What an unprecedented French election means for global business

What an unprecedented French election means for global business


By Andrew Kenney

A centrist newcomer will face an insurgent far-right candidate in the second and final round of France’s presidential election on May 7th. The unprecedented result of Sunday’s preliminary round disrupts a duopoly that has ruled France for some 50 years, but it still prompted a quick rise in early trading on the euro.

Centrist Emmanuel Macron has formed a new party but still embodies a broadly pro-European, business-friendly approach. Far-right candidate Marine Le Pen wants to abandon the common euro currency and the EU, a long-shot goal that would imperil the European experiment. She also has supported the tightening of restrictions on immigration.

A decade ago, this matchup may have been unthinkable. Macron has never won an election, and his party, En Marche!, is only a year old. Le Pen’s party, National Front, was founded by her father, who has been fined in the past for controversial views about the Holocaust. His daughter has sought to distance the party from his views.

The fact that these two topped the field was an apparent relief for investors around the world. The euro was up 1.2% against the US dollar, to nearly a six-month high, by Monday evening in Europe, Reuters reported. Meanwhile, the French CAC 40 was up 4.1% to its highest level in nine years, the German DAX hit an all-time high, and several French banks gained at least 7% by close on Monday, Yahoo Finance reported.

That relief comes in part because a few points’ difference at the ballot box could have resulted in a matchup involving not one but two eurosceptics. Sunday’s fourth-place finisher, far-left candidate Jean-Luc Mélenchon, favours protectionism, withdrawal from NATO, and significant revisions of France’s relationship with the EU.

So, after all the topsy-turvy machinations of this 11-candidate race, it will be the reformist EU supporter against the incendiary populist. Polling indicates that Macron, the centrist, is favoured for a 20-point win, but the United Kingdom’s earlier vote on Brexit and the US election of Donald Trump have shown that populist, nationalist movements are not to be underestimated.

As such, businesses around the world will spend the weeks ahead preparing for the spectre of another blow to globalism and the status quo. Here are the business and trade policies promised by each of the two final candidates, along with analysis from a spectrum of business sources.

LePen’s promises

It’s important to note that the French president’s power over the country’s involvement in the EU is limited. Even if Marine Le Pen wins, a “Frexit,” or French exit from the EU, is highly unlikely, according to an analysis by BMI Research.

Any such proposal would have to be approved by both houses of the French legislature, followed by approval in a popular referendum or by a three-fifths legislative majority. That’s unlikely, considering Le Pen’s National Front party has only two of 925 seats in the French Parliament.

“Mélenchon and Le Pen would face severe political and constitutional hurdles to implementing their anti-EU stance if they did get into power,” said Nick Peters, a portfolio manager for Fidelity International, as quoted in Fund Strategy. “While we would likely see significant volatility if either won, the absolute downside could be limited by this.”

Le Pen still could introduce a non-binding referendum for voters, which she has vowed to do. The UK’s Brexit vote also was “non-binding”, but nonetheless set in motion events that could remove the country from the union, with companies scrambling today to prepare for potential new limitations on labour and tariffs on trade.

In the long term, Le Pen wants to switch France to a new, lower-valued currency that would encourage French exports. She simultaneously wants to tax imports of goods and labour.

Le Pen also has pledged to change France’s border agreements. Following a terror attack, she said she would immediately suspend and renegotiate the Schengen agreement, which creates largely open borders throughout Europe. Writing for CNN, Pieter Cleppe of the think tank Open Europe argued that new border regulations would create traffic jams, slowing trade and damaging economies.

“The effects of Le Pen winning the presidency would not be isolated, but send shockwaves across the euro zone, leading to surging capital outflows from periphery euro-zone members and put strains on the bloc’s financial stability,” BMI analysts wrote. “Rising debt servicing costs in France would worsen the government’s already precarious debt position and therefore put limits on Le Pen’s expansionary fiscal policy plans.”

Macron’s centre

Macron, a former investment banker and former economy minister, has tried to carve out space as a reformer in the political centre.

“The assumption now is that centrist voters will rally around Macron, denying Le Pen the presidency, and hence this will effectively be a pro-establishment, pro-European result which will be positive for risk appetite,” Richard McGuire, head of rates at Rabobank, told the BBC.

Macron apparently wants not just to preserve but also deepen European integration, including by the creation of a separate, common budget for the 19 nations in the euro currency zone, according to Handelsblatt Global, along with “closer co-operation on defence and migration,” in Europe. That kind of cooperation also would improve the EU’s negotiating position on Brexit, according to The Guardian.

On the domestic front, Macron has said that he would lower corporate taxes by 8 percentage points, slash 120,000 public sector jobs, and “give companies more leeway to negotiate individual agreements with staff.” He also has pushed for more “latitude” on the retirement age and France’s 35-hour working week, The Telegraph reported.

Macron also has promised 50 billion euros for job training and education, meant to address the country’s 25% youth unemployment rate. That may be an acknowledgment of the forces that have pushed his opponent, Le Pen, so close to power.

“We believe that social tensions surrounding immigration, a high unemployment rate, and a relatively stagnant economy will keep support for the [National Front] high in the coming ten years,” BMI’s analysis states.

Andrew Kenney is a CGMA Magazine contributing editor.