French election unnerves investors

“France is starting to really freak out investors”, says Sar Sjolin on MarketWatch.com. This week French bond prices slipped to an 18-month low, sending the ten-year government bond yield (yields move inversely to prices) to almost 1.2%, from a record low of 0.1% last July. The yield gap with the German ten-year Bund, considered a safe haven, reached almost 0.8%, a four-year high.

The worry is that François Fillon, the centre-right candidate, has fatally damaged his bid for the presidency after allegedly misusing public funds by paying his wife and children large sums for doing very little. “Voters seeking pro-growth reforms this spring will have to look elsewhere if the self-proclaimed Thatcherite’s campaign collapses”, says The Wall Street Journal.

Fillon’s mishap will also embolden the far-right candidate Marine Le Pen, whose economic programme is a toxic mix of protectionism and yet more state spending. More importantly, she wants to reintroduce the franc and hold a referendum on France’s EU membership. The departure of a founding member would almost certainly spell the end of the European integration project.   

It may be too soon to panic about “Frexit”, however. Polls suggest that Marine Le Pen could well win the first round, but would lose the second to Emmanuel Macron, a former economy minister in the Socialist government who is running as an independent.  And Macron’s “reformist credentials are not in doubt”, as Simon Nixon points out in The Wall Street Journal.

Macron introduced a law in 2015 to deregulate some cosseted professions such as notaries and loosen union restrictions on working hours. The bill, rammed through parliament by decree, was hailed as a “real step in the right direction” by the employers’ association. Long-range bus routes were liberalised to boost competition with trains and Sunday shopping became more widespread. While this isn’t exactly ground-breaking stuff, it suggests he is at least determined to implement further structural reforms, even though he has yet to spell out in detail what he wants to do. He may also struggle to muster a parliamentary majority given he now leads a grass-roots movement outside the Socialist party.

Panicky investors should also bear in mind that, even if Le Pen becomes president, she would need to secure a 60% majority in parliament for a referendum on EU membership – a pretty tall order. That means she could well win and cause a market panic – but fail to blow up the European project.