NN IP: A risk for stability - What the French presidential elections mean for Europe

NN IP: A risk for stability - What the French presidential elections mean for Europe

April 8, 2022

Politics France
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By Willem Verhagen, Senior Economist, Multi Asset at NN Investment Partners (NN IP); Fouad Mehadi, Senior Investment Strategist Multi-Asset at NN IP and Patrick Moonen, Principal Strategist at NN IP

The 2017 French Presidential elections were a decisive moment in the markets because one of the likely contenders in the second round, Marine Le Pen, ran a campaign that prioritized a French exit of the EU. This year the second round of voting will most likely once again be a contest between President Macron and Marine Le Pen, with Macron being the expected winner.

Although Le Pen is no longer running a “Frexit” campaign, the outcome of the elections are still of significant importance for the future of Europe. Le Pen aims to limit the influence of the EU on French policymaking. By contrast, Macron has the intention to press ahead with further European integration.

To understand the importance of these differing perspectives we have to bear in mind that Europe is very much at a crossroad currently. In particular, two big themes are coming together. The first theme is that monetary union still suffers from an incomplete institutional structure to support it.

The second theme is deglobalization: Europe will need to fend for itself to a larger extent in various areas such as geopolitics, defense, high tech industries and (green) energy provision.

Both themes evidently require more cooperation at the European level. In the near term two issues are likely to be important here. First of all, the reform of the EMU fiscal rules in such a way as to make room for more public investment. Second, the question of to what extent joint borrowing, which is a feature of the NGEU, can become a more permanent arrangement.

If we look at the potential impact on equity markets, a Macron win will probably be a non-event as it is largely the consensus outcome. It may lead to a short-term relief but will not fundamentally alter the underlying picture. A win by a candidate from the far-right or far-left would however be a serious headwind, not only for France but for the whole European equity market.

In the short term of fixed income markets we could see some spread widening between the French and German 10y yields, reflecting some higher political risk. In general, higher uncertainty regarding the outlook on who will win the elections will widen spreads.

A Macron win should not have much impact on French spreads and the positive spillover effect on peripherals should be very limited. Indeed, in case a far-right candidate wins or the likelihood of a win increases, then this could lead to a significant repricing of French but also peripheral spreads as European fragmentation risk could resurface.

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