Macron to win but not rule?

As in the Dutch election earlier this spring, so in France: The leading — more establishment — candidate is playing to the anxieties that have fueled the populist wave that resulted in Brexit and the recent election of Donald Trump.

In the campaign’s final days, Emmanuel Macron is making overtures toward French voters disenchanted with globalization, and has called for reform of the European Union, saying its dysfunction is not sustainable. He’s gone so far as to say that if the EU continues to function as it does today, it would be “a betrayal” and France would be forced to quit. Macron, mind you, is seen as the pro-EU candidate.

With that as a backdrop, Sunday’s French runoff election looks to be playing out as predicted. This is thanks in part to pollsters having gone a long way toward reviving their tattered reputations by quite accurately forecasting the outcome of a very tight first round. In that campaign’s final weeks, four candidates were within several percentage points of one another at the top of the polls, creating the real possibility that the National Front’s Marine Le Pen might face Communist-backed Jean-Luc Mélenchon in the runoff. That scenario — two final candidates at opposite extremes of the political spectrum — created sufficient jitters ahead of the vote to unleash a powerful relief rally in equity, currency and bond markets once Macron prevailed as the top vote getter and Le Pen secured the remaining spot in the runoff. Macron is seen by leading European politicians and pundits as an “acceptable” alternative to the divisive Le Pen. Conventional wisdom, betting odds and recent polling all have Macron winning the 7 May runoff by roughly 20 percentage points.

What is particularly notable about this election, aside from another European populist contending for high office but likely falling short, is the fact that neither Le Pen nor Macron has the backing of one of the dominant center-left or center-right French political parties. Given France’s 10% unemployment rate, which is more than double that of Germany or the United Kingdom, Macron is thought likely to promote a somewhat populist reform agenda. However, he might face formidable challenges in Parliament, which could sideline muchneeded policy shifts.

Markets are unprepared in the unlikely event that Le Pen manages to pull off the upset on Sunday. Reaction would likely be quite negative, at least in the short run. Investors are likely to be wary of drawing firm conclusions in the early days of the election’s aftermath though, mindful that predictions of market carnage in the wake of the Brexit and Trump votes failed to pan out. Trailing by a wide margin late in the campaign, Le Pen has sought to modify her anti-EU, anti-euro rhetoric. Whether she would abandon what has been a deeply held principle if given the chance to govern remains to be seen. If Le Pen wins and reverts to her anti-euro ways, expect a good deal of volatility, as it is difficult to imagine the economic and monetary union surviving the loss of its second-largest member.

Control of Parliament looks unlikely
Two-round voting for the 577-seat National Assembly takes place on 11 June and 18 June. Macron’s year-old En Marche! party is in the process of recruiting candidates to run in each constituency. He’s vowed to field a slate of candidates that is half women, while further pledging half of the candidates will have no political experience. Macron says he intends to lure the other half from established parties. Meanwhile, Le Pen’s National Front is expected to dramatically expand its representation in the National Assembly from two seats to as many as 50, even if she is defeated in the runoff. The National Front is expected to be the effective opposition party, even if it is not numerically entitled to be.

Should the Republicans, the established center-right party, garner a parliamentary majority, as some observers predict, they would appoint the prime minister and the cabinet and set the legislative agenda. That state of affairs is referred to as a cohabitation — a president from one party and a parliament controlled by another. Without a majority, Macron could be reduced to a figurehead nearly from the outset of his term, at least regarding domestic policy. Nonetheless, the president retains broad authority over foreign and military affairs.

Heading into Sunday’s final round, it looks as though France is likely to elect a technocratic centrist, rather than a right-wing populist, as its next president. Beyond that, the future is difficult to forecast. A likely outcome, in our view, is that Macron will struggle to usher in much-needed labor reforms, leaving France stuck in a low-growth, relatively highunemployment economy, essentially preserving the status quo. Market impact, barring a Le Pen upset, is expected to be minimal next week, since a Macron victory is nearly fully priced in by markets