EU Awaits Outcome of France's Prolonged Election Season

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We will soon find out whether the wave of populism that swept the world in 2016, resulting in Brexit and President Donald Trump, will reach the shores of France. From April through September, France will elect a new president, a new National Assembly and half its senators. Perhaps the most significant pro-populist outcome would be victories for the anti-European Union, anti-euro and anti-immigration National Front party and Marine Le Pen – although it looks increasingly less likely that they will ultimately prevail. However, with voter uncertainty in France at record levels – approximately 60 per cent of voters are undecided – it is difficult to make any predictions.

Europe, which is in the throes of a "super cycle" election year, will be paying close attention. Following the recent election in the Netherlands, Germany will vote in September and Italy could hold snap elections at any time, although a formal election is not due until next year. Any number of these outcomes could influence whether the EU moves toward closer integration or takes the opposite path.

So far, the pro-EU forces seem to be winning. The capital markets should welcome this as a way to reduce Brexit-related uncertainty after the UK recently began the formal process of leaving the EU. Germany's economy is doing well, and Paris and Berlin could form stronger ties if pro-EU candidates win in both countries, which would help the EU and euro area.

First, however, France needs to vote. Here is our overview of the races, our perspective on the candidates' policies and prospects, and the overall implications for investors.

Overview of France's national elections in 2017
Between April and June, voters in France will elect a president and National Assembly, and in September an electoral panel will choose the Senate. Ultimately, while the French president holds a powerful position, he or she will need to work closely with colleagues in the National Assembly and Senate to enact any significant policy changes – and there are very few scenarios where we expect to see this kind of close cooperation. France is used to the cohabitation system of government, wherein most members of parliament have different political affiliations than the president, but the more left-wing presidential candidates may have an easier time securing a cooperative parliament. It is also possible that no clear majority will emerge in the National Assembly and additional elections will be needed; a similar scenario happened in Spain last year.

Five Elections in Six Months

Policies and prospects of four presidential candidates
There are four leading candidates in France's presidential race:

  • Emmanuel Macron may have the best chance of becoming president. He is solidly pro-EU but a political outsider. Even if he struggles to gain a majority in the National Assembly, he may have enough support to pass some reforms, although he may find his more aggressive campaign positions neutralized.
  • Marine Le Pen should emerge from the first round but may have a hard time winning the second. If she were to become president, the National Front party may struggle to win enough National Assembly seats to give her any chance of driving through significant policy changes.
  • François Fillon is a right-leaning candidate of the establishment, but his chances of surviving even the first round have been diminishing due to a scandal involving his wife's alleged abuse of public funds.
  • Jean-Luc Mélenchon is a far-left politician who has been compared to ex-US presidential candidate Bernie Sanders. At the time of this writing, he has been gaining ground in the polls, although he remains in third place behind Mr Macron and Ms Le Pen.

Outsider Macron Has Best Chance of Winning Both Rounds

Turnout in France has broader investment implications
Voter turnout will be very important overall, and we expect more French citizens to vote in the presidential race than in the National Assembly elections. Voter enthusiasm tends to wane as the electoral process continues, which gives an edge to parties with more committed voters.

France's presidential race remains close enough that we would be uncomfortable trying to pick the ultimate winner – particularly given the upsets seen in last year's Brexit vote and President Trump's victory in the US. However, we do expect Mr Macron and Ms Le Pen to prevail in the first round.

Once the first round's results are known on 24 April, we will see how Europe and the markets respond to the prospect of Ms Le Pen as president. Her policies are hostile to the EU and could keep Europe directionless, beset by populism across the continent, confused by the complexities of Brexit and uncertain of the attitude of President Trump – all of which could further undermine NATO.

A victory by Mr Macron in the first round, however, may provide a boost to the EU and could lift the markets. Until then, investors regionally and globally still seem wary of EU politics and euro-area risk assets, even though earnings and dividend yields are attractive and the euro seems undervalued.

Three Scenarios: Political and Investment Implications of the Presidential Race

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