As the first round of elections on April 23 approaches, French government bonds have been weakening steadily along with improving poll results for Presidential candidate Marine Le Pen, head of the far-Right National Front (FN) and daughter of the founder of this party. The main reason is quite simply that she has vowed, if elected, not only to stop “uncontrolled immigration,” tax foreign workers, and impose trade barriers. She would also take France, one of the European Union’s founding nations, out of the Eurozone and re-introduce the French franc as national currency. Senior party members have said that they would then seek to redenominate about 80% of the country’s EUR 2.1-trillion public debt in the new legal tender – that part which was issued under French law. Foreign investors own almost two-thirds of the government bond market, and in the view of the leading international credit rating agencies, the redenomination of IOUs would effectively trigger a default. Bondholders would then struggle to pursue France in the courts in the same way they pursued Argentina after its 2001 default.
Before hitting the panic button, though, bondholders should contemplate some of the more reassuring parts of the picture. Yes, it is true that Ms. Le Pen has been doing remarkably well in the polls. It warrants pointing out that this is an election campaign unlike any other France has seen. For one thing, it is harshly anti-establishment, almost as if it were proceeding under the banner of the 1950s populists’ “sortez les sortants,” loosely translated as “throw the bums out” or a French version of “let’s drain the swamp.” Among the representatives of the establishment, former conservative leaders Nicolas Sarkozy and Alain Juppe were beaten down in the Republican primaries, the Prime Minister Manuel Valls was defeated in the Socialist primaries by the decidedly more radical Benoit Hamon, and Francois Hollande became the first sitting French President too unpopular to run for re-election. For another, as in so many other countries, election campaigns in France are now being fought to a large degree on-line, and Ms. Le Pen is doing well on this battlefield. She is said to have 1.3 million Twitter followers and almost as many Facebook “likes,” more than double the number of her closest competitors in the presidential race.
If elections were held today, surveys suggest she would garner 27%-28% of the vote while Benoit Hamon, who wants to cut the standard 35-hour workweek even further, would get just 15%. Better placed would be the Republican candidate Francois Fillon, who has just won a temporary reprieve in the embezzlement inquiry that has been bedeviling his bid for the Presidency. So would be Emmanuel Macron, a former Socialist Economy Minister and Rothschild Banker, who is running as an independent and as the candidate of En Marche!, a party that is only ten months old. Neither Fillon nor Macron seems likely to beat Ms. Le Pen. She is virtually certain to make the run-off on May 7, leaving only one place for the mainstream parties. However:
That candidate should then be able to attract support from those who do not make the running and should have better than even odds to defeat Ms. Le Pen in the second round. To be sure, it would take more predictive courage than I can muster to conclude from this that she has no chance at all of winning entry into the Elysee, but even in such an event France’s departure from the Eurozone would not be a foregone conclusion. A referendum on the matter would have to be held, and to organize one Ms. Le Pen would need the support of the Prime Minister. Whereas an overall election victory by her cannot be totally ruled out, one by her National Front can be. In other words, the next PM will represent a different party and will likely oppose the notion of putting “Frexit” to a vote. Furthermore, even if a plebiscite were held, it would not necessarily lead to France’s departure from the Eurozone. Public opinion surveys consistently suggest that a sizable majority of French voters want the country to remain a member of the common-currency arrangement and have little taste for getting the franc back.
All else being equal, the economy would likely have to cope with only a slight moderation of the quickening of its pace that was apparent in last year’s final quarter. Leading indicators have been making solid gains and the Markit Flash Composite Purchasing Managers’ Index (PMI) ticked up to 56.2 in February from 54.1 in January, well above the 50-mark that signals the threshold between expansion and contraction. But all else will, of course, not be equal, with so much depending on the outcome of the elections. Rising angst ahead of the balloting appears already to be making a dent in consumer and business sentiment. And while inflation is not a problem, despite the jump of its “harmonized” measurement to 1.6% in January from 0.8% in December, the next President will have to embrace austerity measures almost from the start, to avoid breaching EU budget rules that limit fiscal red ink to 3.0% of GDP.
Global Perspectives by Dr. Hans Belcsak