At last stock markets and the pollsters have got an election right! It was relief all round, as on this occasion we at Charles Stanley joined the consensus in thinking a win by Mr Macron and Mrs Le Pen was the most likely outcome in a very close race. As expected there was a strong late run by the far left Mr Melenchon, and a resilient performance by Mr Fillon for the centre right Republicans. Mr Macron got 23.9%, Mrs Le Pen 21.4%, Mr Fillon 19.9% and Mr Melenchon 19.6%. It was a still decisive defeat for France’s two main traditional parties of government, as neither have a candidate in the run off.
Stock markets will take heart from this outcome. The pollsters are confident that Mr Macron will beat Mrs Le Pen in two weeks time in the second round decider. All the forces of the centre left and centre right will be there to help Mr Macron across the finishing line in first place. The euro and the EU will be safe from French attacks assuming this comes true.
The issue markets will have to consider, however, is what Mr Macron will be able to do if elected as President. His En Marche movement is recently constructed and is unlikely to win a majority of the seats in the French Parliament. It is possible, of course, that victory in the Presidential election brings a wave of enthusiasm for his movement to give him a stronger than expected position in the Parliament. It is also possible that the traditional parties might wish to be helpful, at least in the early days, to reflect his popularity and his mandate. However, the way Mr Macron detached himself from the socialist party he belonged to as a Minister will not have endeared him to the centre left establishment. The way he wishes to adopt some centre right proposals on business and regulation will worry the centre right who will want to re-establish themselves as a major political force for the pro-business side of the debate. Being in the centre has scope for increasing support whilst you are popular, but leaves you exposed to a squeeze from both sides when they see the opportunity.
Once the Presidential election is decided attention will turn to the Parliamentary elections in June. They will determine whether Mr Macron’s programme has any chance of implementation, or if it will usher in a period of Presidential frustration matched by Parliamentary sniping. His programme is somewhat sketchy. It is described in general terms as being like Germany’s belief in the social market economy. That implies less regulation and tax on business than socialists like, matched with more social protection and solidarity measures than conservatives usually recommend. The problem is cost in an economy like the French one already at the limits of spending under the Maastricht budget controls.
The economic recovery of the Eurozone continues. This latest news removes much of the political risk that stalked markets in the run up to the election, removing the threat of a Eurosceptic high spending left wing candidate, and making it difficult for the National Front to win. The market is not expecting much from Mr Macron’s reform programme. That is wise given the difficulties he will face in framing it and getting it through. Some of it requires reform at the EU level, which will be even more problematic. Winning an election in France does not change the views of the other 26 member states that are staying in.
The above article by John Redwood, Charles Stanley’s global chief economist, was first published by Charles Stanley on 24th April 2017.