The President, Parliament, and Predicament of France
Investors who had been holding their breaths during the French presidential election primary appeared to exhale in relief after the first round of voting on Sunday, April 23, 2017. The euro currency gained about 1% against the dollar and major stock indexes started Monday with similar gains. Relief rallies are often short-lived, however.
BerganKDV Wealth Management has been limiting exposure to European and developed Asian country equities at below market-weight levels in portfolios we manage. This stance was not based on any short-term political calculation, but rather because we see other parts of the world having relatively better prospects in the long term for economic growth.
We continue to monitor developments in the French election cycle, with an eye on implications for economic growth and cooperation in Europe. A wait-and-see approach makes sense to us.
The election results suggest that France may be in for big changes politically, though French voters might refrain from changes that investors feared: exiting the European Union or abandoning the euro currency.
Sunday’s voting rejected the nominees of both major, national parties in France, elevating instead two “outsider” finalists from a field of 11 contenders. Here is what happens next.
- The two finalists will stand in the second, final round of voting on May 7th.
- After that, France will hold its Parliamentary election in June.
- After that, the new president elected in May will have to persuade a majority of the new parliament to approve her or his nominee for Prime Minister, who will actually be the head of government and exercise the real executive power.
The two finalists for president would take France in almost opposite directions. Big changes in France could bend the course of global economic growth.
Emmanual Macron is a young, relative newcomer to French national politics. He is something of a phenomenon. He ran an independent, media-centric campaign that appeared to win the largest plurality of the votes on Sunday. Macron’s political weakness is that he held himself apart from France’s traditional, national political parties. Now, he will need to attract established party support to win in May.
Macron has served as an economic minister in the French parliament. His liberal/progressive platform openly advocates positions that investors might favor, such as keeping France in the European Union and participating in the euro common currency. Macron is seen as a “status-quo” candidate in this way, compared to his opponent.
Investor concern focused on the other finalist, Marine Le Pen, the “change” candidate, who will ask voters for a mandate to take France out of the European economic union, a kind of French Exit, or “Frexit”, and to renounce the euro currency, going back to using the French franc instead.
The change of money would be a source of significant uncertainty for investors. Le Pen has even proposed to re-denominate existing French government debt unilaterally into francs from euros, forcing investors to accept francs in payment of interest and repayment of principal on bonds that were purchased with euros. That wouldn’t be popular outside of France.
There is a serious question of the long-term viability of the European economic union and the euro currency without France as a full participant. Investors might not look favorably on the prospect of a Le Pen presidency.
Le Pen, leader of the conservative party, National Front (FN), achieved a very close second place finish. A veteran French politician, Le Pen is the daughter of one of the FN’s founders and starts down the home stretch with a long-standing base of support.
Macron and Le Pen each won about 23% of Sunday’s votes. One of them will need to bump that 23% up to more than 50% over the next two weeks to become the next President of France. What a contest it seems likely to be!
Investor relief following Sunday’s vote reflected hopes that most of the other 54% of Sunday’s votes might go to Macron in the final round. According to a blog post on Politico.eu, an Ipsos poll taken immediately after the April ballot showed the young centrist candidate holding a lead of more than 60% compared to less than 40% for Ms. Le Pen among likely second-round voters.
Perhaps investors who fear a Le Pen presidency are hoping that, if she wins, the majority of Parliament would not go along with her. The flip side of that hope might be a question whether Mr. Macron can transform his “outsider” status of April into a Parliamentary mandate in June.
The French predicament is that its economy continues to grow very slowly, with high unemployment. According to data provided by the Organization for Economic Co-operation and Development, the unemployment rate remains near 10% in France, while the French economy may grow just 1.6% this year. That rate is too slow to bring unemployment down appreciably.
These well-known problems in France’s economy have resisted the efforts of the past two presidents. The problems seem likely to shape the next presidency of France also, rather than the other way around, regardless of which candidate wins the office.
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