French elections: short-term relief for the Eurozone

French elections: short-term relief for the Eurozone

24-04-2017 | Insight

Emmanuel Macron will face Marine Le Pen in the second round of the French presidential election on 7 May. This represents some short-term relief for markets, even though many challenges still lie ahead.

  • Léon  Cornelissen
    Chief Economist
  • Lukas Daalder
    Former CIO Robeco Investment Solutions. Daalder left Robeco in July 2018.

Speed read

  • A business- and market-friendly outcome in the short run
  • A Macron presidency would still raise concerns in the medium term
  • Next European election focus will be Italy
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According to official figures based on the results of 97% of votes counted after polls closed Sunday, Emmanuel Macron, an independent centrist, came out first with 23.9% of the vote, ahead of Marine Le Pen, the far-right leader, with 21.4%. They both came ahead of François Fillon, the conservative former prime minister, and left-wing candidate Jean-Luc Mélenchon.

“The rollercoaster four-horse race has ended with a market-friendly outcome,” says Robeco’s Chief economist Léon Cornelissen. “This result was broadly in line with the polls and, contrary to expectations, voter turnout was similar to previous French presidential elections.”

The chances of seeing nationalist and Eurosceptic Le Pen at the Elysée Palace have decreased. “Polls before the first round suggested that Macron would be the strongest candidate against Le Pen, winning the second round by 61% to 39%,” says Cornelissen. “Betting markets now see Macron’s chances of becoming the next French president as close to 90%.”

Short-term relief, but…

In the short run, a Macron presidency would be considered beneficial for the current business cycle upswing in the Eurozone, and would rule out a possible French exit from the Eurozone and the European Union. “European equities should outperform global markets, although the upside may be capped by the strengthening of the euro, now up 1.5% because of the election outcome,” says Lukas Daalder, Chief Investment Officer at Robeco. “Not surprisingly, the French bond market liked the outcome, with the spread versus the German bond market declining.”

“Frexit has never been a popular idea in France, as illustrated by the recent toning down on this theme by Le Pen, and is clearly off the agenda for years to come,” says Cornelissen. “Macron was also the only Kremlin-sceptic among the main candidates of the first round, which will greatly facilitate continuing friendly relations with Berlin.”

For the time being, the French economy is enjoying a cyclical upswing, with growth strengthening to 1.5% over the course of this year. A now very likely Macron presidency in France will drop off the agenda as a significant risk for the stability of the Eurozone.

However, concerns remain over the medium term. Macron does not have the backing of the two mainstream political parties. “After parliamentary elections in June, he most likely will have to work with a coalition cabinet, “ says Cornelissen. “Will he be able or willing to push through his modest reformist economic agenda, or will France continue to remain a laggard vis-à-vis Germany, raising long-term political risks for the next presidential elections?”

Next election focus: Italy

Financial markets will now switch their attention to Italy, where the euro-sceptic Five Star movement is currently leading the polls ahead of the next elections, which have to be held no later than May 2018. “A euro-sceptic parliamentary majority is likely, although that’s somewhat different than a workable government coalition,” says Cornelissen.

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