Governments come and go in the Euro area. It often makes little difference to investors. The Euro sails on, the European Central Bank sets interest rates, economic policy has to bow to the deficit requirements and other rules of the EU. The scope for individual country differentiation is narrow. Countries that defy the scheme deliberately are reined in, as with Greece. Countries that fail to hit targets in a less provocative way have to try harder next time, as Italy and Belgium have to do with their state debt so far above the permitted maximum, or France occasionally with its running budget deficit. Investors concentrate on the actions of the Central Bank and the zone as a whole, and draw more relevant material from the economic figures than from individual government statements.
This time, however, the French elections really matter. The French electorate look as if they want to have a fundamental choice between Emmanuel Macron, and Marine Le Pen. The political and economic world will look very different in early May depending on which wins. The same will be true if some other candidate replaces Mr Macron as the second placed challenger in round one.
If Le Pen wins she has made clear she wants to take France out of the Euro and give the French people the opportunity to leave the EU as a whole. She speaks warmly of Trump’s victory in the US and of Brexit, though she is no conservative. Her slogan is “Au nom du people”. She hopes this will resonate as strongly as “Make America Great Again” and “Take back control”. Her policies are a mixture of socialism and authoritarianism. She wants strict migration controls and protection to raise living standards and job prospects for French people. She condemns the elites and banker capitalism as the cause of poverty and unemployment.
The man who many see as her nemesis in the second round, the man who according to the polls will be the next President of France, clearly takes her slogan and language very seriously. Imitation is a serious form of flattery. There are echoes of her words about the people scattered through Mr Macron’s writings and speeches. The Macron appeal is carefully crafted. His slogan of “En marche” is about forming a sense of momentum and change. He needs to build a whole new political party out of what he calls his movement. He is identifying candidates to put up for the Assembly elections. His pitch is anti-establishment. He explains how he wishes to defy the rules of political life – in the right way. He complains about the failure of traditional parties and politics. In order to beat the great outsider, Le Pen, he portrays himself as an outsider too. He plays down his recent roles for the current President and his work as Economy Minister. He makes a virtue of having never himself held elected office. He has jumped ship from the unpopular socialist party, and looks capable of elbowing aside the chosen candidate of the Republican party. If this election is Le Pen against Macron the traditional main parties, the French equivalent of Labour and the Conservatives, will have no candidates in the last round of the election. What is surprising is no-one seems surprised by this turn of events.
A Macron win will be seen as the counter revolution after Brexit and Trump. In a way it would be. It will reassure markets that the Euro is here to stay. It will calm fears about many aspects of Euro and EU economic policy and it will be seen as a vote for the status quo. It will, however, be a vote based on adopting language from the peaceful revolution. Macron can only win by tapping into the disappointment and anger about conventional parties and politics as it has been practised in the Eurozone in recent years. It will yield a presidency that has aroused expectations of change with no sure form that change can take. President Macron will either have to deliver some substantial change, or he will be harried by an increasingly vocal opposition that thinks their peaceful revolution is delayed, not cancelled.
We continue to base our approach to the Euro area on the consensus view that Le Pen will lose in the second round. We will need to adjust our view if it looks more likely she will win. The Euro and the EU would look very different without one of its two main anchor countries still in the currency.
The above article by John Redwood, Charles Stanley’s Chief Global Strategist, was first published by Charles Stanley on 10th February 2017.