Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 02 May 2017 at 11:45 GMT

Europe Divided: Will Emmanuel Macron be able to govern? — #SaxoStrats

Head of Macro Analysis / Saxo Bank
  • Macron poised to win second round with 60% support currently
  • June legislative elections will determine the shape of the new government
  • June vote poses risk to Macron, but worst-case scenario remains unlikely
  • Read more on our dedicated Europe divided page

Emmanuel Macron
Emmanuel Macron is set to become France's next president, but how much power 
he will wield remains unknown. Photo: Shutterstock 

By Christopher Dembik

"There are no disputes between the Minister of Finance and I, and this is for a straightforward reason, it is because – in particular concerning defence issues – I decide and he implements what I decide." — Jacques Chirac, July 14, 2004.

In our view, there are five main takeaways from the first round of the election :

  • Unlike Brexit and the US presidential election, opinion polls in France have proven to be very reliable. The methodology used (quotas and the extensive use of adjustments) enabled the sampling error to be greatly reduced to a great extent.
  • The Front National (has lost ground in relation to the results of the first round of the 2015 regional elections (21.3% versus 28%).
  • In a system which has been dominated for decades by two parties, the Socialists and Les Républicains, Macron has being successful in repeating the achievement of General Charles De Gaulle in helping a third political mainstream force to emerge in the country. 
  • The vote in favour of the founder of the En Marche! party has created a geographical break with previous elections as he took the upper hand in regions in which Christian democracy was well-rooted, but also in historical bastions of the PS such as in the Puy-de-Dôme department and in large urban areas where the upper-middle class makes up a higher share of the population than elsewhere.
  • The main risk for investors in 2017 is that they paid too much attention to political risk. As the votes in Austria, the Netherlands, and in France have proved, such risks have often been overestimated by markets in the last few months. 

The winner of the second round is already known

Emmanuel Macron will be the next president of France. Currently, opinion polls are estimating that he is likely to get a 60% share of votes, against 40% for Marine Le Pen. It is probable that Macron's lead will come down in the lead-up to the vote. 

This is a crucial point and it has not yet been priced into the market. It could create new tensions which will affect French financial assets and increase France's bond spread. However, the informal anti-Le Pen alliance of the mainstream parties, despite being called into question for a period, should mean that enough voters switch their allegiance to Macron for him to win. 

It would be wrong, though, to compare the percentage of votes that Emmanuel Macron will obtain to that garnered by Jacques Chirac in 2002 (in the second round against Marine Le Pen's father Jean-Marie, then the leader of the FN). Since then, we must note, the financial crisis of 2007 and the strategy of "dédiabolisation" implemented by the FN since 2011 have enabled it to considerably extend its electoral base.

Front National
The FN has picked up significant support in France's "rust-belt" for its combination 
of right- and left-wing stances. Photo: Shutterstock

Why Le Pen will fall short

Marine Le Pen will not be able to break through the glass ceiling. After having received 7.7 million votes in the first round, and based on voter turnout of 81.5% in the second round (which is the average turnout since 1958, the year in which French presidential elections by direct universal suffrage began), the FN would need 10 million extra votes to win.

This seems completely impossible in light of voting intentions. Consequently, based on opinion polls, the far-right candidate is likely to fall short by between two and three million votes to get past the 50% figure.

The only major uncertainty relates to the abstention rate, which could be higher than the average of 20%. However, it would require a historically unprecedented drop in turnout to 50% for Le Pen to be able to seriously challenge Macron. 

In such an event, she would only need 12 million votes to win. Such a drop is highly unlikely, since the lowest turnout since 1958 was 68.85% in 1969.

Why June's legislative vote is key for Macron

The fundamental question for France is whether Emmanuel Macron will have the parliamentary majority necessary to implement his reformist programme in the wake of the elections on June 11 and 18.

There are four possible scenarios...

1. Macron obtains an absolute majority (289 seats): In accordance with the spirit of the Constitution of the Fifth Republic and the constitutional reform carried out in September 2000, the votes result in a majority for the president made up of En Marche! MPs, "Macron-compatible" PS MPs, members of the UDI and supporters of Alain Juppé, which would enable all of the reforms promised to be implemented. 

This scenario, which assumes great enthusiasm regarding Macron (which was not seen in the first round of voting), an implosion of the PS, and a split within Les Républicains appears quite unlikely.

2. Macron obtains a relative majority: This is our baseline scenario. Given that they do not have an absolute majority in the National Assembly, Macron and his government will have to work to obtain, on an act-by-act basis, its support. 

This scenario is a credible one. The political lines are already moving as prominent Les Républicains figures have expressed their wish to work with Macron. In this context, a prime minister skilled at negotiation will have to be appointed, for instance PS MP and En Marche! secretary-general Richard Ferrand. This would represent an unusual but not a new situation in the history of the Fifth Republic (as Socialist PM Michel Rocard was faced with the same scenario from 1988 to 1991). 

At that time, Rocard obtained support from centrists and Communist Party MPs agreed to be neutral. He also used Article 49-3 to a great extent. This article is a mechanism that enables the government to be held responsible for legislation which is automatically adopted, unless a motion of censure is filed by at least 58 MPs and is voted for by at least 289 MPs (which is an absolute majority). 

If this is the case, the government must resign, which has not happened since 1963. Thus, in spite of the lack of an absolute majority, the 1988-1991 period was characterised by major reforms, such as the introduction of the CSG (a social welfare contribution), the re-introduction of the ISF (wealth tax), and the creation of the RMI (jobseeker's allowance). 

The French constitution is sufficiently well-designed to cater to all circumstances and to allow even a government with a relative majority to carry out reforms. It is, consequently, prudent to say that Macron will be a president who will be able to implement his programme of reforms.  

3. A coalition government with Les Républicains and/or UDI: This is certainly the second most credible scenario. This would be the fourth coalition government there has been since 1958. 

Instead of becoming a "republican monarch", Macron would be reduced to the role of a president with fairly limited powers and would certainly not be in a position to put in place his ambitious economic programme. 

Markets are hoping for a powerful Macron regime that will launch
long-sought reforms. Photo: Shutterstock

He would have power in a few areas (defence and foreign policy), but a more minor role in relation to domestic policies. 

4. The Balkanisation of the National Assembly: This is the worst-case scenario, but there is really no chance that this will occur. In this theoretical framework, the scores obtained by the four main presidential candidates (about 20% each) suggest that four parliamentary groups of equal size will emerge, which would lead to the sort of political instability not seen since the Fourth Republic. 

This assumption is evidently erroneous. Indeed, the national popularity of Jean-Luc Mélenchon is not reflected in the scores obtained by the Front de Gauche or by the French Communist Party at the local level, which needs the support of the PS to manage to get MPs elected. 

Furthermore, the fact that the proportional representation system is not used for the French legislative elections means that the FN will not get a significant amount of MPs elected (currently the party only has two MPs).  

— Edited by Michael McKenna

Christopher Dembik is head of macro analysis at Saxo Bank


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