Editors’ Note: MarketMinder Europe favours no political party or politician, analysing developments solely for their potential market and economic impact.
Well that was anticlimactic. French President Emmanuel Macron cruised to victory over challenger Marine Le Pen in Sunday’s runoff, becoming the first French incumbent president to win re-election in 20 years.[i] Heading into the contest, polls put his lead in single digits, seemingly keeping the outcome in question.[ii] Yet the latest election returns put his margin at 58.5% to 41.5%.[iii] Some commentators we follow have expressed relief that France won’t be ruled for five years by a nationalist who touted far-left economic policy on the campaign trail. Others warn that Macron’s decision to tack left on economic policy whilst campaigning could herald a shift away from his first term’s alleged pro-growth reform bent. We think both viewpoints largely miss the elephant in the room: French presidents can’t do much without Parliament, and Parliament’s lower chamber, the National Assembly, holds elections in June. In our view, a break from the deep political gridlock that we observed for most of Macron’s first term seems unlikely. Whilst that probably prevents meaningful pro-growth reforms, we think it is also likely to reduce legislative uncertainty. That likely extends the status quo that French stocks have been fine with for years, in our view.
From the start, we didn’t think the presidential contest was likely to make or break stocks. Given Le Pen’s National Rally has had difficulties organising at the grassroots level, the likelihood it won a majority in June was exceedingly low, in our view.[iv] We think her economic agenda likely would have gone next to nowhere. She might have been a thorn in other EU leaders’ sides, but that probably would have amounted to far less than many commentators we follow warned. The European Council operates by consensus, and we have long observed that process to be messy, with holdouts holding plenty of influence. That the holdout would have come from the bloc’s second-largest economy wouldn’t have changed much beyond appearances, in our view.[v]
As for Macron, we think his reform credentials have long been overstated. Yes, he ran and won as a reformer in 2017.[vi] Yes, he passed some labour reforms that year, but the legislation that passed was watered down greatly from initial proposals and didn’t address the country’s rigid system of employment contracts.[vii] Yes, he managed to get France’s budget more in line with EU deficit limits before the pandemic.[viii] But one of the deficit reduction tools—which doubled as a green initiative—was a fuel tax hike.[ix] Whilst it was popular with Metro-riding urban dwellers, it was political poison in the suburban and rural areas where people commute long distances to work.[x] It also roiled truck drivers, sparking the yellow vest protests in late 2018, which brought much of the country to a standstill and put Macron’s flagship pension reforms on ice.[xi] When he tried to revive those in late 2019, it sparked the longest general strike in French history.[xii] Then came COVID, and reform plans basically dropped from the agenda.
This time, Macron again ran on pension reform, including raising the retirement age from 62 to 65. Yet he started walking that back even before the second-round vote, saying 64 might be a better age after 65 proved bitterly unpopular.[xiii] Now, waffling is the norm for all politicians, in our view, but we suggest thinking this through from a political capital standpoint: Macron’s La Republique En Marche party currently holds 267 of the National Assembly’s 577 seats.[xiv] It governs in coalition with the centrist Democratic Movement and Agir ensemble, which have 57 and 22 seats, respectively.[xv] If Macron couldn’t parlay his coalition’s huge majority into significant labour and pension reforms after beating Le Pen by over 30 points in 2017, what is the likelihood he has more success now, after a tougher election fight?[xvi] If the opposition parties chip away at his majority in June, we think the participating lawmakers will probably become even less apt to rock the boat. Perhaps he could pass something watered down in that scenario. But if he loses his majority, that is likely off the table, in our view. Even natural allies like the centre-right Les Republicains would likely demur: Why spend political capital helping a rival pass their agenda? We suspect they would likely think it better to wait for their turn in the spotlight.
In our view, the presidential runoff cleared much of this year’s early uncertainty—for stocks, we think that is a benefit. In our experience, markets generally don’t prefer any candidate over another—we think policies, not people, are what matter—but simply knowing the winner lets people move on, in our view. We think June’s National Assembly vote will be another opportunity for uncertainty to fall—likely a plus for stocks. If it extends political gridlock, as we think likely, then that helps too, in our view. Whilst many commentators we follow characterise France as a country needing reform, its longstanding structural issues haven’t prevented its economy and markets from doing fine over time.[xvii] We think whether any economy needs reform is always a matter of opinion, too. But in our experience, even well-intended changes can risk creating winners and losers, which often raises legislative uncertainty for stocks. We think that can be a headwind even when a government investors view as pro-market is in charge. So when the legislature can’t pass much, we think it eases legislative risk and helps stocks. There may be some initial disappointment if reform hopes were high at first, but in our experience it usually evens out, with gridlock giving stocks a bit less to worry about.
[i] Source: French Ministry of the Interior, as of 26/4/2022.
[ii] “French Election Polls: Who is Leading the Race to be the Next President of France?,” Angelique Chrisafis, Jon Henley and Seán Clark, The Guardian, 14/4/2022.
[iii] Source: French Ministry of the Interior, as of 25/4/2022.
[iv] “French Far-Right Chief Criticized for Her Mainstream Turn,” Elaine Ganley, Associated Press, 3/7/2021.
[v] Source: World Bank, as of 26/4/2022. Statement based on annual gross domestic product amongst EU member-states. Gross domestic product is a government-produced measure of economic output.
[vi] “Emmanuel Macron Launches Outsider Bid for French Presidency,” Angelique Chrisafis, The Guardian, 16/11/2016.
[vii] “5 Key Points From Macron’s Big Labor Reform,” Nicholas Vinocur, Politico, 31/8/2017.
[viii] “France Cuts Billions From Public Spending to Meet EU Limit,” Staff, BBC News, 11/7/2017.
[ix] “Macron Refuses to back Down on French Fuel Tax as Protests Loom,” Michel Rose and Dominique Vidalon, Reuters, 5/11/2018.
[x] “France Fuel Protests: Who Are the ‘Gilet Jaunes’ (Yellow Vests)?,” Staff, BBC News, 6/12/2018.
[xii] “Macron Pension Reform: France Paralysed by Biggest Strike in Years,” Staff, BBC News, 5/12/2019.
[xiii] “Macron’s Camp Defends Backtrack on French Pension Reform,” Joseph Schmid, Yahoo! News, 12/4/2022.
[xiv] Source: National Assembly, as of 25/4/2022.
[xvi] Source: French Ministry of the Interior, as of 26/4/2022.
[xvii] Source: FactSet, as of 26/4/2022. Statement based on MSCI France Index return with net dividends in GBP.
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