In December last year, I wrote a story for MoneyWeek in which we looked at five big themes that might shape 2017.
Among them was the idea that in the wake of Donald Trump’s election and the Brexit vote, everyone was getting too worried about the French presidential elections.
A victory for Marine Le Pen would have posed an existential crisis for the eurozone. But the odds of it happening were always small.
Instead, it looked a lot more likely that then-front runner François Fillon – France’s Margaret Thatcher – would win. As a result, you’d get a big relief rally in French stocks.
So, we said, you should invest in France.
Turns out I was half-right. Le Pen did lose. But the winner was much more of a surprise…
The youngest French leader since Napoleon
France has chosen Emmanuel Macron as its next president. The centrist politician, who set up his own party – En Marche! (now rebranded La République En Marche) – beat National Front leader Marine Le Pen comfortably, taking around 66% of the vote.
Le Pen’s loss isn’t a surprise. Pollsters have acquired a poor reputation following the “surprise” Brexit vote, and the “surprise” Donald Trump vote. But in both of those cases, the races were far, far closer than anyone gave them credit for at the time.
The real problem was that markets (and everyone else) became too complacent, and had bet on victories for “business as usual” – a vote to stay in the EU, and a vote for Hillary Clinton – with far more conviction than was justified. Hence the shock they got when the vote went the other way.
In the case of France, however, there was never really any suggestion that Le Pen could win a second round run-off. The gap between her and almost anyone else she could have been up against was too vast.
As a result, following Macron’s first round victory, markets rightly assumed that he had a very high chance of winning the presidency, which is why we’re unlikely to see much of a “relief rally” in the euro or the eurozone’s markets today – we’ve already seen it over the past fortnight.
This is not “peak populism”
You’ll also hear talk of “peak populism”. But that’s a very simplistic understanding of the demand for change that’s sweeping the globe.
Pundits who never understood why people voted for Brexit or Trump in the first place have always lumped these movements in together. But the only real thing uniting voters across the globe in their demands for political change is a sense of frustration with the way things are.
From that point of view, the vote for Macron fits the pattern perfectly well. Macron might look like a fairly “normal” centre-left politician to us here in the UK. But he’s set up his own party.
If Britain had presidential elections, this is the equivalent of both Labour and the Conservatives getting kicked out in the first round, leaving the country with a face off between UKIP and the SDP (remember them? That’s what happened the last time Labour had an unelectably left-wing leader).
So Macron represents as much of a rejection of “business as usual” as Le Pen would have. He might be pro-globalisation, pro-EU, and thoroughly centre-left on most policy areas, but he’s also ridiculously young – 39 – and was very much a “long shot” candidate up until very recently. Make no mistake, by French standards, Macron represents change.
And of course, while Le Pen may not have won, she did manage to secure roughly double the percentage of votes that her father did in 2002, the last time the National Front got to the second round of a French presidential election. She plans to rebrand the party in preparation for 2022.
It’s also worth noting that the abstention rate of 25% was the highest this century, and a record number of ballots were spoiled or blank – more than 11% of those who voted. In short, there are a lot of angry voters out there.
The question now is: what does Macron actually stand for, does he have any hope of getting his agenda through, and will it be enough to placate those voters?
Macron will probably fail, but stick with your eurozone bets
As David Marsh of the OMFIF think tank puts it this morning, Macron is “the latest in a long line of hitherto largely underperforming saviours of the French nation.”
Macron wants to reduce the public sector payroll. He wants to cut public spending. He wants to cut corporation tax (from 33% to 25%), and he wants to cut income tax. He wants to reform the labour market to bring down France’s chronically high unemployment rate, but has backed away from the idea of ending the 35-hour working week.
He’s keen to work closely with Germany to strengthen the EU, and advocates a common fiscal policy, completion of the banking union and a joint finance minister – a much closer EU in other words. He’s also pro-free trade, but within a more protectionist EU.
Put bluntly, he sounds like he’s making a lot of promises that sound good to a lot of people. And some of those reforms would make France more competitive. But lots of French presidents have promised similar reforms. And France is still where it is.
He also has no seats in parliament, what with leading a new party. So he’ll have to pull together a coalition at the legislative elections in June. That could rapidly reveal how much opportunity he’ll have to make good on his promises.
But in the meantime, the biggest political hurdle of the year for markets has been cleared. Attention will now turn to the fact that European economic data is improving and the European Central Bank is now being forced to come up with excuses to keep monetary policy loose.
So expect our American cousins to pump a lot more money into stocks on the continent now that the coast is apparently clear. That means you should stick with your own bets on Europe for now.