European election series: Part 4 of 4…la grande élection

Editor’s note: This is the fourth and final in the blog series about the forthcoming European elections.

French elections – the big one

Earlier in this series, I discussed the pivotal elections in the Netherlands, Germany, and Italy. Now for the big one: la grande élection. The French election has the biggest potential impact to Europe, and this blog post is the biggest of the series.

Euro exit, debt monetization, closed borders, protectionism – these are the potential threats facing France if Marine Le Pen, leader of the far-right National Front (FN) party, wins the presidential election. Le Pen’s support is stronger than ever because she successfully taps into the same immigration and trade anxieties that last year propelled Donald Trump to victory and convinced the U.K. public to vote for Brexit.

The first round of the presidential elections will be held on Sunday, April 23, 2017. The main contenders are

  • Jean-Luc Mélenchon, the far-left candidate;
  • Benoit Hamon for the socialists;
  • Emmanuel Macron, leader of the new centrist En Marche! party;
  • Francois Fillon for the Republicans,
  • and, Marine Le Pen, the far-right FN candidate.

The two candidates with the highest number of first-round votes will then go head-to-head in the second and final round on Sunday, May 7. The candidate who wins an absolute majority will become president.

With less than a month to go before the first round, polls indicate Le Pen will win the first round, but lose the run-off, with Macron ultimately becoming the new French president. Yet, the sizable proportion of undecided voters, abstaining voters, and wavering voters means that the chances of a Le Pen victory are still very much alive.

Blame the economic malaise

In recent years, the French economy has come to be characterised by sluggish economic growth, rising inequality, and high unemployment. French voters are growing tired of the stagnant economy and heavy regulations; as a result, they’re looking for change.

Le Pen represents a break from the political establishment, with her belief that the solution is regaining monetary sovereignty and reducing foreign trade. The recent spate of terrorist attacks in France has also propelled questions about national security, immigration, and nationalism to the heart of the electoral debate. These issues are central to the FN’s campaign.

Le Pen’s support tends to come from blue-collar workers and the non-college educated. She is also more popular outside of the capitol – a profile typical of a populist supporter. Last year’s Brexit vote and the Trump victory gave Le Pen’s campaign a boost since they meant that French voters – as in other European countries – are less stigmatized by a populist victory. Perhaps unsurprisingly then, Le Pen’s lead in the first round has been apparent from the early stages.

Fear not…

Nevertheless, while Le Pen is likely to make it into the final round election run-off, all polls show that she is unlikely to win. Certainly, there are several institutional and political reasons to believe that Le Pen will not become France’s next president.

  1.  The two-round voting system favours mainstream parties, since voters tend to rally behind those candidates if the choice is between them and a more extreme political party. Sidenote: While Macron is from a newly formed party, he can be considered the more “mainstream candidate” compared to Le Pen. A recent poll on perceptions of the FN party suggested that almost 60% of respondents view it as a threat to democracy.
  2. There is an unspoken agreement among the mainstream parties to present a broad united front against the FN party in the final round of the election. Thus, ideally, the candidate who confronts Le Pen in the second round will be able to win the presidency with the support of mainstream voters from the left and the right.
  3. Le Pen’s electoral base of around 6.5 million votes, as suggested by the regional elections in 2015, seems too small for her to win the run-off round. Presidential elections in France tend to have high turnouts of around 80% to 85%, indicating that a candidate would require around 18 million votes to win. Even a 100% increase in FN’s support over the past two years would leave Le Pen lacking.

The silent, but deadly, French voters

What, then, would it take for Le Pen to pull off an unexpected victory? Polling error could be a factor…at a stretch. Currently, she pulls around 40% of the support, compared with Macron’s 60%. However, the margin of error in polls tends to be between 2% and 5% (and was around that level in the Brexit and U.S. presidential election polls), so Le Pen’s gap is unlikely to be closed by polling error alone.

