Front National (FN) party, Marine Le Pen, will face the
independent centrist candidate, Emmanuel Macron. After
last year’s political surprises with the Brexit referendum
and the US presidential elections, the French vote is
regarded as the most important test of the advance of
populist movements in 2017. In the imagery of Mark Rutte
(the leader of the Dutch Liberal Party), the French elections
are the semi-final in the struggle against the “wrong kind
of populism”.
This note provides an overview of the upcoming elections
in France and the potential scenarios that could result
from them. Overall, we maintain our belief that the FN is
unlikely to win these elections and that a market friendly
French President will take office on May 7th.
Four candidates could qualify for the runoff
What investors fear is that a Le Pen victory would
automatically lead to her calling a referendum on France’s
membership of the EU, which, if passed, implies leaving
also the EMU. However this scenario is very unlikely. First,
even though Mme Le Pen will probably reach the second
round, this week M. Macron has overtaken her in first round
polls (Figure 1). The difference in support between the two
is now within the margin of error.
In the runoff, surveys consistently point to a 60-40 defeat
for Mme Le Pen. Voters from the traditional parties will
probably converge towards M. Macron as happened in
2002. At the time the PS set aside political differences
and campaigned for Jacques Chirac, the UMP’s candidate,
against Jean Marie Le Pen (Marine Le Pen’s father), who had
unexpectedly reached the second round.
1
BSI Views: Are financial markets overestimating the risk of Frexit?
2 | Infocus April 2017
Nonetheless, the risk of a Le Pen victory remains. Some
analysts warned that a low turnout of M. Macron’s voters
in the second round would favour Mme Le Pen whose
supporters are very motivated and will surely support their
candidate in the runoff.
1. First round presidential elections polls
28
26
24
22
20
%
18
16
14
12
10
8
6
29-Jan
15-Feb
07-Mar
Mélenchon (left)
Macron (independent)
Hamon (centre-left)
Fillon (centre-right)
26-Mar
11-Apr
Le Pen (eurosceptic)
Sources: Ifop-Fiducial, BVA and OpinionWay
However, as described in a previous note,1 from a
constitutional point of view it may not be as easy
for President Le Pen to call a referendum on French
membership to the European Union. She would first
need to change the Constitution for which she needs a
parliamentary majority. However, the FN currently holds
two seats in the 577-seat Assemblée Nationale (which will
be renewed later in June) and no seats in the 348-member
Sénat.
Opinion polls indicate that the FN will not get a majority
of seats in the June elections. One-third of Senators are
elected every three years (with the next election to held in
September) so the earliest time the FN can get a majority
in the Sénat is 2020. Nevertheless, if the FN manages
to call a referendum on EU membership, it is far from
guaranteed that the French citizens will vote to leave the
Union.
FRENCH PRESIDENTIAL ELECTIONS: THE REAL TEST FOR THE EURO
Over the past weeks, M. Mélenchon has seen a surge in
popularity thanks to his good performance during the TV
debates and is now very close to M. François Fillon, the
UMP candidate (one poll published in the week starting
with April 10th even puts him ahead of M. Fillon by one
percentage point). M. Mélenchon’s increasing support
(who is now assigned the same probability of victory as M.
Fillon by bookmakers) may be behind the late increase in
European, especially French, market tensions.
markets. Figure 2 below shows how the 10-year sovereign
spread to the German Bund has started to fall towards the
end of February, when polls began to show the increasing
support for M. Macron in the first round.
2. 10-year sovereign spread to German Bund and Mme Le
Pen’s lead in opinion polls over M. Macron
85
7
80
6
75
5
70
4
65
3
% 60
2
55
1
50
0
45
-1
40
-2
35
29-Jan
13-Feb
28-Feb
15-Mar
30-Mar
18-Apr
Le Pen poll lead vs. Macron (%)
In this unusual election race, we cannot exclude further
twists ahead of the elections with two other candidates
standing a few percentage points behind the other two
and who may reach the second. M. Jean-Luc Mélenchon
(founder of the Left Party) is not far in opinion polls from
the Mme Le Pen and M. Macron. He calls for a revision
of EU treaties (with the possibility of exiting in case the
request is not accepted) and for an increase in the topincome bracket wealth tax.
