Global Macro Weekly Digest (Issue 79):French run-up election:large poll gaps favor the pro-EUliberal

The first round of French presidential election ended as expected: social liberal Emmanuel Macron ranked first obtaining 24% of the votes, ahead of far-right Eurosceptic Marine Le Pen on 21.3% and center-right conservative Francois Fillon on 20% and far-left Jean-Luc Melenchon on 19.6%. As a result, Macron and Le Pen, the two candidates with diametrically opposed visions on economy and France-EU relations, will face each other again in a televised debate on May 3rd (Wednesday), and will compete in the final contest on May 7th (Sunday). We maintain our baseline case that Macron is expected to defeat Le Pen and become the next French president.

    As we have mentioned, in the two-round election system, the mainstream and non-extreme parties will form allies to defeat extreme party candidates in the runoff. Similar situation can be seen in 2002 French presidential election and 2015 regional election. For now, endorsements for Macron have continued to come from across the political mainstream: former president Nicholas Sarkozy, as well as the incumbent president Francois Hollande, both expressed their support for Macron. Most other defeated candidates (center-right Fillon and center-left Hamon) have also urged their supporters to vote for Macron. Although the far-left former candidate Melenchon refused to endorse Macron, he clearly urged his supporters to offer “not one vote” for Le Pen. Only the right-winger former candidate Nicolas Dupont- Aignan (ranked 6th, with 4.7% votes in the 1st round) endorsed Le Pen. In general, Macron and Le Pen are expected to gain 60% and 40% votes respectively in the runoff.

    The two finalists hold diametrically opposed visions on economic policies and France-EU relations. Macron promotes market economic policies, and proposed reforms to the governance of a more integrated Eurozone: a common fiscal policy, a joint finance minister, a Eurozone debt instrument, and completion of the banking union. Le Pen, on the other hand, wants to protect France from international trade, immigration, and the Eurozone/EU. In our view, Macron’s policy could work better to stimulate France’s lackluster economic growth, reduce the high unemployment rate and debt ratio, and lead to a more integrated and stable Eurozone. Le Pen’s protectionism policies may address the issue of inequality, but will also increase the cost of business activities; and bring risks of a splintering Eurozone which could further discourage trade and investment. Without a re-boost in business activities, we can hardly imagine that economic growth will finally get to improve or unemployment will fall.

    With that said, Macron now faces significant challenges to convince voters that he can make the promised changes. So far, the election has knocked out candidates from both the two mainstream political parties that have ruled France for the past 60 years, suggesting voters’ disappointment towards the established parties and eager for change. Unfortunately, although claimed himself as a non-established candidate, as the former Socialist economic minister, Macron does not really stand for change to many French voters. Also, assuming a Macron victory, in the upcoming legislative election in June, it will be hard for Macron to obtain a majority in the National Assembly, and a possible co-habitation may further impede Macron’s policy making and implementation. As a result, if Macron’s promise of a new direction looks more like a reaffirmation of the old dispensation, voters could turn to Le Pen or just abstain; in either case, Le Pen’s odds of winning will increase.

    In sum, we expect that Macron will win the runoff election on May 7th. But potential risks cannot be neglected. At this point, the nature of choice between the two candidates is not only a choice between pro-EU globalism versus anti-EU nationalism, but also between unsustainable status quo versus change. The May 3 debate between the two candidates is important to watch; and if Macron cannot convince that his presidency will bring significant changes to the economy as well as the France-EU relations, his odds of winning could be dramatically lowered. If Macron wins, market could further go up, especially the euro, as political risks subside. But the rally is expected to be short-term and the upside is limited, as the market has already priced in most of the result.