Market Analysis

The Eurozone Outside of Catalonia

Whilst neither fundamentally changes our bright outlook for eurozone equities, they represent more falling uncertainty and show how sentiment in the eurozone is still playing catch-up.

With so much media coverage recently over Catalonia and the well-telegraphed non-event that was the 26 October ECB meeting, some other noteworthy political developments in the eurozone seemingly fell on deaf ears. France passed sizeable tax cuts and Italy passed long-rumored electoral reforms. Whilst neither fundamentally changes our bright outlook for eurozone equities, they represent more falling uncertainty and—especially in France—show how sentiment in the eurozone is still playing catch-up.


President Emmanuel Macron took advantage of his En Marche! Party’s 61% majority in the National Assembly, passing a budget including some tax cuts and reductions in public spending. The purpose of this budget—in conjunction with previously announced hiring and small business reforms—is to encourage businesses and entrepreneurs to move back to France by removing some laws that local and international business long complained about. In aggregate, the administration projects the budget changes will reduce France’s budget deficit below the eurozone’s 3% (of GDP) limit.

Among the tax cuts’ highlights , the corporate tax rate will fall to 25% from 33% between now and 2022. The surtax on high earners—a flagship policy of former President François Hollande, will also go away, as will the wealth tax, which scared off an estimated 60,000 millionaires since 2000. In its place is a new property tax, which applies to real property above €1.3 million—and should exempt 80% of French households. Capital gains taxes will also change from a complex schedule—with rates ranging from 45% to 60% with lots of complexities —to a flat rate of 30%. Finally, the 3% additional tax on dividends bites the dust.

On the spending side, the administration trimmed a few subsidies. Government-subsidised job contracts will fall by an estimated €1.5 billion per year, whilst annual housing subsidies will drop by about €1.7 billion. Health insurance benefits and subsidies will fall by an estimated €4.2 billion annually. Additionally, many retiring government employees will not be backfilled, effectively trimming the public payroll without taking on politically difficult layoffs.

Whether these measures are enough to lure capital back to France is debatable. Macron sees an opportunity to attract companies from the UK, post-Brexit, and chipping away at some of France’s long-running competitiveness issues can’t hurt. Yet media coverage has been scarce and negative, citing protestors with signs reading “Macron President of the Rich.” Though anecdotal, it is one example of how sentiment in the eurozone remains too dour. Few seem to see incremental reform as the small positive it is.


Electoral reform easily passed parliament—thanks to support from most major parties and prominent leaders, including former Prime Minister Matteo Renzi’s Democrats, former Prime Minister Silvio Berlusconi’s Forza Italia and the Northern League. Through a series of four different bills, lawmakers were able to push through changes to harmonise the electoral rules in the Upper & Lower houses.

Overall, these changes do two things. First, they allow multi-party coalitions to form before elections take place. Second, they change the parliamentary election rules so that one-third of all seats are allocated based on an outright winner in each region, with the remaining two-thirds allocated proportionally. These rule changes are part of what Renzi wanted when he called the referendum on electoral reform late last year. At the time, he likely got too greedy with his agenda (he also tried to completely defang the Senate’s power). As a result, he stepped down as prime minister, making way for a caretaker government with a narrow mandate to reform electoral law and reduce the likelihood of a hung parliament. This package would seem to fit the bill, and it is a setback for the populist Five Star Movement (M5S).

Italy’s next election is due by May 2018, and the electoral reforms should help ease uncertainty in the run-up. All year, investors have feared M5S gaining power in Italy, but the new laws effectively end the party’s chances of entering government unless something radically changes. M5S has so far refused to form a coalition with any other party. They consistently have fringe support, but they rarely have enough votes to win any contest outright. The other three main parties’ joint support could also be a preview of a possible three-way coalition government of Renzi’s Democrats, Berlusconi’s Forza Italia, and the Northern League, though this is speculative for now. Mostly, it is just another nail in the coffin for eurosceptic populism.

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