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Q&A French elections: will Macron be able to reform France?

Economic Report

  • Macron won the French presidency on Sunday, as widely predicted
  • Markets apparently fully priced in his victory
  • Much of his domestic and economic success now depends on his new party’s performance in the June parliamentary elections
  • Subsequently, there are three main scenarios for government formation after June

What happened yesterday (and was it expected)?

Emmanuel Macron won the French Presidential elections with a clear margin against Marine Le Pen (66% vs. 34%). He will become France’s youngest president ever, an astonishing achievement as he never held elected office before and only started his political movement one year ago. The margin was wider than expected and forecast by the last polls on Friday the 5th of May. This may reflect Macron’s increased upward momentum since the debate on Wednesday where he was seen to perform significantly better than Le Pen. Friday’s hacks of Macron’s election campaign and subsequent email publications seem to have not hurt his standing with the French electorate. Ms. Le Pen conceded quickly after the first results emerged clearly showing her losing, congratulating Mr. Macron. She still performed significantly better than her father, who only got 17% of votes in 2002.

Macron’s victory was welcomed by European leaders. He now faces the task to appeal to and convince the French people to give him a parliamentary majority. In this Q&A we will look at what’s next, explore the possible outcomes of June’s parliamentary elections and preview Macron’s economic agenda.

What is the market reaction?

A lot of political reactions worldwide after Macron claimed his victory but not much really when looking at financial markets. After the first round the French polls proved to be very accurate and a sigh of relief could be heard in the markets followed by cheering. With hindsight it can be concluded that the markets –more or less – fully priced in a victory for Macron. Although we have seen EUR/USD hitting a 6-month high at 1.1023 the currency pair soon lost its upward momentum retreating to levels seen last Friday. To put things in perspective, despite this morning’s better than expected German factory orders, EUR/USD is still below last week’s closing rate of 1,0998.

No different story when we look at the development of the 10y yield on French government debt. The French 10y benchmark still yields around 4% The risk indicator of French government debt - reflected by the bund spread – has also remained constant and still hovers around 43 basis points.

Figure 1: The spread remained more or less constant after Macron secured his victory
Figure 1: The spread remained more or less constant after Macron secured his victorySource: Bloomberg, Macrobond

We will have to wait for the upcoming parliamentary elections, to be held on the 11th and 18th of June, to see what the political landscape will look like and how the markets will react to that. The current polls predict a divided political landscape. Therefore, while the European project might not be under acute threat anymore, it remains to be seen how much of the desperately needed reforms the elected reformist will be able to implement. 

What will happen next?

Outgoing president Hollande announced inauguration of Macron as the new president will take place by Sunday the 14th of May. The President is constitutionally free to appoint a Prime Minister who then forms a government. He or she can form a caretaker government until the upcoming parliamentary elections. The legislative election for each of the 577 seats for the Assembly will be held on the 11th (first round) and 18th of June (second and final round). They work in a similar way to the Presidential elections on a local voting district-level. If a candidate secures more than 50% in the first round (and turnout is at least 50%), he or she is elected. In the likely event no candidate achieves this, the best performing candidates of the first round move on to the second where the candidate with a majority of votes wins.

The parliamentary elections are scheduled soon after the presidential elections so that the new President would always have a workable majority in Parliament. However, since Macron with his new and untested En Marche!-movement will struggle to win a majority, these elections will become instrumental in determining the domestic and thereby economic success of his presidency.

What are the scenarios after the parliamentary elections?

Last week, one polling agency released a poll for the parliamentary elections. It projected Macron’s EM to win 249 to 286, indeed falling short of 289 seats needed for a majority. This shows Macron faces an uphill struggle to achieve a majority. Note that these polls should be viewed with a high degree of uncertainty as the French electoral system makes it difficult to poll accurately. The Front National is unlikely to achieve more than about 40 seats as the French electoral system basically acts as a glass ceiling for them.

The most likely outcome at this moment is EM coming first or second in the elections but falling short of a majority. The Republicains (LR) are still expected to do well and could even come in first if they manage to remain united after their candidates’ defeat in the first round. A resulting grand coalition could then get going reasonably quickly with some deal-making: Macron is happy to accept some tough security policies for more hardline credentials and both parties have similar views on economic issues. A priority could be reviving previously the cancelled labour market reforms (the El Khomri law). Even though this may start off relatively smoothly in terms of legislative processes, social protest may be quite strong. Especially since many center-left voters only backed Macron to stop Le Pen from winning. The deep divided French society further increases Macron’s difficulties in getting things done. What will happen later this year is then dependent on Macron’s commitment to his own reform agenda. In addition, there may be some internal division within the new EM party between former socialist party members and new center-right members.

Another, less likely, outcome is a majority LR-government forced on Macron (cohabitation). While this may also work reasonably well in the short term, it is likely to result in political gridlock. Macron created a political platform that implicitly and explicitly wants to break with the traditional left vs. right divide in French politics. Therefore he is unlikely to simply accept the socially conservative agenda of LR.

The least likely possibility is an outright majority for Macron’s EM. In this case he faces the least impediments in implementing his domestic and economic agenda. There could still be some setbacks however. New and unexperienced members of parliament could quit or split off in the face of social unrest. In the worst case, this could constrain Macrons agenda in a similar way as happened to previous president Hollande.

What will President Macron’s economic policy look like?

The 39-year old independent candidate is the surprise of these elections. He is internationally and EU-minded and non-partisan. He believes France has to be a credible partner as a prerequisite to further working together with Germany. His economic reform plan rests on three pillars: a cut in public spending, 'more just' fiscal policy and a EUR50 billion investment plan. He promises to reform the labour market by allowing more firm-based collective bargaining as well as lowering social charges. In addition, though, he proposes a universal unemployment benefit that is conditional on active participation. He leaves the current retirement age of 62 intact and is keen to invest heavily in education. He is also firmly in favour of further free trade agreements and EU integration. This could provide new impetus to the European project. But the fact that he is unlikely to achieve a majority in the French parliament means France’s structural problems and economic setbacks will not be resolved any time soon.

Daniel van Schoot
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
Teeuwe Mevissen
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 712 1509

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