investment insights

    Who will lead France? The run-off pits Macron against Le Pen, again

    Who will lead France? The run-off pits Macron against Le Pen, again
    Stéphane Monier - Chief Investment Officer<br/> Lombard Odier Private Bank

    Stéphane Monier

    Chief Investment Officer
    Lombard Odier Private Bank

    Key takeaways

    • President Macron will face far-right candidate Marine Le Pen in a second-round vote for the next five-year term on 24 April
    • Debates over the next two weeks, as well as support from other eliminated candidates, will be key to securing a second mandate for Mr Macron
    • Markets are worried that a nationalist government in a major EU member state would undermine European economic and budget policies. The euro will reflect this risk until 24 April
    • At stake is a more nationalist, anti-globalisation ambition for France, advocated by Mrs Le Pen, however she would still need to win parliamentary support to enact any legislation.

    French President Emmanuel Macron faces a tougher battle for re-election than five years ago. His opponent, the far-right Marine Le Pen, has learned from her mistakes in 2017 when the two candidates first faced off for presidential office. The race matters for investors because despite diluting her anti-European policies since, Mrs Le Pen’s ambition remains a less liberal, nationalist France.

    In the 10 April first-round presidential election, Mr Macron won 27.6% of the vote, beating expectations, and Mrs Le Pen earned 23.4%. That sets them up for a second-round run-off on 24 April. For the first time, it is mathematically possible for Mrs Le Pen to win. The latest estimates suggest that she may score as much as 49% of the second-round vote (see chart 1). “Of course Marine Le Pen can win,” said Edouard Philippe, a former prime minister under Mr Macron, on 31 March.

    Mrs Le Pen’s gains in recent weeks of campaigning were probably the result of defections from the more extreme candidate Eric Zemmour. Nevertheless, it is unclear whether the ‘Republican front’ that historically united to keep far-right presidential candidates out of office will work again. Left-wing candidate Jean-Luc Mélenchon, who placed third with 21.9% of the 10 April vote, very clearly called on supporters not to vote for Mrs Le Pen, but did not endorse Mr Macron.

    Until opinion polls narrowed in the first week of April, markets had dismissed anything but a win by Mr Macron. Now, the spread between French 10-year sovereign bonds (known as OATs, for obligations assimilables du Trésor) and the equivalent German Bund stands at 54 basis points (see chart 2).

    When President Macron took office in May 2017, he said that he wanted to end voters’ reasons for supporting extremists. The UK had recently voted to leave the EU and American voters had put Donald Trump in the White House. President Macron has been an advocate for stronger EU budget and defence integration as a way of making sure that the bloc can stand up to both the US and China.

    No French president since Jacques Chirac in 2002 has won re-election. And no president since Charles de Gaulle in 1965 has won a second mandate and kept a working majority in the ‘Assemblée nationale’, or lower house of parliament. Mr Macron lost his absolute majority in May 2020 after a series of defections created new breakaway parties. His ‘République en Marche’ party currently holds 268 seats in the 577-seat Assemblée, excluding the support of a further 79 seats from two other groups.

    Mrs Le Pen has just six deputies in the Assemblée, and no senators

    Mrs Le Pen’s party has just six deputies in the Assemblée, and no representatives among the upper house’s 348 senators. If she were to win the presidency, she would struggle to find enough support to pass any legislation. The next parliamentary elections take place on 12 June and 19 June 2022.


    French economic performance

    Just a month ago, the President enjoyed a seemingly unassailable lead. Mr Macron saw a boost in popularity from diplomatic efforts to avert the war in Ukraine through a series of conversations with Russian President Vladimir Putin. However, the war triggered a set of commodity price shocks to energy and food that have contributed to a rising cost of living.

    Nevertheless, at 4.5%, annual inflation rate in March in France was lower than those of its nearest neighbours Spain (9.8%), Germany (7.3%) and Italy (6.7%). This difference is in part thanks to a series of government fuel rebates and energy subsidies worth EUR 7 billion, including price caps on household electricity and gas prices. Over the past six months, these measures are estimated to have cost EUR 25 billion, financed in part through higher value-added tax revenues from rising fuel prices.

    The French economy has recovered more quickly from the pandemic than any other Western economy after the US. French gross domestic product (GDP) expanded by 7% in 2021, as the pandemic’s economic impact faded, its fastest growth in more than half a century. The economy is forecast to grow by 3.6% in 2022, according to the European Commission. That compares with growth in Germany of 2.8% in 2021 and 3.6% in 2022. French unemployment is close to four-decade lows, at 7.1% in January, after reforms and investments in career-changes, youth training programmes and support for new businesses, including EUR 300 billion in state-guaranteed loans to support industries during the pandemic. A planned EUR 100 billion public investment over two years includes spending on commercial competitiveness, ecological and social projects.

    Mr Macron’s campaign suffered from a late start, as he announced his candidacy at the last moment a month ago. Over the next two weeks, he will have opportunities to explain his programme in direct comparison with Mrs Le Pen’s. In particular, he will have to defend his record, as well as address the reasons behind the rapid decline in purchasing power. The two candidates are scheduled to hold a televised debate on 20 April, which will be key in this presidential election.

    The potential political impact of a cost of living crisis cannot be underestimated. Protests marked Mr Macron’s first years in office. These included railway strikes, pension reform opposition and the yellow vests ('gilets jaunes') social movement against a range of issues from higher fuel prices to rural speed limits.