-3
10Y sovereign spread with Bund
Mme Le Pen lead in polls over M. Macron (rhs)
Sources: Bloomberg, Ifop-Fiducial, BVA and OpinionWay
M. Macron’s increased popularity over the last few weeks
has calmed investors, despite the widespread geopolitical
uncertainty that has caused some anxiety in financial
3. VSTOXX May 17 futures price and Mme Le Pen lead over
M. Macron
25
7
24
6
23
5
22
4
21
3
20
2
19
1
18
0
17
-1
16
01-Feb
22-Feb
15-Mar
05-Apr
Le Pen poll lead vs. Macron (%)
Financial markets vote for Macron
Investors seem to believe that a victory for Macron
would probably be the best scenario for France and
for the EU as whole. His ambitious programme calls for
important reforms in France and for deeper integration
with the creation of a Minister of Economy and Finance
of the euro area. In France, M. Macron calls for reforms
in the labour market and the pension system (there are
currently 37 schemes and he plans to unify them into one),
a commitment to the EU-deficit targets and a €50 billion
investment plan (for more details on the candidates’
programmes, refer to the table in the Appendix on Page 5.
Activity on futures contracts linked to volatility of the Euro
STOXX equity index also suggests that traders are now
assigning a higher probability to a victory by M. Macron.
Earlier this year traders were betting on higher volatility
in May resulting from Mme Le Pen winning the elections.
However, as her lead over M. Macron started decreasing,
investors reversed their decisions and the price of VSTOXX
future expiring in May fell as is clear from Figure 3 below.
VSTOXX futures price
When he won the centre-right coalition primary elections,
M. Fillon was seen by most analysts and commentators
as the most likely next French President. His deep public
expenditure cuts and business-friendly reforms were
welcomed positively by investors. The scandal he was
involved in regarding payments to his wife and children
changed everything and he is not expected to qualify
for the runoff. Nevertheless, he remains close to the two
leading candidates and cannot be fully excluded from
the race.
-2
VSTOXX May 2017 futures price
Mme Le Pen lead in polls over M. Macron (rhs)
Sources: Bloomberg, Ifop-Fiducial, BVA and OpinionWay
Infocus April 2017 | 3
FRENCH PRESIDENTIAL ELECTIONS: THE REAL TEST FOR THE EURO
Cohabitation poses risks too
In this year’s strange elections, the legislative votes in June
take on a very relevant role, probably even more so than
the presidential ones. They will determine the government,
which shall determine the policy of the nation (French
Constitution, Article 20). The way the electoral system of
the Assemblée Nationale is designed does not make it
prone to a non-mainstream party’s majority.
It is well possible that the next French president cannot
rely on a parliamentary majority. On the one hand, M.
Macron does not have an established party behind him,
or the expertise and logistics needed to campaign for a
parliamentary majority. On the other hand, Mme Le Pen
faces a different issue resulting from the French electoral
system. The traditional parties may, as they already did at
the 2015 regional elections, join forces to defeat her.
The President may, thus, need to appoint a Prime Minister
from a different party than his or her own restoring the
so-called cohabitation, which only occurred three times
in history. In this case the President will retreat to foreign
and international policy and retain a referee role in the
political arena.
The centre-right coalition (led by the UMP) is predicted
to win a significant share of seats in June (although the
latest poll dates back to June 2016), making it a candidate
for a senior partner in an agreement with the President.
Its programme bears more similarities with M. Macron’s
programme than with Mme Le Pen’s. They both want to
decrease public spending reducing public sector jobs,
although M. Fillon aims at a much less interventionist
state machine. Both M. Macron and M. Fillon want deeper
European integration, but M. Macron is more pro-EU.
M. Fillon is, according to analysts, the most “right-wing”
of the centre-right coalition primary election contenders.
Therefore, he may be able to strike a deal with Mme Le
Pen, should she be elected, on certain issues regarding
on immigration and foreign policy. They both call for a
crackdown on illegal immigration and for stronger ties
with Russia.