Three other factors, however, could impact the election outcome. First, there are reports that participation may be lower than in previous elections. This would likely benefit Le Pen, because her supporters tend to be the most active voters. Second, there are still a large number of voters that have yet to express their preference and are, therefore, not reflected in polls. Third, many voters have said that they could still change their minds and vote for a different candidate. Worryingly, this proportion of voters is highest for Macron and lowest for Le Pen.

It’s an uphill struggle for Le Pen to win more votes than Macron, but not impossible. Consider too that, in the two-week period before the second round, FN may seek to soften its rhetoric in an attempt to win support from the moderate right-wing faction of the electorate.

E.U. Revoir?

What would happen if Le Pen did win? The National Front party wants to reduce immigration meaningfully and for hiring priority of French nationals over foreigners. It wants to raise trade barriers to protect French industries, while also building an alliance with Russia. It wants to shrink the government deficit by allowing the central bank to buy French government debt. Most importantly, Le Pen advocates leaving the euro. Fortunately, from a market perspective at least, there are several hurdles for Le Pen to get over.

In France, according to Article 89 of the Constitution, the president and parliament jointly have the authority to call a referendum. In addition, a change in constitution – proposed and approved by Parliament – would also be required.

France will determine the composition of Parliament’s lower house, the National Assembly, in legislative elections in June this year. The 577 members of the National Assembly are elected from single-member constituencies in a two-round system, with the prime minister usually coming from the largest party in Parliament. The FN party would need to win 289 out of the 577 parliamentary seats for a majority. It currently has two seats. The tremendous increase in support that would be necessary suggests that the chances of FN winning an outright majority in the legislative elections are even smaller than those of Le Pen becoming president.

This implies that a “President Le Pen” would likely serve under a cohabitation agreement, whereby the president and prime minister come from different parties. In this case, as the French constitution dictates that the vast majority of decisions by a president need parliamentary approval, Le Pen would find it almost impossible to push through her wider agenda, including calling a referendum on leaving the euro.

Almost impossible. Le Pen could use Article 11 to hold a referendum without requiring parliamentary approval. While this would still require a sign-off by the constitutional court, which would likely block the action, Le Pen could be within touching distance. Even then, winning a referendum would be a difficult task. Support for the European Union and the euro is still strong, although it has been diminishing.

A market in crisis

Either way, however, another country leader in favor of leaving the European Union (EU) would do unnecessary damage to Europe, prompting an existential crisis for the EU. From a market perspective, a Le Pen victory would lead to a sharp rise in uncertainty, a spike in French bond yields, and desperately negative reaction from European equity markets. We would expect a swift response from the European Central Bank, including monetary easing or liquidity provision, which would add to the downward impact on the euro currency.

A FN victory at the parliamentary elections in June would see significantly more severe market movements. There would be a meaningful risk of a fully-fledged sovereign crisis as investors questioned the future of the euro, with liquidity outflows from banks and a possible disintegration of the EU.

No deal is better than a bad deal

France’s political and legislative make-up should prevent Marine Le Pen from becoming president. However, in our world of unexpected outcomes, game-changing developments cannot be ruled out. So while Le Pen faces an uphill struggle to win this election, it is not entirely out of her grasp. The repercussions would be severe. But remember, France has two elections this year, not one. In the unlikely scenario that she wins, the parliamentary elections in June would either hand Le Pen full power, or leave her as a lame-duck president. A France without reforms is better than a France with Le Pen’s reforms.

 

Follow Principal Global Investors on LinkedIn

 

_________________________________________________________

Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of March 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision.

The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account

Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document.

Third party content, such as comments to this blog, is not reviewed by Principal Global Investors before it is displayed, although we may remove, alter, edit or adapt any such comments. Principal Global Investors does not endorse, authorize, or sponsor any third party content. Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided.

© 2017 Principal Financial Services, Inc.

Principal, Principal and symbol design and Principal Financial Group are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company.

Principal Global Investors is the asset management arm of the Principal Financial Group.

Investing involves risk, including possible loss of principal.

Principal Funds are distributed by Principal Funds Distributor, Inc.

t1703310821