    The potential political impact of a cost of living crisis cannot be underestimated

    Mr Macron promises to raise the threshold for paying inheritance taxes, a measure for monetizing overtime, housing renovations, and a programme for more affordable electric vehicles. The campaign pledges include a minimum state pension of EUR 1,100 per month, continued education reforms to emphasise skills in maths and French, more healthcare workers and police. He wants to increase the average retirement age from 62 to 65 within a decade and remove a set of industry-specific exemptions. In 2021, the Macron government postponed pension reforms until after the pandemic.

    Le Pen’s proposals

    Marine Le Pen’s proposals, as described in her campaign leaflet delivered to French voters last week, put the rising cost of living at the heart of her promise to increase consumers’ purchasing power. “Everything is going up,” says the leaflet, “apart from salaries.” She proposes to “massively” cut fuel, gas and electricity taxes, taking Value Added Tax on energy from 20% to 5.5%. At the same time, Mrs Le Pen’s programme would stop constructing wind turbines, and dismantle those already built. In contrast with Mr Macron, she proposes lowering the retirement age to begin at 60, for those who have been working since the age of 20.

    In addition, she would cut motorway toll charges, lower succession costs and give French nationals priority in jobs, accommodation and social care. Mrs Le Pen also includes a promise to “help businesses to increase salaries.” The proposals include indexing pensions to inflation, and ending income tax for employees under 30 and corporate tax for entrepreneurs under 30.

    Finally, says the pamphlet, France’s place in the world is in decline. Since 2017, France has welcomed 1.5 million legal immigrants, it says, concluding that “our values, liberties and ways of life are threatened.”

    In March, Mrs Le Pen's campaign still included a photo of herself shaking hands with Russian President Vladimir Putin. In 2014, her party borrowed EUR 11 million from Russian banks, and last month took another EUR 10.7 million loan from a Hungarian bank (last week she congratulated Hungary’s populist prime minister Viktor Orbán on winning a fifth term). On 31 March, she told French television that France could be an ally of President Putin after the war. Mrs Le Pen, in line with Mr Orbán, opposes sanctions on Russian individuals, interests and assets.

    Mrs Le Pen’s diplomatic positions do not appear to have undermined her standing in domestic French politics since Mr Zemmour’s admiration for the Russian president attracted much media attention. As evidence of Russian war crimes continues to surface from Ukraine, Mrs Le Pen’s sympathies may now see renewed scrutiny.


    EU reforms not ‘Frexit’

    In 2017, in a televised debate with Mr Macron, Mrs Le Pen failed to explain her economic proposals, including a call to leave the euro currency. She will be determined not to make the same mistakes again, and this time can focus on Mr Macron’s track record in office.

    Mrs Le Pen has since moderated her policies, including changing the party’s name from the ‘Front National’, associated for its hard-right views, to ‘National Rally’ (‘Rassemblement National’). The party now advocates a selective approach to the EU’s laws and trade rules while withholding France’s payments. In 2019, the party dropped its ‘Frexit’ policy of leaving the bloc, and instead pledged reforms. It has also abandoned a policy of leaving the euro.

    Potentially, France’s greatest political challenge in the longer term is that the alternatives to Mr Macron’s globalism look polarised and more nationalist, whether left or right. The President has failed to convince French voters that such extremes are unnecessary, with the traditional, more centrist parties weakened by defections to these more radical visions.

    At stake is a transformation of France’s international standing and ambitions

    At stake is a transformation of France’s international standing and ambitions. Over the last two years, the pandemic and Russia’s invasion of Ukraine have seen EU-wide fiscal packages for economic and healthcare support and, more recently, commitments to boost military spending. Over the last five years, Mr Macron has pushed for more EU defence and budget coordination.


    Currency polls

    A key market concern is that a nationalist government of a major EU member state would lead to less coordinated European economic and budget policy. After the first-round results, markets appear marginally less concerned about a possible Le Pen second-round victory, with the CAC 40 index outperforming broader European equity indices. The French index has underperformed broader European peers so far this year, mostly over the last month, led by stocks generally more exposed to the French economy. Amid lingering uncertainty, we expect the next two weeks to remain volatile, keeping stocks under pressure until a clearer picture emerges. An eventual Macron win could open the door to an unwinding of the recent underperformance, but for now we remain neutral on European, and French, equities.

    In fixed income markets, President Macron’s better than expected first round result also translated into a slight tightening of OAT spreads to German Bunds. In coming weeks, we believe this spread could widen up to 80 bps, a line in the sand created in the 2017 presidential election.

    Currency markets likely remain the best route to position for the tail risk of an eventual Le Pen victory. Over the past week, the euro has weakened against the US dollar, reflecting the increased likelihood of Mrs Le Pen becoming President. Still, the probability of Mr Macron’s re-election remains high, and we expect markets to resume their focus on fundamentals after the second round vote. Against the US dollar, which will benefit from tightening monetary policy, we expect the euro to trade around 1.06 at the end of 2022, from today’s 1.09.

    Wichtige Hinweise.

    Die vorliegende Marketingmitteilung wurde von der Bank Lombard Odier & Co AG (nachstehend “Lombard Odier”) herausgegeben. Sie ist weder für die Abgabe, Veröffentlichung oder Verwendung in Rechtsordnungen bestimmt, in denen eine solche Abgabe, Veröffentlichung oder Verwendung rechtswidrig ist, noch richtet sie sich an Personen oder Rechtsstrukturen, an die eine entsprechende

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