Macron Buys Time For The “Globalists”

Marine Le Pen of the National Front (FN) has fallen at the final hurdle in her quest for the Presidency of France. Her failure comes as a great relief to Europe’s markets and political elites – except those UK eurosceptics who thought she might be a friendlier ear during Brexit negotiations. But does it merely buy more time before the last stand of the “globalists”?

The man who stopped her, Emmanuel Macron and his centre-left En Marche! movement, came from outside the traditional French party system. For a change, this means a pro-business, pro-Europe, outward-looking and optimistic vision rather than the angry populism we have gotten used to recently. Following disappointment for the Freedom Party (PVV) in the Netherlands in March, this change in mood could prove influential in the German and Italian elections due to be held over the next 12 months.

As I wrote in the run up to this election, a win for Macron allows investors to focus their attention back on Europe’s fast-improving fundamentals, and this could consolidate the relief rally in risky assets. If anything, the risks lie in the Eurozone’s recent set of strong core inflation data. This could be nothing more than a sharp rise in package-holiday prices, but it bears watching because much of the optimism around the European recovery depends upon the European Central Bank (ECB) maintaining its dovish stance.

At the same time, there is a reason why more than 40% of French voters put their mark next to populists on both the right and the left over the two rounds of this election. According to Eurostat, France’s gross government debt was 96% of its GDP at the end of 2016, compared with 68% in Germany and 83% for the EU as a whole; unemployment stands at 10%, compared with just 4% in Germany and 8.5% for the EU as a whole.

Macron’s economic platform seems market-friendly. He does not plan to raise the retirement age from 62 years, but at least he hasn’t promised to cut it to 60 as Le Pen did. He wants to make EUR 60 billion of budget savings to bring France’s deficit within EU limits, but would also cut corporation tax from 33.3% to 25% and spend EUR 50 billion over five years on pro-growth fiscal measures such as apprenticeships and infrastructure.

However, “market friendly” is unlikely to assuage the anger of voters who chose Le Pen or Jean-Luc Mélenchon. We should also remember that En Marche!, which remains more of a movement than an organised political party, is unlikely to gain control in parliamentary elections next month. A fiscally-hawkish parliament could work with Macron on his pension reforms and corporate tax cuts but stymie his spending plans. Or it could simply usher in a period of political stalemate and sluggish economic growth. Neither outcome is the best foundation for keeping Le Pen or her FN successor out again in five years’ time.

This is perhaps the key thing to keep in mind as the relief takes off. Macron is fortunate to be entering the Élysée Palace at a time when economic tailwinds can fix some problems regardless of policy. But these tailwinds will blow for months, not years. In any case, real progress needs to be made towards meeting the concerns of those left behind by globalisation, without jeopardising France’s competitiveness.

The populist tide may be turning for now, but the next five years may represent the last stand for the “globalist” worldview. If a new generation of centrists fail to deliver, the populists will return, fed by even stronger anger and resentment. Today is a time for relief – but there is no time for complacency from either politicians or investors.

Salman Ahmed – Chief Investment Strategist – Lombard Odier Investment Managers