Cohabitation, no matter between which party and
candidate, may entail lengthy and cumbersome
negotiations, which may delay the normal legislative
functions with possible negative consequences on the
economy as a whole. In addition, the result would be
a compromise on the candidates’ initial platform. We
may witness a grand-coalition government for the first
time. Markets understanding of the issues related to
cohabitation may also be what is behind the recent
increase in volatility.
Conclusions
The Presidential elections in France are keeping European
financial markets with bated breath. They represent the
most important populist test this year. With the traditional
parties probably out of the race and an anti-EU candidate
leading the polls, investors worry about the potential
consequences. Nevertheless, the peculiarities of the
French electoral system make victory of a populist party
candidate unlikely.
We see the probability of an anti-EU President being
elected and a referendum on French membership be
held as a tail risk. Therefore, we believe that the recent
anxiety in financial markets to fade away after the election.
The potential cohabitation resulting after the legislative
elections in June may also add to the markets’ concern.
Infocus April 2017 | 4
APPENDIX
The programmes of the main French presidential candidates
CANDIDATE
ECONOMY
SECURITY AND
IMMIGRATION
EUROPE AND THE
WORLD
SOCIETY AND
GOVERNANCE
Mélenchon
(Left Party)
Lower pension age to 60; maintain
35-hour week; raise minimum wage;
repeal recent controversial labour
market reform making it easier for
firms to fire workers; increase top
income tax rate to 100%
End wars and austerity
causing immigrannts to
migrate
Oppose EU treaties
(change them or leave);
leave NATO; oppose to
TAFTA/CETA
End “presidential
monarchy“ giving more
power to citizens;
cement guarantees on
rights such as abortion
Hamon
(Socialist
Party)
Raise minimum wage; basic welfare
income of €600 to everyone aged 18
or upwards (estimated cost €300 bn);
introduce "robot tax" on robots in
businesses
Hire 1,000 police officers
per year; boost defence
budget to 3% of GDP;
introduce „temporary
humanitarian visa“; allow
pending asylum seekers
to work
Recognise Palestinian
state; seek moratorium
on EU‘s Stability and
Growth Pact; favour EU
convergence on tax,
social and defence policy
Legalise cannabise;
return to seven-year nonrenewable presidential
term; limit MPs to three
mandates; introduce
citizen-legislating
(parliament must
consider bills proposed
with 1% of citizens
backing)
Macron
(En Marche!)
Decrease public spending by €6 bn by
reducing public sector jobs; respect
EU budget laws; public investment
plan of €50 bn; cut corporate tax to
25%; maintain 35-hour week allowing
negotiations of true work hours
at company level; create universal
employment benefits programme
(unemployed individuals lose benefits
if they turn down two job offers); unify
pension system for public and private
workers
Hire 10,000 police officers;
keep EU-Schengen pact
while boosting external
frontier policing by 5,000;
adopt common European
asylum policy
Establish common
European defence
funding; push for further
intregation of euro area
governments with EMU
Finance Minister
Require clean court
record for all ministers;
ban holding more than
one elected office; give
€500 to yougsters for
cultural activities
Fillon
(Republican
Party)
Reduce public expenditure by €100
bn by cutting public service jobs by
500,000; increase work week to 39
hours; raise pension age to 65; scrap
wealth tax; cut corporate tax to 25%
Create EU external
frontier police force;
establish annual quota
for immigrants intake;
abolish free mdical care
for foreigners
Consolidate euro area
decision making; end
sanctions to Russia and
ally with them in Syria
conflict
Change law on adoption
of same-sex couples
Le Pen
(Front
National)
Increase salaries of €1,500 by €200
a month; cut retirement age to 60
raising pensions; reform or maintain
wealth tax; reform company profit tax
Call referendum on reestablishment of death
penalty; promulgate
law favouring hiring
French-origin people;
reduce immigrants
intake to 10,000; urge
legal immigrants to leave
country after 1 year of
unemployment; hire
15,000 police
Re-establish French
franc currency and make
central bank answerable
to French Treasury;
call referendum on EU
membership; pull out
of Common Agricultural
Policy
Bring back seven-year
presidential term and
make it non-renewable;
ban all religious clothing
and apparel in public
service; remove EU flag
from buildings
Infocus April 2017 | 5
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Infocus April 2017 | 6