Winning One for the Globalists

Globalism has triumphed over nationalism in the French presidential election. Stimulating European growth, however, may pose a greater challenge.

Pro-European Union candidate Emmanuel Macron’s victory over nationalist Marine Le Pen has brought relief to those who feared that France, the second-largest source of revenue for the European Union, could seek a Brexit-like departure from the world’s largest economic bloc. The end of the anxiety stoked by Le Pen’s campaign should buoy financial markets and reassure those who see benefit in a united Europe. Deputy Chief Investment Officer Raman Srivastava says he expects a modest relief rally after the vote because markets had already priced in a Macron victory. "We think spreads in peripheral government bonds will likely tighten somewhat, as will corporate credit generally," he says. "We also believe the euro will do well and we expect bunds to sell off as the election-led migration to safety unwinds somewhat."

Results Don’t Extinguish Euroskepticism

Meanwhile, though, the political, cultural and economic challenges that France and Europe face will not go away simply because someone who sought power by exploiting those problems lost an election. Over the two rounds of voting, a significant percentage of French voters supported either Le Pen or the equally anti-establishment Jean-Luc Melenchon; their defeats will not extinguish euroskepticism and nationalism in France, or elsewhere in Europe. Macron’s ability to confront these issues and restore voters’ trust in French institutions will be tested in the June parliamentary elections. "If his En Marche! party wins a majority," says Director of Sovereign Research and Strategy Rebecca Braeu, "Macron will have greater ability to pursue growth-friendly structural reforms. We expect that French spreads would tighten to roughly 20 basis points over bunds on prospects for higher potential growth."

Political Risks Remain in the Eurozone

With a less-friendly parliament, though, Macron could struggle to advance the ambitious pro-growth agenda that gained him attention during the campaign, including proposals to liberalize employment laws and overhaul the public pension system. The French and European economies need these sorts of structural reforms if they are to generate the economic growth necessary to close the social fissures that fuel movements like Le Pen’s Front National. As Chief Economist Vincent Reinhart observes, Europe is currently enduring the slowest recovery from a severe financial crisis in two centuries with only barely positive real GDP growth, on average, since the financial crisis.

Srivastava notes, "Political risk remains for the Eurozone, most notably in Germany, but also in Italy. Nevertheless, we view the former as relatively benign regardless of outcome. Italy holds more potential for an upset, but we note the election will not likely occur in 2017."

Potential ECB Taper Tantrum On The Horizon?

In the meantime, Standish views the timing of the decision by the European Central Bank (ECB) to begin tapering its quantitative easing (QE) program as the plot for the next episode in Europe’s long-running geopolitical risk drama that began with the Greek debt crisis more than seven years ago. We will be watching to see whether the ECB can unwind QE without triggering a ‘taper tantrum’ of the sort that occurred in the US when the US Federal Reserve announced cuts to its bond-buying program. With the prospect of Le Pen as president of France now off the table, we believe the relatively stable political environment, and signs of at least modest economic health, provide favorable conditions for the ECB to begin considering tapering.

In France, as in the Netherlands in March, European voters have chosen leaders who would keep Europe intact rather than political entrepreneurs who seek to capitalize on popular discontent with existing economic and social policies. What remains to be seen is whether the ruling elites can make these policies generate needed economic growth.

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